Divgi TorqTransfer Systems IPO Review

Divgi TorqTransfer Systems IPO Review: Divgi TorqTransfer Systems Limited is coming up with its Initial Public Offering. The IPO will open for subscription on March 1st, 2023, and close on  March 3rd, 2023. It is looking to raise up to ₹412 Crores. In this article, we will look at Divgi TorqTransfer Systems Limited IPO Review 2023 and analyze its strengths and weaknesses. Keep reading to find out! 

Divgi TorqTransfer Systems IPO Review– About The Company

Incorporated in 1964, Divgi TorqTransfer Systems Limited is engaged in the business of manufacturing automotive components. They are of the few players in India who develop and provide system-level transfer cases, torque couplers, and dual-clutch automatic transmission solutions.

They are also one of the leading suppliers of transfer case systems to automotive OEMs in India and are the only manufacturer of torque couplers in India

Services Provided by the company:

Divgi TorqTransfer Systems Limited has a diversified products portfolio that includes:

1. Torque transfer systems (which include four-wheel-drive (“4WD”) and all-wheel-drive (“AWD”) products)
2. Synchronizer systems for manual transmissions and DCT
3. Components for the above-mentioned product categories for torque transfer systems and synchronizer systems in manual transmission, DCT, and EVs

In addition, they have developed:

1. Transmission systems for EVs
2. DCT systems;
3. Rear wheel drive manual transmissions

Divgi TorqTransfer Systems IPO Review – Financial Highlights

If we look at the financials of Divgi TorqTransfer Systems. we find out that their assets have grown from Rs. 303.70 crores in March 2020 to Rs. 430.21 crores in September 2022. Their revenues also follow a similar trend, it has grown from Rs. 170.74 crore in March 2020 to Rs. 241.87 crore in March 2022. As of September 2022, the company’s revenue stands at Rs 137.55 crores for FY22-23. 

Their profits have grown from Rs. 28.04 crore in March 2020 to Rs. 46.15 crores in March 2022. As of September 2022, the company’s profits stand at Rs 25.66 crores for FY22-23.  It is also important to note that the company’s borrowing has significantly decreased from Rs. 50.41 crores In March 2020 to Rs. 0.50 crores as of 30-Sep-22.

Balance of the company 

Source : Red Herring Prospectus of Divgi TorqTransfer Systems

Profit and loss Statement of the company

Source : Red Herring Prospectus of Divgi TorqTransfer Systems

Divgi TorqTransfer Systems IPO Review – Competitors

Following are the competitors of the company in each of its product verticals:

• Transfer Case: Aisin, BorgWarner, Dana, Magna, Univance
• Torque Coupler: Aisin, BorgWarner, Schaeffler, Valeo, ZF
• Synchroniser Pack: Anand CY Myuteck Automotive, Natesan Synchrocones, Yugal Precision

Strengths of the Company

• The company is one the few suppliers in India that develop and provide system-level transfer cases, DCT solutions, torque couplers, and transmission systems for EVs across a wide range of automotive vehicles and geographies. They also hold a leadership position across select product categories.
• The company has strategically located manufacturing facilities that hold the capacity of producing high-precision components meeting system-level design intent.
• The company maintained long-term relationships with large domestic and global customers.
• The company consists experienced board of directors and a senior management team that is backed by a skilled and qualified workforce.
• The company has maintained a consistent financial performance and also keeps its focus on its innovation and R&D capabilities.

Weaknesses of the Company

• The company’s business is largely dependent on 5 key customers and losing any of these customers or a reduction in purchases by any of these players can have an adverse impact on the business.
• The company’s inability to export or grow the business in certain countries in which they have geographical concentration will impact their business.
• The disruption in the availability of raw materials and components or the changes in their prices will have an impact on the business
• A disruption in the supply of raw materials and key components or the failure on behalf of suppliers and third-party logistics service providers to meet their obligations will have a significant impact on the business.

Divgi TorqTransfer Systems Review – Key IPO Information

Particulars	Details
IPO Size	₹412.00 Cr
Fresh Issue	₹180.00 Cr
Offer for Sale (OFS)	3,934,243 shares
Opening date	March 1, 2023
Closing date	March 3, 2023
Face Value	₹5 per share
Price Band	₹560 to ₹590 per share
Lot Size	25 Shares
Minimum Lot Size	1(25)
Maximum Lot Size	13(325)
Listing Date	March 14, 2023

Promoters: Jitendra Bhaskar Divgi, Hirendra Bhaskar Divgi And Divgi Holdings Private Limited

Book Running Lead Manager: Inga Ventures Private Limited, Equirus Capital Private Limited

Registrar to the Offer: Link Intime India Private Limited 

The Objective of the Issue

The net proceeds from this issue will be utilized for the following purposes:

• For financing the capital expenditure requirements for the purchase of machinery and equipment at companies manufacturing facility
• General corporate purposes

In Closing

In this article, we looked at the details of Divgi TorqTransfer Systems IPO Review 2023. Analysts remain divided on the IPO and its potential gains. This is a good opportunity for investors to look into the company and analyze its strengths and weaknesses. That’s it for this post.

Are you applying for the IPO? Let us know in the comments below.

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Fundamental Analysis of Astral – Segments, Financials & More

Fundamental Analysis of Astral: Investors are always looking for companies that are gradual but consistent wealth creators. They slowly, but steadily compound the investments as their earnings and net profits grow year-on-year. Their lack of volatility gives an investor peace of mind. In this article, we’ll conduct a fundamental analysis of one such similar company i.e. Astral Ltd., a consistent, wealth-generating stock, and find out whether it can be a good bet or not. 

Fundamental Analysis of Astral

We’ll start off by getting a quick overview of the business of Astral followed by a segment analysis. Next, we’ll learn about the industry landscape, the financials of the stock, and its future plans. A summary concludes the article at the end. So without further ado, let us jump in.

Company Overview

Astral Ltd. (popularly known as Astral Pipes) was set up in 1996 to manufacture drainage and plumbing products. Fast forward to the present date, it is one of the leading Indian real estate ancillary companies serving millions of households with its product offerings.

The company manufactures  Chlorinated Poly Vinyl Chloride (CPVC) and Poly Vinyl Chloride (PVC) pipes, piping systems, and tanks for drainage, agriculture, fire protection, cable protection, and other end uses. Additionally, it also makes adhesives and sealants. But that’s not all, Astral has also ventured into the paints, faucets, and sanitary ware product lines to tap their growing market in India.

The company owns 18 manufacturing facilities all over the world. Its strong workforce of over 6,000 employees serves customers across 25 countries. Its total domestic installed capacity and UK & US installed capacity stood at 3,36,686 MT and 31,632 MT at the end of FY22 respectively.

