RIL and ICICI Bank: Two bellwethers surprise on the upside

Over the weekend, two bellwether companies declared their quarterly and full year results. The interesting part was that both the stocks delivered better than what the street expected. In the case of Reliance Industries, the top line growth in the oil to chemicals (O2C) business was actually lower, but that was more than compensated by the positive growth shown by the digital and the retail business. Overall ,the top line still showed moderate growth of over 2%. What was really surprising, as we shall see later was the way the profits of Reliance grew, despite a high base. This growth in profit was not only visible across the retail and the digital business but even the traditional O2C business.

Let us quickly turn to ICICI Bank, which announced results on Saturday. ICICI Bank flattered the street with stunning growth on the top line and the bottom line. For the first time the quarterly net profits of ICICI Bank got tantalizingly close to the Rs10,000 crore mark. But the bigger story was how the bank has managed to grow its net interest income and its NIMs, without compromising on asset quality. The bank has emerged much stronger from the tumultuous last few years and now reports NIMs that are better than that of HDFC Bank. Here we shall take a more detailed look at how ICICI bank flattered the street over the week and how it has become the banking bellwether for the Indian banking sector.

Reliance Q4FY23 results says, Growth is Life

For many years, the unmistakeable tagline of Reliance Industries has been “Growth is Life.” In the latest March 2023 quarter, Reliance growth on the top line may have been moderate but the bottom line growth has more than made up for it. For the March 2023 quarter, Reliance Industries reported 2.12% growth in top line revenues at Rs216,376 crore on a consolidated basis.

Net profits for the quarter stood at Rs19,200 crore, a full 19.11% higher on a yoy basis. This is despite lower revenues on the core O2C business, which was more than made up by the growth in retail and digital services revenues. As a new milestone, total annual profits for FY23 for Reliance Industries stood at an all-time high of Rs74,088 crore. Here is a quick look at the quarterly numbers of RIL.

The net profit growth of 19.11% for Q4FY23 was triggered by 21.8% growth in the EBITDA to Rs41,389 crore. In the last few quarters, it has been the digital business that has been driving growth in EBITDA while retail has driven growth in top line. In Q4FY23, digital EBITDA continued to gain while the retail EBITDA benefited from better and wider sourcing benefits. Even the oil to chemicals (O2C) business saw profit growth on the back of higher transport fuel cracks and optimized feedstock costs.

The business footprint of digital and retail has been expanding rapidly. For instance, Jio consolidated its already dominant market share with 5G rollout. On the other hand, Reliance Retail opened more than 3,300 new stores taking total store area to 65.6 million square feet. One area for the company to watch out would be the debt angle. As of FY23, gross debt stood at Rs314,708 crore while net debt (net of cash/equivalents) stood at Rs110,218 crore; which is a 3-fold over FY22. In FY21, net debt was almost zero. Clearly, amidst all the euphoria, higher cost of funds appears to be impacting deleveraging efforts.

ICICI Bank plays the margins game to perfection

The quarterly and the full year results of ICICI Bank came in much better than the street expected. In fact, ICICI Bank reported 25.9% growth in total revenues for the March 2023 quarter at Rs53,923cr. But the real big story was that the net interest income (NII) increased by 40% to Rs17,667 crore in Q4FY23 while the critical net interest margins (NIM) expanded by a record 90 bps from 4.00% to 4.90% yoy. NIMs were at 4.65% in December 2022.

Let us turn to the key drivers of the growth in the ICICI Bank numbers. In terms of top line, there was positive growth across retail lending, corporate lending, and growth in terms of non-interest and fee income. The spike in the net profit happened despite a sharp 52% spike in provisions for doubtful assets made in the quarter. Apart from the core income flows of ICICI bank, non-interest income grew 11.3% while fee income for the quarter also grew by a healthy 10.6% at Rs4,830 crore.

How did the overall business of ICICI Bank grew in terms of deposits and lending? The total deposits grew by 11% in the fourth quarter to a whopping Rs11.81 trillion out of which the current and savings accounts (CASA) deposits ratio stood at 43.6%. The CASA represents the low cost funding mix of the bank. On the assets side, the domestic loans portfolio grew by 20.5% yoy. One of the positive features for ICICI Bank is that the asset quality is now largely under control.

The provision coverage ratio (PCR) stands at 82.8% of non-performing assets. Gross NPAs were lower at 2.81% while net NPAs at 0.48% in the March 2023 quarter indicate that most of the potential loan losses are already provided for. Return on assets (ROA) a key metrics for banks has sustained above 0.50% in the last few quarters. To a large extent, the latest quarter results prove that ICICI Bank is regaining its financial performance mojo once again.