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Top 5 Stocks in the Financial Services Sector: Overview and Analysis

Written by - Rudri Rawell

July 10, 2023 10 minutes

Financial services sector is seen as the backbone of India’s economic growth. The country has a well-diversified financial sector that is seeing a fast-paced expansion. The sector’s growth has been driven by factors like favorable government policies, innovative products and services, high-quality business fundamentals, and a higher focus on under-penetrated business areas.

As India continues to see rising disposable incomes, sustainable economic growth, rising consumerism and better access to credit, the financial services sector has caught the fancy of many investors. 

Read More – How to Analyze a Stock to Invest Better

Here’s a detailed look at the financial services sector in India. Also know the Top 5 stocks in the financial services sector to tap onto the sector’s growth story.

Overview of India’s financial services sector

Financial services sector comprises mutual funds, insurance companies, commercial banks, non-banking financial corporations (NBFCs), pension funds, cooperatives, and other small-scale financial companies. With the banking regulator allowing new entities like payment banks, small finance banks etc. to be included in this sector, it is experiencing further enhancement.

Did you know?

The financial services sector in India is experiencing rapid growth accounting for close to 6% of the country’s GDP. 

Key factors influencing the financial services industry

Until a few decades ago, India had a mostly government-dominated financial services sector, since the majority of services were offered by nationalised banks. Massive reforms were initiated in this sector initiated in 1991 with an objective to accelerate economic growth as the government opened up the sector for foreign direct investment.

The table below shows some of the key growth drivers in the sector:

Benefits of FDIIndia is considered one of the most vibrant economies in the world due to a strong financial services sector. With foreign investment rules getting relaxed, the country is seeing a positive influx in the insurance sector as many global companies are now entering into joint ventures with Indian companies. 
Insurance segment growthDemonstrating a huge growth potential, India’s insurance market may touch US$ 250 billion by 2025. By 2030, the country’s insurance segment may see close to US$ 78 billion of additional life insurance premiums.
CAGR of mobile walletsThe sector’s mobile wallet segment is likely to achieve a Compound Annual Growth Rate (CAGR) of 150%.
Dominance of mutual fundsThe mutual fund segment is also expecting a five-fold growth in assets under management to touch US$ 1.47 trillion. It is likely to see a three-fold rise in investor accounts in the next 3-4 years.
Operational efficiency Companies in this sector are focusing on widening their outreach through emerging technologies with an end-objective of sharply reducing the cost of operations.
Smartphone penetrationWith increasing availability of smartphones across the nation along with cheaper data connections, most citizens of the country can easily make use of financial products such as insurance, mutual funds, loans, Demat account, etc. with online KYC processes.
Innovation in FinTech companies Financial technology or FinTech companies are aggressively using technology to offer financial services such as personal loans, insurance, mutual funds, etc. across the country. 

Did you know?

As per statistics, by 2028, India is likely to rank fourth among the private wealth markets across the globe. 

(Source-   IBEF)

Top 5 stocks in the Indian financial services sector

Let’s find out which are the top 5 stocks in the financial services sector as per market capitalization:

Bajaj Finance Ltd

Established in 2007, Bajaj Finance Limited is an Indian NBFC offering financial products like loans, wealth management, general insurance, loans for small and medium-sized enterprises (SME), consumer finance, and commercial lending. Apart from a strong focus on retail financing, the company also launched IPO financing services for HNIs. The company’s future plans include widening its presence across semi-urban and rural areas through new product introductions. The key details of this company are tabled below.

CategoryDetails
Market Capitalization Rs. 4,75,487 crores
PE Ratio41.46
Return on Equity23.46 (July’23)
Debt Equity Ratio3.16 (July’23)
Promotor’s Holdings55.91%
Share priceRs. 7,838 (05 July 2023)
Dividend Yield0.38%

Bajaj Finserv Ltd.

Bajaj Finserv Ltd offers products like life and general insurance, along with consumer finance. Other primary focus areas include SME lending, rural lending, commercial lending, loan against securities and mortgage lending. It is also actively engaged in wind-energy generation. The company has plans to expand its offerings across various financial products and services. The company’s management is planning to unleash Bajaj Finance 3.0 for a more agile business approach that will adopt digital enhancements for aggressive growth. The key details of this company are tabled below.

CategoryDetails
Market Capitalization Rs. 2,59,217 crores
PE Ratio40.50
Return on Equity14.81 (July’23)
Debt Equity Ratio4.57 (July’23)
Promotor’s Holdings60.78%
Share priceRs. 1,613 (05 July 2023)
Dividend Yield0.05%

Muthoot Finance Ltd.

This non-banking finance company has two main business segments, financing and power generation. The company’s focus areas include financial services, foreign exchange, insurance distribution, personal and business loans against gold jewellery. The company is known for its gold loans that are primarily offered to individuals who have gold jewellery but are unable to gain formal credit for short-term liquidity needs. The Company boasts of close to 3,678 branches spread across 21 states in India. The key details of this company are tabled below.