The pipe maker has a strong distribution network with 23 depots, 2,535+ distributors, and 1,80,000+ dealers.

Source: Astral Ltd. Annual Report FY22

We pretty much understand the business and scale of operations of the company now. We’ll move forward to a quick segment analysis of Astral.

Segment Analysis

Product-wise Segments

The fittings, pipes, tanks, and other piping systems form part of the plastic division. The revenue share of the adhesives & sealants segment and the plastic segment has largely remained the same over the last six years.

The table below presents the share (in percentage) of the two revenue segments of Astral Ltd.

Segment Revenue	FY17	FY18	FY19	FY20	FY21	FY22
Plastic	75	74	74	77	76	77
Adhesives	25	26	26	23	24	23

(figures in %)

However, a closer look at the segment profits below tells that the contribution of adhesives in the earnings of the company has come down. This is because of the rise in the cost of raw materials used for manufacturing sealants & adhesives. The management expects margin improvement for its smaller division in the coming quarters.

Segment Profit	FY17	FY18	FY19	FY20	FY21	FY22
Plastic	71	64	69	78	79	81
Adhesives	29	36	31	22	21	19

(figures in %)

Geographical Segments

The table below highlights the share of geographical revenue segments of the company for the last two fiscals. ERROR

Geographical Areas	FY21	FY22
Within India	90.15	91.02
Outside India	9.85	8.98

(figures in %)

Industry Overview

For our industry overview of Astral, we’ll take a look at the 3 sectors i.e. the pipes, tanks, and adhesives sectors separately. These are the three segments in which it primarily operates.

Pipes

The Indian plastic pipes market is pegged at Rs 30,000 crore with organized players controlling 65% of the market. Talking about the industry segmentation, plumbing pipes used for residential and commercial real estate make up 50-55% of the total demand. The share of agricultural and infrastructure & industrial demand is 35% and 5-10% respectively.

The domestic plastic pipes market is projected to grow at a CAGR of 12-14% during the FY21 and FY25 period. The demand will primarily be led by the substitution of metal pipes, replacement demand, affordable housing, higher irrigation, and water supply & sanitation (WSS) demand. 

Source: Crisil

Tanks

The water storage tanks market is Rs 4,500-5,000 crores worth, with unorganized players catering to a majority of 70% of the market. This is because of the voluminous nature of the product which results in high transportation costs. 

However, the outlook for the organized market is strong as the companies are setting up manufacturing and distribution networks throughout the country.

Adhesives

The adhesives market in India was valued at Rs 13,400-13,600 crore in FY21. The industrial (B2B industries such as packaging, footwear, paints & automotive) and consumer (furniture, construction, arts, & electrical) are two sub-segments accounting for 40-42% and 58-60% of the market respectively.

The consumer adhesives market (worth Rs 5,300-5,500 crore in FY21), in which Astral operates is expected to expand at a CAGR of 9-10% during the FY21 and FY26 period.

Thanks for reading so far. We have covered the hardest parts of our fundamental analysis of Astral. In the sections ahead, we’ll race through the financials of the stock.

Astral – Financials

Revenue & Net Profit Growth

The operating revenues of the pipe manufacturer have grown at a CAGR of 12.85% to Rs 4,394 crore in FY22 over the last six years. The table below shows the growing trend of the sales and net profits of Astral.

Financial Year	Operating Revenue	Operating Profit	Net Profit
2022	4,394	781	490
2021	3,176	666	408
2020	2,578	468	250
2019	2,507	388	197
2018	2,139	329	176
2017	2,127	265	145
6-Yr CAGR	12.85%	19.76%	22.58%

(figures in Rs Cr except for CAGR)

But the net profits have increased faster than the operating income. How? We answer this in the section on profit margins of our fundamental analysis of Astral.

Operating & Net Profit Margins

Despite commodity cost inflation in the last few years, the operating and net profit margins have expanded in the last six financial years. The figures below show how the broadening of margins has aided the company to post better bottom-line growth.

Financial Year	OPM	NPM
2022	17.77	11.16
2021	20.97	12.85
2020	18.16	9.68
2019	15.47	7.87
2018	15.37	8.21
2017	12.44	6.80

(figures in %)

Debt/Equity & Interest Coverage

Speaking of the leverage of the company, Astral is almost a debt-free stock with a minimal debt-to-equity ratio of 0.04 and a high-interest coverage ratio of 61.26. Its interest coverage has improved in recent years as the interest charges came down.

Financial Year	Debt/Equity	Interest Coverage
2022	0.04	61.26
2021	0.02	42.22
2020	0.08	8.81
2019	0.15	9.98
2018	0.12	12.62

Return Ratios

Astral is an efficient and profitable business with high return ratios. The company reported adequate RoCE and RoE of 30.28% and 23.29% in FY22 respectively. 

However, RoE being lower than RoCE reflects that the management can increase earnings for shareholders by including leverage in the capital mix.

The table below presents the return on capital employed (RoCE) and the return on equity (RoE) of Astral for the last five years.

Financial Year	RoCE	RoE
2022	30.28	23.29
2021	30.32	24.46
2020	21.43	18.57
2019	23.13	18.10
2018	23.88	19.16

(figures in %)

Future Plans of Astral

So far we have only looked at the past years’ data for our fundamental analysis of Astral. In this section, we’ll try to get a sense of what lies ahead for the company and its shareholders.

1. Astral recently acquired a majority 51% stake in Gem Pants for Rs 194 crore. This will mark a gradual entry of the company into the growing paints market in India.
2. In addition to this, with the recently launched faucets and sanitary product lines, the company plans to add Rs 1,500 crore to its revenues in the next few years. 

Key Metrics of Astral

Let us now have a review of the key metrics of the stock.

CMP	₹1,860	Market Cap (Cr.)	₹37,500
EPS	₹19.5	Stock P/E	96.8
RoCE	30.28%	RoE	23.29%
Promoter Holding	55.8%	Book Value	₹120
Debt to Equity	0.04	Price to Book Value	15.50
Net Profit Margin	11.16%	Operating Profit Margin	17.77%

In Conclusion

Astral’s focus on maintaining margins and staying a premium company has helped it to grow consistently. It has likewise delivered stellar profit growth. As the company braces for its new ventures, it will be interesting to closely follow the sales data of the paints and sanitary ware divisions in the coming quarters.

After going through our fundamental analysis of Astral, do you think the stock will be able to deliver stellar returns in the future as well? It has given an impressive CAGR return of 32% every year in the last five years. How about you let us know in the comments below?

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Top Small Cap Stocks in India – Stocks To Watch in 2023

Top Small Cap Stocks in India: Risk-taking investors are always on the lookout for high-growth small companies. The idea is that they can double investment much faster than their slow-growing larger counterparts. But how do you find the best smaller companies? There are so many of them. In this article, we’ll tell you about the top small-cap stocks in India which you can add to your watchlists.

