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Pick up in economic activity to shoot up country’s CAD to over 1% in FY22

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With a pick up in economic activity and the consequent rise in imports, India is expected to quickly turn from a position of current account surplus in FY21 to that of current account deficit (CAD) in FY22.

As per an assessment by Kotak Institutional Equities (KIE), the country’s current account deficit to GDP is likely at 1.1 per cent in FY22 with rupee remaining strong against dollar and remaining in the Rs 72.5-74 range in near term.

The Covid-19 pandemic and nationwide lockdown last year has impacted the economic activity in the country with GDP plummeting by over 24 per cent in April-June quarter of FY21.

For the full year FY21, the current account balance recorded a surplus of 0.9 per cent of GDP as against a deficit of 0.9 per cent in FY20 on the back of a sharp contraction in the trade deficit to $102.2 billion from $157.5 billion in FY20. This was the first time that the country has recorded an annual current account surplus in 17 years. But this surplus was largely on account of a slowdown in imports due to shrinking economic activity.

We expect the overall external sector to remain comfortable but will be subjected to risks from a widening trade deficit, high commodity prices, and policy normalisation in the US, and spread of Covid cases, KIE said in its report.

The rupee has been appreciating significantly recently aided by broad based dollar weakness after a soft rhetoric by the Fed Chair followed by weakening global economic data, muted RBI intervention, and heavy, although lumpy, FII flows in debt. KIE expects this appreciating bias to continue in the near term, especially given the slew of big ticket IPOs lined up in the months ahead and the persistence of wider interest rate gap. However, imminent Fed taper by end- CY2021 and widening domestic trade deficits should gradually weigh on the rupee.

“We maintain our CAD/GDP estimate of 1.1 per cent (US$34.1 bn) in FY2022E and BOP surplus of US$35 billion. We expect USD-INR to remain in the range of 72.5-74 in the near term and will be watchful of shifts in the forex space and volatility when tapering begins,” the report said.

Business

Cyclicals to drive Q3FY22 earnings growth: MOFSLA

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Corporate earnings growth for the third quarter of FY22 is expected to be led by cyclical stocks, Motilal Oswal Financial Services (MOSFL) said in a report.

Earnings growth is anticipated to be driven by metals, oil and gas and BFSI (Banking, Financial Services and Insurance) sectors.

In its report, MOSFL said that economic recovery backed by festive demand, higher commodity prices and improvement in asset quality in financials are expected to back this trend.

“There remains a clear divergence in 3QFY22 earnings growth. Global cyclicals, such as oil and gas and metals, continue to drive aggregate earnings growth, while BFSI profits are led by improvements in asset quality and credit growth,” the report said.

“Technology is likely to continue its momentum, propelled by strong revenue growth,” it added.

The auto and cement sectors are anticipated to drag earnings down, led by poor demand and higher commodity prices.

“Consumer, healthcare, capital goods, consumer durables and specialty chemicals are predicted to report single-digit YoY profit growth. Input cost pressures continue to weigh on gross margins for cement, specialty chemicals, autos, consumer staples and durables sectors,” the report said.

The report pointed out that Asian Paints, Bharti Airtel, BPCL, IOC, Tata Steel, JSW Steel, Titan, Hindalco and ONGC have seen an upgrade in their FY22 earnings.

“Companies that have seen downgrades to their FY22E earnings are Tata Motors, Maruti Suzuki, Ultratech Cement, Hero Motors, Shree Cement, Coal India, Axis Bank and HUL,” it said.

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HDFC Bank’s Q3FY22 YoY net profit up 18.1%

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 Lending major HDFC Bank on Saturday reported a year-on-year rise in net profit of 18.1 per cent for the third quarter of FY22.

The bank’s net profit increased to Rs 10,342.2 crore during the period under review over the quarter ended December 31, 2020.

Besides, the bank’s net interest income (income earned less interest expended) for the quarter under review grew by 13 per cent to Rs 18,443.5 crore from Rs 16,317.6 crore for the quarter ended December 31, 2020.

The lender’s net revenues (net interest income plus other income) increased by 12.1 per cent to Rs 26,627 crore from Rs 23,760.8 crore for the quarter ended December 31, 2020.

“Advances grew at 16.5 per cent, reaching new heights driven by relationship management, digital offering and breadth of products. Core net interest margin was at 4.1 per cent. New liability relationships added during the quarter remained at an all-time high,” HDFC Bank said in a statement.

“This continued focus on deposits helped in the maintenance of a healthy liquidity coverage ratio at 123 per cent, well above the regulatory requirement, which positions the bank favourably to capitalise on growth opportunities,” it added.

As per Q3FY22 results, provisions and contingencies for the quarter rose Rs 2,994 crore (consisting of specific loan loss provisions of Rs 1,820.6 crore and general and other provisions of Rs 1,173.4 crore) as against total provisions of Rs 3,414.1 crore for the quarter ended December 31, 2020.

“Total provisions for the current quarter included contingent provisions of approximately Rs 900 crore,” it said.

“The total credit cost ratio was at 0.94 per cent, as compared to 1.30 per cent for the quarter ending September 30, 2021 and 1.25 per cent for the quarter ending December 31, 2020,” it added.

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Lenders expected to exhibit strong Q3FY22 results

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 Listed lenders in India’s equity markets are expected to report ‘optically’ strong earnings growth for Q3FY22, said HDFC Securities in a report.

Accordingly, the brokerage house expects its coverage universe of 23 lenders to report 51 per cent YoY growth during the period under review.

This trend, the report said will come largely on the back of expected normalisation of provisions.

“The pace of collections and recoveries continues to improve, which, concurrent with normalised economic activity, is likely to moderate the stressed pool,” the report said.

“Disbursements are likely to witness healthy growth, driven by seasonal pick-up in retail loans as large corporate Capex remains elusive.”

As per the report, the revival in business momentum is likely to drive a 10.4 per cent YoY loan growth for the brokerage house’s coverage universe, with large private banks and large NBFCs (BAF) continuing to clock market share gains.

“The third wave of the pandemic is unlikely to impact Q3 earnings except in underlying sectors like travel and tourism that are already under stress.”

“However, we expect most lenders to maintain a surplus provisioning buffer for potential asset quality issues. We tweak our FY22E-FY24E forecasts for select lenders to factor in lower credit growth and marginally higher credit costs.”

Besides, HDFC Securities continue to prefer large banks with strong balance sheets and formidable deposit franchises.

Furthermore, it cited that business momentum continues to gather pace.

“In a quarter relatively unaffected by the pandemic and near-normal resumption of economic activity, we expect to see strong sequential growth in disbursements, particularly in retail and SME segments, riding on seasonal and pent- up demand.”

“Provisional filings suggest that banks within our coverage universe continue to gain market share as reflected in loan growth at 12 per cent YoY compared to system-wide YoY credit growth at 7 per cent.”

At present, the brokerage house has 23 lenders in its coverage universe including ICICI Bank, SBI, Bajaj Finance, SBI Cards, and Axis Bank.

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