Top Small Cap Stocks in India

We’ve shortlisted some of the best small-cap companies on the basis of their return ratios, sales growth, future plans, and more. A brief description of the business, any recent developments, and financials are also present. So without further ado, let us jump in.

Top Small Cap Stocks in India #1 – Mazagon Dock Shipbuilders

CMP	₹758	Market Cap (Cr.)	₹15,250
EPS	₹44.6	Stock P/E	17.0
RoCE	25.5%	RoE	19.1%
Promoter Holding	84.8%	Book Value	₹185
Debt to Equity	0.00	Price to Book Value	4.09
Net Profit Margin	10.4%	Operating Profit Margin	7.7%

Mazagon Dock Shipbuilders traces its origins to 1774 when a small dry dock was established in Mazagon. The business grew over the years and it was incorporated in 1934 as a privately held company. 

Later in 1960, the company was taken over by Government and brought under the ownership of the Ministry of Defence, Government of India. Presently, the government holds a majority 84.8% stake in the company.

The defense CPSU is engaged in the business of manufacturing warships and submarines for the Indian Navy. It also builds offshore oil drilling platforms, tankers, cargo bulk carriers, passenger ships, and ferries. Additionally, it provides ship repairs and ship refits services.

The net profits of the company have grown from Rs 496 crore in FY18 to Rs 611 crore in FY22. Its TTM profit after tax stood at Rs 952 crore after the December 2022 quarter. The earnings have more than doubled from FY18 levels because of sales increase and margin growth.

Top Small Cap Stocks in India #2 – Happiest Minds Technologies

CMP	₹850	Market Cap (Cr.)	₹12,500
EPS	₹15.5	Stock P/E	56.1
RoCE	32%	RoE	31%
Promoter Holding	53.2%	Book Value	₹50
Debt to Equity	0.53	Price to Book Value	16.90
Net Profit Margin	18%	Operating Profit Margin	24%

Founded in 2011 by Ashok Soota, Happiest Minds is an IT solutions & services company. It helps organizations in their digital transformation endeavors. The company provides digital business, product engineering, agile infra & security, IoT, analytics, and digital process transformation services.

Happiest Minds caters to clients across a broad range of industries including airline, automotive, BFSI, e-commerce, consumer packaged goods, insurance, and manufacturing.

Recently it acquired Madurai-based IT services company Sri Mookambika Infosolutions (SMI) for Rs 111 crore. This will take the total workforce up by 400 to 5,011 employees now.

The IT company had its IPO in September 2020 and has generated a return of 137% for its investors since the listing date. This comes as revenues and net profits of Happiest Minds have grown rapidly in the last five financial years. 

Fiscal Year	Sales	Net Profit
2022	1094	181
2021	773	162
2020	698	72
2019	590	14
2018	444	-13

(figures in Rs Cr)

Like other IT companies, it also has high return ratios with RoCE 31.2% and RoE 30.6% respectively. The stock currently trades at a price-to-earnings ratio of 60.2 and price to book value ratio of 18.2.

Top Small Cap Stocks in India #3 – Aegis Logistics

CMP	₹350	Market Cap (Cr.)	₹12,250
EPS	₹11.9	Stock P/E	29.4
RoCE	17.4%	RoE	17.4%
Promoter Holding	58.1%	Book Value	₹95
Debt to Equity	0.46	Price to Book Value	3.67
Net Profit Margin	8.3%	Operating Profit Margin	11.5%

Aegis Logistics was founded almost 6 decades ago in 1956. Since then, it has emerged as a leading oil, gas, and chemical logistics company. An integrated business, it stands as one of the major private importers and handlers of liquefied petroleum gas (LPG).

Aegis has a big network of liquid and gas terminals at key Indian ports. The company can handle 15,70,000 kilolitres (KL) of chemicals and petroleum, oil & lubricants (POL), and 1,14,000 MT of LPG. 

Hindustan Petroleum, Bharat Petroleum, Reliance Industries, ONGC, Tata Steel, and Shell are some of the top clients of this Mumbai-headquartered company. 

As for the future plans, Aegis will be setting up liquids and gas terminalling facilities in JV with Royal Vopak N.V. Furthermore, it plans to add 65 more gas retailing stations to its portfolio of 135 stations at present.

The profits of Aegis Logistics have grown at a CAGR of 12.45% to Rs 385 crore in FY22 from Rs 214 crore in FY18 on the back of margin expansion in the last two years. As a result, the stock rallied by 65% in the last year.

Top Small Cap Stocks in India #4 – Campus Activewear

CMP	₹375	Market Cap (Cr.)	₹11,500
EPS	₹3.6	Stock P/E	103
RoCE	31.9%	RoE	29.5%
Promoter Holding	74%	Book Value	₹16
Debt to Equity	0.83	Price to Book Value	23.80
Net Profit Margin	9.1%	Operating Profit Margin	20.3%

Incorporated in 2016, Campus Activewear is a leading sport and athleisure footwear company in India. It manufactures and retails footwear across various price segments and demographic audiences.

The company has an assembly capacity of 28.80 million pairs per annum. As for the retail presence, it has a strong network of over 425 distributors and 20,000 retailers. It has 66 COCOs, 41 FOFOs, and 107 EBOs across major Indian cities.

In addition to its offline presence, the company also has a formidable digital presence. Campus sold 5.56 million shoes and earned 32.92% of its FY22 revenue from online channels.

The sales of Campus Activewear have grown at a CAGR of 19% from Rs 595 crore in FY19 to Rs 1,194 core in FY22. During the same period, its net profits have grown at a much faster annual rate of 29% from Rs 39 crore to Rs 108 crore.

The company had its IPO recently in April 2022. The stock has a high promoter holding of 74%. In addition to this, it is an efficient business with return ratios of RoCE and RoE at 31.9% and 29.5% respectively.

Top Small Cap Stocks in India #5 – Cholamandalam Financial Holdings

CMP	₹600	Market Cap (Cr.)	₹11,250
EPS	₹63.2	Stock P/E	9.47
RoCE	10.2%	RoE	17.3%
Promoter Holding	48.6%	Book Value	₹367
Debt to Equity	11.50	Price to Book Value	1.64
Net Profit Margin	15.3%	Operating Profit Margin	50.8%

Part of the multi-billion conglomerate Murugappa Group, Cholamandalam Financial Holdings Ltd. (CHFL) is a non-deposit-taking investment company. Over 7 decades old, it is presently structured as a holding company owning significant investments in the other companies of the business group.

CHFL indirectly provides insurance, lending, risk management, and other financial services through its stakes in:

1. Cholamandalam Investment and Finance Company Ltd.
2. Cholamandalam MS General Insurance Company Ltd.
3. Cholamandalam MS Risk Services Ltd.

It is one of the most preferred stocks in the assets management industry with various mutual funds holding a substantial investment in the company. As of the recent shareholding data for December 2022, FIIs and DIIs owned 11.60% and 26.57% stakes in CFHL respectively.

The net profits of Cholamandalam Financial Holdings have almost doubled from Rs 1,165 crore in FY20 to Rs 2,239 crore in FY22. The stock presently trades at a P/E of 9.47 and offers a good RoE of 17.3%. 

List of Top Small Cap Stocks in India

Above we read about the five top small-cap stocks in India. The table below compiles those names and a few others for your reference.

Company Name	Industry	CMP (Rs)	Market Cap (Rs Cr)
Mazagon Dock Shipbuilders	Maritime	760	15,250
Mahindra CIE Automotive	Auto Ancillary	391	15,000
Happiest Minds Tech.	IT	850	12,500
Aegis Logistics	Logistics	350	12,250
Campus Activewear	Footwear	375	11,500
Cholamandalam Fin. Holdings	Finance - Investment	600	11,250
Suzlon Energy	Renewable Energy	9	10,000
Lemon Tree Hotels	Hospitality	75	6,000
West Coast Paper Mills	Paper	5,000	3,300
Mrs. Bectors Food Specialities	FMCG	511	3,000

In Conclusion

In our study of the top small-cap stocks in India, we noticed how the stock returns have closely tracked the earnings growth and the expansion in margins. Therefore, increasing sales should be the primary filter to pick good small-cap companies. But it is also a risky proposition because stock may fall sharply if the growth evaporates. Investors may quickly dump the stock.

What parameters should one keep in mind while investing in small-cap companies? 

You can now get the latest updates in the stock market on Trade Brains News and you can also use our Trade Brains Stock Screener to find the best stocks.

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Fundamental Analysis of Coal India – Overview, Financials & More

Fundamental Analysis of Coal India: The share price of Coal India, the largest coal company in the world has returned an impressive 57% in the last two years. The gains come on the back of the rising Coal sales as the government pushes for more electricity penetration across the nation. But, is there more to it? Or all the rally is done and you are late to the party? In this article, we’ll try to know it by conducting a fundamental analysis of Coal India Ltd.

Fundamental Analysis of Coal India

We’ll begin the article by getting ourselves familiar with the business of the company. Next, we’ll do a quick SWOT analysis and read about India’s coal sector. After that, we’ll race through the financials of the stock and have a review of the future plans of the company. A summary concludes the article in the end.

Company Overview

Coal India Ltd. (CIL) is the largest coal company in the world. It is a Maharatna-status government company under the Ministry of Coal, Government of India. The central public sector undertaking was incorporated 48 years ago in 1975.

CIL is structured as a holding company owning 84 mining areas across 8 Indian states through its various subsidiaries. As of April 1, 2022, the company had 318 mines. 

Coal India accounts for almost 80% of the overall coal produced in the country. The company matches 40% of the primary commercial power demand alone. Its scale of operations can be gauged from the fact that it produced a whopping 623 million tonne (MT) of coal during the FY 2021-22.

The mining and sale of coal is the main revenue stream for the company. Apart from this, the loading & additional transportation charges and evacuation facility charges form part of other operating income. In simple terms, these are logistics services that are provided to the customers of Coal India. The sale of coal accounted for 91.71% of the total operating income of the company in FY22. 

SWOT Analysis of Coal India

Strengths

1. CIL enjoys economies of scale given its large scale of operations.
2. Its huge coal resources and operations network is spread across the country helping it to cater to its customers easily.

Weaknesses 

1. Coal India has high wages cost hurting its margins.
2. Additionally, coal production is costly in underground (legacy) mines. 

Opportunities

1. The company is putting efforts to diversify into the solar sector.
2. Rural electrification and the Power for All UDAY scheme will increase the demand for energy in India significantly.

Threats

1. Renewable energy production is one of the biggest threats to coal-based power generation.
2. Land acquisition and the rise in the cost of land are other threats that can counter CIL’s efforts to produce more coal.

Industry Overview

India is the second largest coal producer in the world. The country produced 777.03 MT of coal in the financial year 2021-22. The government has a huge influence on the Indian coal industry with state-owned companies Coal India and Singareni Collieries Company. 

Talking about the demand, the energy sector in India is dependent on coal as 55% of the installed generation capacity is coal-powered. According to the Draft NITI Aayog Report (Nov’21) on “Coal Demand in India – 2030 and beyond”, the coal demand for power production will stay strong and even increase in the coming years as the nation plans to increase its energy production in the future.

However, the share of coal is projected to come down in percentage terms as the nation will move further towards renewable energy. The reduction of coal in India’s energy mix is estimated to shrink to 52% by 2030 (from 72% at present), 43% by 2035, and 34% by 2040.

India’s per capita annual power consumption at 1,276 in FY21 was much lower than even other developing countries like South Africa and Brazil. Thus, the overall power demand in India is expected to grow at a strong pace.

A variety of factors: rising living standards, higher electrical and electronic appliance penetration even across rural areas, more focus of the government on boosting the manufacturing sector’s contribution to GDP growth, construction of data centers, and better irrigation through electric pump sets in the agricultural sector will contribute to higher energy demand in the years to come.

Coal India – Financials

Revenue & Net Profit Growth

The operating revenue and profits of Coal India have grown inconsistently over the last six years. The top line expanded by 22% in FY22 to Rs 109,714 crore from Rs 90,026 crore last year. The bottom line grew by 37% during the same period to Rs 17,378 crore.

The earnings momentum is picking up. For instance, the trailing twelve-month (TTM) income and net profit after the December 2022 quarter results stood at Rs 132,806 crore and Rs 29,312 crore respectively.

The table below shows the operating revenues and net profits of Coal India for the previous six financial years.

Fiscal year	Operating revenue	Net Profit
2022	109,714	17,378
2021	90,026	12,702
2020	96,080	16,700
2019	99,586	17,464
2018	87,269	7,020
2017	83,999	9,282

(figures in Rs Cr)

Operating & Net Profit Margin

The operating and net profit margins have remained strong over the years for the mining company. However, FY18 margins were depressed on the account of a sudden increase in employee benefit expenses from Rs 33,523 crore in FY17 to Rs 42,634 crore.

The table below highlights the operating profit margins and net profit margins of Coal India for the past six fiscals.

Fiscal year	OPM	NPM
2022	19.14	17.27
2021	18.20	15.36
2020	19.22	18.69
2019	21.65	18.80
2018	17.02	8.04
2017	22.66	11.05

(figures in %)

Return Ratios: RoCE & RoE

Moving on to the efficiency analysis, Coal India is a profitable business with a high return on equity and return on capital employed. There is a significant discrepancy between the RoE and the RoCE figures because of various other provisions forming part of the non-current liabilities.

The table below shows the RoCE and RoE of Coal India for the last five years.

Fiscal year	RoE	RoCE
2022	43.65	19.25
2021	37.01	16.14
2020	57.02	22.60
2019	74.96	29.53
2018	31.5	10.96

(figures in %)

Debt/Equity & Interest Coverage

Having covered the business, industry landscape, and P&L metrics of the company, we’ll now do a quick leverage study as part of our fundamental analysis of Coal India. It is largely a debt-free stock with a negligible debt-to-equity ratio and a high-interest coverage ratio. 

Furthermore, being a government miner in the energy sector, the company enjoys a strong credit rating of  CCR AAA/Stable from CRISIL.

The debt-to-equity ratio and interest coverage ratio of Coal India for the past few years are presented below.

Fiscal year	Debt / Equity	Interest Coverage
2022	0.08	52.81
2021	0.16	28.94
2020	0.20	48.87
2019	0.08	99.62
2018	0.08	25.84

Future Plans of Coal India

So far we looked at the past years’ data as part of our fundamental analysis of Coal India. In this section, we’ll try to make a sense of what lies ahead for the company and its investors.

1. CIL has targeted a coal supply of 700 MT in FY 2022-23, a 13% jump over the FY22 figure.
2. The ambitious goal of the Government of India to supply electricity to every home 24×7 by 2025 presents a huge opportunity for the company as this will result in the 1 billion tonnes (BT) annual production of coal by 2024-25.
3. In line with its production goals, the CPSU has earmarked a large CAPEX of Rs 16,500 crore towards volume growth in the near future.
4. Furthermore, Rs 20,000 crore worth of railway track projects are under execution already to increase the evacuation of coal.

Fundamental Analysis of Coal India – Key Metrics

We are now almost at the end of our fundamental analysis of Coal India. Let us take a quick look at the key metrics of the stock.

CMP	₹218	Market Cap (Cr.)	₹135,500
EPS	₹47.6	Stock P/E	4.6
RoCE	19.25%	RoE	43.65%
Promoter Holding	66.1%	Book Value	₹91.5
Debt to Equity	0.08	Price to Book Value	2.39
Net Profit Margin	17.27%	Operating Profit Margin	19.14%

In Conclusion

The increase in the sale of coal has definitely changed the fortunes of Coal India and its investors in the last two years. Interested investors will have to closely follow the offtake figures and CAPEX plans of the company to see where the stock is going. 

After going through our fundamental analysis of Coal India, do you think the company will be able to increase production in the coming quarters? What can be speed bumps for the stock? How about we continue our conversation in the comments below?

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Fundamental Analysis of Deepak Nitrite – Financials, Future Plans & More

Fundamental Analysis of Deepak Nitrite: The name Deepak Nitrite always enters the conversation whenever investors talk about the recent boom of the chemicals sector in India. The stock has given multi-bagger gains to thousands of investors. But is there more to it? Or all the boom is done and over now? In this article, we’ll conduct a fundamental analysis of Deepak Nitrite Ltd. and try to know if there is more than meets the eye.

Fundamental Analysis of Deepak Nitrite

We’ll start off with a brief highlight of the business of the company and how its product portfolio has changed over the years. Later, we’ll race through the industry landscape and financials of the stock. A section on future plans and a summary conclude the article at the end.

Company Overview

Deepak Nitrite Ltd. (DNL) is a fast-growing chemical intermediary Indian company with a well-diversified portfolio. It is the largest producer of sodium nitrite, sodium nitrate, Phenol, and Acetone in India. 

DNL has incorporated over 50 years ago in 1970 in Gujarat by C.K. Mehta, father of the present chairman and MD Deepak C. Mehta. 

As of today, it produces 30+ products from its 6 manufacturing plants. The company serves over 1,000 customers across 45 nations globally. It had a strong workforce of 2,006 employees at the end of FY22.

Source: Deepak Nitrite Ltd. AR FY22

Deepak Nitrite has been a key beneficiary of the boom of the Indian chemicals industry in the last half-decade. In the sections ahead, we’ll read more about this and how it has become a preferred choice of Indian companies for Phenolics, which they used to import earlier.

Segment Analysis

The product line of DNL can be divided into 4 segments:

1. Basic intermediates are standard products like sodium nitrite, sodium nitrate, etc which find applications in industries such as petrochemicals, rubber, agrochemicals, and industrial explosives.
2. Fine & specialty chemicals are specialized, high-margin products. The company caters to the specific needs of clients in the paper, personal care, pharma, and more such sectors.
3. Performance products are chemicals (used in paper, detergents, and other industries) that add particular characteristics to any product. 
4. Phenolics division expanded rapidly in recent years as DNL become an import substitute for Indian automotive, pharma, rubber, and various players.

Revenue Segments of Deepak Nitrite

The table below shows how the revenue segments of Deepak Nitrite have grown over the years.

Share of Revenue Segments	FY17	FY18	FY19	FY20	FY21	FY22
Basic Intermediates	47.28	43.77	32.60	21.90	17.31	18.20
Fine & Speciality Chemicals	25.46	27.14	19.55	13.63	17.46	12.22
Performance Products	17.98	17.58	14.71	17.87	6.93	7.64
Phenolics	NA	NA	33.14	46.60	58.31	61.94

(figures in %)

The share of different product segments of DNL in its revenue has changed over the years. The most significant is the Phenolics segment growth (it comes under Deepak Phenolics, a wholly-owned subsidiary of Deepak Nitrite now) which grew to account for 62% of the company’s revenues in FY22. Set up in 2014, Phenolics was a small division of the company generating insignificant income earlier.

Segment Results of Deepak Nitrite

Similarly, the table below highlights the share of profits before interest and taxes (earnings before interest and taxes) of different divisions of DNL.

EBIT Segments	FY17	FY18	FY19	FY20	FY21	FY22
Basic Intermediates	88	107	145	209	195	313
Fine & Speciality Chemicals	82	115	127	175	334	257
Performance Products	-18	-8	83	419	23	99
Phenolics	NA	NA	96	187	633	867
Total EBIT	152	213	451	991	1,184	1,536

(figures in Rs Cr)

Geographical Segments

The exports accounted for 22.49% of the total income of the company in FY22. Domestic sales fetched a majority of 77.51% of the total revenue.

We are now well aware of what the company does and how it has matured over the years. Let us equip ourselves with the Indian chemicals industry landscape as part of our fundamental analysis of Deepak Nitrite.

Industry Overview

According to the data from FICCI, India holds a 4% market share in the $ 5,027 billion worth global chemicals industry. China stands as the largest producer with a 39% share. The ‘commodity’ chemicals and ‘specialty’ chemicals make up around 80% and 20% of the total market respectively.

Since 2017, the Chinese chemical industry started faltering as the government came down harsh to control pollution and emissions. Because of this, the prices increased worldwide. The structural change presented a huge opportunity for Indian companies as most of them already had eco-friendly practices in place. 

The Indian specialty chemicals sector is estimated to double its share in the worldwide market from 4% presently to 6% by 2026. The annual growth has been pegged at 18-20% in FY22 and 14-15% in FY23. 

Going forward, the outlook and revenue visibility are expected to stay strong for the Indian players as MNCs shift their chemical requirements to India and other APAC nations.

We have read about the company, its segments, and the chemicals sector so far in our fundamental analysis of Deepak Nitrite. In the sections ahead, we’ll do a quick SWOT analysis and race through the financials of the stock.

SWOT Analysis of Deepak Nitrite

Strengths

DNL has a comprehensive product portfolio across four segments catering to clients in various sectors thereby diversifying associated risks and helping it to obtain new clients easily.

Weaknesses

Uncertainty in the raw materials and fuel costs can hurt profit margins as the company is not able to pass through increased costs for long-term agreements.

Opportunities

Like in the past, DNL’s strategy of substituting imports for critical products will help it to capitalize on value-added downstream products in the future.

Threats

Obsolescence risk and a short supply of skilled labor for complex chemical processes are two significant threats to the company.

Deepak Nitrite – Financials

Revenue & Net Profit Growth

Over the last six years, the operating revenues of Deepak Nitrite have grown at a CAGR of 29.31% from Rs 1,455 crore in FY17 to Rs 6,802 crore in FY22. The annualized growth of operating profit and net profit is high at 50.30% and 85.91% on low bases respectively.

The table below shows the operating revenue, operating profit, and net profit of the company for the previous six fiscals.

Fiscal Year	Operating revenue	Operating profit	Net profit
2022	6,802	1,642	1,067
2021	4,360	1,280	776
2020	4,230	1,074	611
2019	2,700	429	174
2018	1,676	212	79
2017	1,455	142	26*
CAGR (%)	29.31%	50.30%	85.91%

(figures in Rs Cr except for CAGR)

*The net profit for FY17 has been adjusted for an exceptional profit of Rs 70 crore.

Operating & Net Profit Margins

Following the boom of the Indian chemicals industry, the margins of the company also expanded multi-fold over the years. 

Reduced production and stringent environmental norms increased the prices of chemicals globally. Furthermore, the China+1 strategy brought more demand. This helped Indian manufacturers stand in line with global players, resulting in significant growth in their profit margins.

The table below brings forward the improvement in the operating margins and net profit margins of DNL. 

Fiscal Year	OPM	NPM
2022	24	16
2021	29	18
2020	25	14
2019	16	6
2018	13	5
2017	10	2

(figures in %)

Return Ratios: RoCE & RoE

The return ratios of Deepak Nitrite have improved significantly because of the earnings from the Phenolics and Fine & Speciality Chemicals segments. The figures in the table below convey the transition of DNL into a highly profitable business.

Fiscal Year	RoCE	RoE
2022	40	38
2021	37	40
2020	37	46
2019	17	17
2018	10	10

(figures in Rs Cr)

Higher profits made Deepak Nitrite a financially stable stock. But how? The earnings growth has helped Deepak Nitrite to deleverage itself. We read more about this in the next section.

Debt/Equity & Interest Coverage

Notice in the table below how the management has paid back the debt to bring down the debt-to-equity ratio. Additionally, increased shareholders’ funds and earnings before interest & taxes further improved debt to equity ratio and interest coverage ratio of the stock.

Fiscal Year	Debt / Equity	Interest Coverage (times)
2022	0.09	48.36
2021	0.25	17.1
2020	0.65	8.02
2019	1.05	4.22
2018	0.96	3.46

Future Plans Of Deepak Nitrite

So far we only looked at the previous years’ data as part of our fundamental analysis of Deepak Nitrite. In this section, we’ll try to get an idea of what lies ahead for the company and its investors.

1. The management has planned to invest around Rs 1,500 crore in FY22 and FY23 to enter upstream/downstream products and increase the efficiency of existing product lines.
2. The Rs 700 crore CAPEX of the phenolics subsidiary will likely get completed by FY24 adding high-value solvents with backward integration capabilities to the product portfolio.  
3. Additionally, the company has been de-risking its manufacturing operations by setting up a Sodium Nitrate plant in Oman by investing $ 15 million in the JV with a 51% stake.
4. Furthermore, the management has earmarked a new investment of Rs 1,000 crore to set up a world-class facility for Polycarbonate compounding business.

Fundamental Analysis of Deepak Nitrite – Key Metrics

Before we hit the end, let us quickly revise the key metrics of the stock.

CMP	₹1,800	Market Cap (Cr.)	₹24,500
EPS	₹64.9	Stock P/E	27.7
RoCE	40%	RoE	38%
Promoter Holding	45.7%	Book Value	₹268
Debt to Equity	0.09	Price to Book Value	6.74
Net Profit Margin	16%	Operating Profit Margin	24%

In Conclusion

The recent Q3FY23 results (Rs 209 crore profit on the sales of Rs 1,991 crore) tell how the management is steering Deepak Nitrite towards higher growth in the future. Investors will have to keep a close eye on the operating margins and quarterly sales growth to see where the stock is going. 

In your opinion, what can be unexpected speed bumps for investors in the near future? How about you let us know your views on DNL in the comments below?

You can now get the latest updates in the stock market on  Trade Brains News and you can also use our  Trade Brains Screener to find the best stocks.

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Top Mid-Cap Stocks in India – Stocks To Watch In 2023

Top Mid-Cap Stocks in India: Many investors prefer mid-cap stocks over large-cap companies in the hope of higher returns. Against only 100 large companies, the recent AMFI classification lists out 150 mid-cap companies in India. How do you go about picking the best ones from such a large pool? Well, in this article we’ll get you a list of the top mid-cap stocks in India which you can add to your watchlist.

Top Mid-Cap Stocks In India

In this article, we shall be talking about the business models, recent developments, and a few financial metrics of mid-cap companies. Later, we present a table that includes more such companies. So without further ado, let us jump in.

Top Mid-Cap Stocks in India #1 – Tube Investments of India

CMP	₹2,415	Market Cap (Cr.)	₹46,500
EPS	₹42.6	Stock P/E	57.7
RoCE	29.4%	RoE	28.1%
Promoter Holding	46.4%	Book Value	₹178
Debt to Equity	0.26	Price to Book Value	13.50
Net Profit Margin	7.8%	Operating Profit Margin	16.6%

Part of the fertilizers to cycles conglomerate Murugappa Group, Tube Investments of India is a diversified company with varied business interests. It was incorporated in 1949 as TI Cycles of India Ltd. It is one of the favorite mid-cap stocks of mid-cap and growth-oriented mutual funds. 

The company manufactures a broad range of consumer and industrial products such as cycles, power generation, transmission, & distribution products, forging, welding, & other industrial equipment, EVs, and auto-ancillary products.

Tube Investments has ramped up its expansion in the e-mobility space with a series of acquisitions and investments. It recently acquired the entire stake in the Celestial E-Mobility, an electric tractors startup. The company made another small stake purchase in X2Fuels and Energy, an early-stage thermochemical technology startup.

Before this, the holding company had acquired a controlling stake in the troubled CG Power and Industrial Solutions. Now the subsidiary is eying large railway projects like Vande Bharat in joint ventures.

Tube Investments’ consolidated revenues doubled to Rs 12,525 crore in FY22 from Rs 6,083 crore in FY21 after the inclusion of CG Power’s earnings. It is a low-debt stock with high RoCE and RoE of 29.4% and 28.1% respectively. 

Top Mid-Cap Stocks in India #2 – Polycab India

CMP	₹3,000	Market Cap (Cr.)	₹44,500
EPS	₹78.0	Stock P/E	38.1
RoCE	22.50%	RoE	17.30%
Promoter Holding	66.6%	Book Value	₹390
Debt to Equity	0.02	Price to Book Value	7.59
Net Profit Margin	7.4%	Operating Profit Margin	10.4%

Polycab India Ltd. (formerly Polycab Wires Ltd.) is India’s largest manufacturer of wires, cables, and fast-moving electrical goods (FMEG). It traces its origins back to 1964 when promoters jointly set up a manufacturing facility at the Halol plant. 

Since then it has grown to capture a leading 22-24% market share in the organized cables market in India. It has a vast network of more than 4,600 dealers and distributors. The company has 25 facilities across 5 locations with strong backward integration. 

As for the revenue segments, Polycab’s wires & cables division accounted for 87% of the total Rs 12,204 crore income in FY22. The FMEG segment and copper & EPC segment brought 10% and 3% revenue respectively. The management is particularly bullish on switch and switchgear in the FMEG segment now.

Source: Polycab India Corporate Presentation – January 2023

The company plans to touch sales of Rs 20,000 crore by FY26. Polycab invested Rs 527 crore towards expansion in FY22. In past, the topline grew at a CAGR of 12.5% every year from Rs 6,770 crore in FY18 to Rs 12,204 crore in FY22. 

Polycab is a debt-free stock with a high promoter holding of 66.6%. Additionally, it has high return ratios with RoCE and RoE at 22.50% and 17.30% respectively.

Top Mid-Cap Stocks in India #3 – Indian Hotels Company 

CMP	₹313	Market Cap (Cr.)	₹44,500
EPS	₹5.3	Stock P/E	61.2
RoCE	1.2%	RoE	-5.5%
Promoter Holding	38.2%	Book Value	₹51
Debt to Equity	0.38	Price to Book Value	6.21
Net Profit Margin	-10.2%	Operating Profit Margin	13.2%

Incorporated in 1899 by Mr. Jamsetji Tata, Indian Hotels Company Limited (IHCL) is the hospitality arm of the salt-to-software Tata Group. The company is the largest hospitality enterprise in South Asia with Indian origins.

It runs hotels, resorts, and homestays under its various brands: Taj, SeleQtions, Vivanta, Ginger, and amã Stays & Trails. It has a large portfolio of 28,650+ keys in 240 hotels across different segments. 

IHCL has properties across all of India. It also has an international presence with hotels in UAE, South Africa, Bhutan, Sri Lanka, Maldives, the US, and a few other countries. 

Source: IHCL Investor Presentation

IHCL also runs 43 spas, 15 boutiques, 34 salons, 380 restaurants and bars, a culinary & food delivery platform, an exclusive business club worldwide, and TajSATS, an air catering service in a joint venture with SATS, a Singaporean airport service company. 

The company has come out of the pandemic blues with its TTM revenues and net profit at Rs 5,057 crore and Rs 786 crore after the December 2022 quarter results. This is much better than Rs 3,056 crore revenues and a loss of Rs 265 crore in FY22. 

Top Mid-Cap Stocks in India #4 – IDFC First Bank

CMP	₹57	Market Cap (Cr.)	₹35,500
EPS	₹3.3	Stock P/E	17.6
RoCE	4.6%	RoE	0.7%
Book Value	₹33.9	Price to Book Value	1.69
GNPA	2.96%	NNPA	1.03%
CASA Ratio	50%	Capital Adequacy	16.06%
Promoter Holding	36.4%	PCR	76.60%

IDFC FIRST Bank came into the existence after the merger of erstwhile IDFC Bank and erstwhile Capital First in December 2018. Incorporated in 1997, IDFC had a key presence in corporate banking. Founded by Mr. Vaidyanathan, Capital First had a strong retail presence and was looking for a banking license to become a bank.

The merger was beneficial for both companies as it resulted in a diversified loan book amid India’s fast-changing economic landscape. As of the present date, IDFC First bank is a universal bank with a diversified loan book. It offers a portfolio of services including personal loans, credit cards, education loans, working capital loans, and more.

It has emerged as a leading tech-driven bank with a broad customer base of more than 7.3 million and growing. 

As of the quarter ending December 2022, its CASA ratio stood at 50%. It’s GNPA and NNPA improved to 2.96% and 1.03% respectively.  

It has a well-diversified lending portfolio with more than 20 business lines. The bank has a strong capital adequacy ratio of 16.06%.

Its earnings have been volatile after the merger but there are green shoots visible with improving returns and stellar profits of Rs 485 crore, Rs 567 crore, and Rs 617 crore in the first three quarters of FY 2022-23.

Top Mid-Cap Stocks in India #5 – Metro Brands

CMP	₹830	Market Cap (Cr.)	₹22,500
EPS	₹13.3	Stock P/E	62.2
RoCE	19.9%	RoE	20.2%
Promoter Holding	74.2%	Book Value	₹53
Debt to Equity	0.56	Price to Book Value	15.80
Net Profit Margin	15.9%	Operating Profit Margin	30.7%

Metro Brands Ltd. (MBL) is one of the largest footwear specialty retailers in India. It started in 1995 with a single store and currently operates 720 stores across 142 cities in the country.

It retails footwear across all sub-segments (casual, party-wear, wedding, formal, and sportswear) and price-positioning (from under Rs 500 to more than Rs 3,000 as well). 

Metro, Mochi, Da Vinchi, J. Fontini, and Walkway are powerful in-house brands of MBL. Additionally, it is a seller of third-party brands such as Crocs, Fitflop, Skechers, and Clarks. In-house brands accounted for 73% of the revenues of the company in the latest fiscal.

It had 178 exclusive brand outlets (EBOs) of Crocs, 162 multi-brand outlets (MBOs) of Mochi, and 231 MBOs of Metro at the end of FY22. 

The company raised Rs 295 crore of fresh capital in its IPO in December 2021 which it has utilized for new store openings. Since its listing, the stock has generated an impressive 77% return for its investors.

MBL is a highly profitable business with a return on equity of 20.2%. Additionally, it has a high promoter holding of 74.20%. The retailer reported the highest-ever annual sales of Rs 1,343 core in FY22. Its TTM revenue stood higher at Rs 1,986 crore after the December 2022 quarter results.

List of Top Mid-Cap Stocks in India 

The table below presents more such top mid-cap stocks in India.

Company Name	Industry	CMP (Rs)	Market Cap (Rs Cr)
Tube Investments of India	Diversified	2,415	46,500
Polycab India	Cables	3,000	45,000
Indian Hotels Company	Hospitality	313	44,500
IDFC First Bank	Banking	57	35,500
Metro Brands	Footwear	830	22,500
Ashok Leyland	Automobile	150	44,000
Jubilant Foodworks	QSR	454	30,000
UNO Minda	Auto Ancillary	509	29,000
Deepak Nitrite	Chemicals	1,788	24,500
Syngene International	Life Sciences Services	567	23,000

In Conclusion

It is believed that small and mid-sized companies can grow their revenues faster than large companies. The prospects of higher returns attract more investors. However, in a bear market, small-cap and mid-cap stocks fall harder. Thus, higher prospects always bring higher volatility and risks. 

Investors’ allocation to the smaller companies should be limited to the extent of research and the volatility they can bear. In your opinion, what are other factors one must consider while purchasing small-cap and mid-cap stocks? How about you let us know in the comments below?

You can now get the latest updates in the stock market on Trade Brains News and you can also use our Trade Brains Stock Screener to find the best stocks.

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What is Pledging Of Stocks? Definition, Risk & More

What is pledging of stocks? The pandemic brought increased participation of Indian citizens in the stock markets with a new breed of traders and investors. Now every trader and investor wants to earn above-average returns. Some even resort to margin trading facilities, collateral margins, or loans against shares. All these concepts mean the same thing more or less: borrowing funds by pledging the stocks. So, what does pledging stocks mean? Through this article, we’ll learn just that.

What is The Pledging of stocks?

Pledging of stocks is a mechanism by which investors (or traders) borrow money by providing the stocks or shares held by them as collateral. In the most simple terms, pledging means borrowing money against stock holdings. Just like stocks, ETFs and mutual fund units can also be pledged to avail loans.

What are the different ways of pledging stocks?

There are broadly three ways in which you can pledge your shares:

1. Loan against securities (LAS) means borrowing funds by pledging your shares to various NBFCs such as HDFC, Kotak, etc. Zerodha also allows you to get LAS with the help of its NBFC-arm Zerodha Capital Private Ltd. 

This is usually a cheaper option as compared to taking a personal loan. During LAS, the balance gets transferred directly to the bank account.

2. Margin Trading Facility (MTF) allows one to borrow funds while making a fresh purchase itself. In the most simple terms, you can purchase a share of Rs 100 but pay only Rs 25 while taking the trade if the allowed margin is 25% on the stock. The balance amount is borrowed and interest is levied on it. 

The shares are pledged to depositories after making the transaction. In this method, the stocks held have a trigger price. If the trading price falls below the trigger price, some units get sold automatically to make up for the margin shortfall. This is known as margin call. You’ve to provide more funds to avoid margin calls in situations when the stocks fall (or the position goes against you).

3. Under the collateral margin facility, the investors can pledge the securities present in their brokerage accounts to avail extra margin for trading equity intraday, futures & options writing (equity and currency F&O).

However, after the recent changes, exchanges allow a maximum of 50% margin only to be used for F&O positions. This means if you use margin for open positions, you’ll have to fund the balance 50% requirement in cash or cash equivalents.

How much can you borrow by pledging shares?

When shares are pledged, investors get a margin (or funds) after a certain amount is deducted from the price of the collateral. The amount deducted is called a ‘haircut’.

The haircut % and the maximum amount of money you’ll get differs according to the stocks pledged. On some stocks, you can avail yourself of as much as 85-90% of the value. On others, it can be as low as only 10 to 20% of the value of your stock.

For example, assume you hold a share of Indian Oil Corp. and its present value is Rs 100. The haircut on IOCL’s share is 25%. Then you’ll get Rs 75 after pledging the share of the company in your account.

The collateral constraint is most in a loan against securities. RBI allows a maximum of 50% of the collateral value as a loan against securities. Thus if the price of a share is Rs 100, the most you can get is Rs 50. There is a multitude of charges such as processing fees, pledging fees, and more that must be closely studied while taking a LAS.

How do pledging stocks work?

Every time a pledge is created on a stock, it has to be authorized via CDSL or NSDL. The stocks (or securities) pledged are kept safe with the broker while they provide you with the money for trading or investing.

The value of the security against which a pledge is created is calculated as a lower of the previous closing price or the last trading price. After the haircut deduction, the balance starts reflecting in the available margin section of your stock broker.

The other way is you can make a fresh purchase by purchasing a share for Rs 100 on margin by paying only Rs 25. The balance amount is provided by your broker. 

What are the charges for pledging stocks?

Usually, an investor has to pay the interest on the amount borrowed and a basic fee for pledging & unpledging of the stocks. Different trading platforms have different charge structures for availing of the margin facility.

1. Interest charge: The interest charge levied on the borrowed funds is ideally between 8% to 18% (annualized). 

2. Pledging fee: This is a small flat amount usually in the range of Rs 20 to Rs 30 plus GST for every stock pledged. So the amount will be, say Rs 30 * 3 = Rs 90 plus GST if you pledge shares of three companies. The booking platforms charge this during the pledging or the unpledging process.

What are the risks while pledging stocks?

While the prospects of earning superior returns by leverage are lucrative, it also entails the risk of a margin call. 

You see, the price of securities fluctuates because of the volatility. Even if you are confident for the long term, your broker can ask you to deposit more funds because the market value of your collateral has decreased. If you don’t, the broker may sell the stocks at loss to save their downside.

In Conclusion

The decision of pledging stocks to avail more margin is entirely onto the trader or investor. But one must read all the terms & conditions and applicable charges carefully before pledging the shares. Furthermore, it is beneficial to compare the interest charge across the brokers to see which suits you best. 

What are your views on the pledging of stocks? Which broker do you think is best for this? How about you let us know in the comments below?

You can now get the latest updates in the stock market on Trade Brains News and you can also use our Trade Brains Stock Screener to find the best stocks.

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