CategoryDetails
Market Capitalization Rs. 49,866 crores
PE Ratio12.80
Return on Equity17.86% (July’23)
Debt Equity Ratio2.56
Promotor’s Holdings73.35%
Share priceRs. 1,260 (05 July 2023)
Dividend Yield1.77%

HDFC Asset Management Company Ltd.

HDFC Asset Management Company is a joint venture between Housing Development Finance Corporation Limited (“HDFC”) and Standard Life Investments Limited (“SLI”). The company offers mutual fund schemes and the main revenue driver is the fees generated for managing these schemes. Since 2013, it has been one of the most profitable AMCs in India. It boasts of a strong pan-India network of distributors, agents, and bank collaborations. The company also enjoys economies of scale that help in maintaining low costs and higher profitability. The key details of this company are tabled below.

CategoryDetails
Market Capitalization Rs. 48,913 crores
PE Ratio34.36
Return on Equity24.26 (July’23)
Debt Equity Ratio
Promotor’s Holdings62.77%
Share priceRs. 2.294 (05 July 2023)
Dividend Yield2.09%

ICICI Securities Ltd.

ICICI Securities Limited is a leading Indian technology-driven securities company offering varied financial services like investment banking, brokerage and financial products distribution. The company focuses on both retail and institutional clients. Known as one of India’s largest broking houses, the company offers a wide range of investment services, including online and offline stock trading, platform for mutual fund buy/sell, portfolio management services, insurance, Demat accounts, loans and fixed deposits. The key details of this company are tabled below.

CategoryDetails
Market Capitalization Rs. 19,587 crores
PE Ratio17.56
Return on Equity42.31% (July’23)
Debt Equity Ratio3.30
Promotor’s Holdings74.85%
Share priceRs. 607.95 (05 July 2023)
Dividend Yield3.71%

Risks and challenges in the financial services sector

Here are some of the risks and challenges facing the Indian financial services sector:

  • Cybersecurity: The financial services sector is a major target for cyberattacks. These attacks can have a significant impact on businesses and consumers, leading to financial losses, disruption, and reputational damage.
  • Regulatory compliance: The financial services sector is subject to a complex and ever-changing regulatory environment. Businesses in this sector need to be able to comply with a wide range of regulations, including those related to anti-money laundering, market conduct, and data protection. Failure to comply with these regulations can lead to significant penalties.
  • Market volatility: The financial markets are volatile, and this can pose challenges for businesses in the financial services sector. Market volatility can make it difficult to price products and services, and it can also lead to losses.
  • Interest rate risk: Interest rates are a key factor in the financial services sector. Rising interest rates can make it more expensive for businesses to borrow money, and this can impact their profitability. Falling interest rates can also pose challenges, as they can lead to a decline in the value of investments.
  • Liquidity risk: Liquidity is the ability to convert assets into cash quickly and easily. Businesses in the financial services sector need to have adequate liquidity in order to meet their obligations. If a business does not have enough liquidity, it may be unable to meet its financial obligations, which can lead to financial distress.

Future outlook and growth potential

The Indian financial services sector is expected to grow at a CAGR of 12% between 2022 and 2027. This growth will be driven by a number of factors, including rising income levels, increased urbanization, and the growing adoption of digital financial services. The sector is also expected to benefit from the government’s focus on financial inclusion and the development of the financial technology (FinTech) sector.

Here are some of the key trends that are expected to shape the Indian financial services sector in the coming years:

  • The rise of FinTech: FinTech is the use of technology to deliver financial services. FinTech companies are disrupting the traditional financial services industry by offering innovative and efficient products and services.
  • The growth of digital banking: Digital banking is the use of online and mobile channels to deliver banking services. Digital banking is growing rapidly in India, as consumers are increasingly using digital channels to manage their finances.
  • The expansion of financial inclusion: Financial inclusion is the provision of access to financial services to underserved and unserved segments of the population. The government of India is committed to expanding financial inclusion, and this is expected to drive growth in the financial services sector.

Conclusion

With an increased demand driven by the rising incomes of individuals and corporates, the financial services sector is tapping into offerings like wealth management through financial innovation. With more and more Fintech companies joining the financial services space, there is an expansion of offerings in the sector and this will lead to higher growth in the coming years. The service providers in this sector are constantly expanding their outreach using different mediums.

Lastly, government support continues to act as a booster for this sector through various policy measures and initiatives.

FAQs

What is the policy support offered by the government to the Indian financial services sector?

As per the Budget 2021-22 announcement, the government approved 100% FDI for insurance intermediaries and raised the FDI limit to 74% from earlier 49% in the insurance sector.

Why is the financial services sector important for the Indian economy?

ndia’s financial services sector is one of the main drivers of the economy, providing a free flow of capital and ensuring market liquidity. The strength of the sector is demonstrative of overall economic growth. Also, companies in this sector are better positioned to manage risks.

Is regulatory compliance hampering the growth of the financial services sector in India?

Since regulatory measures are ever-changing, these pose a major challenge to the financial services sector, as non-compliance often involves huge penalties.

Why is the financial services sector facing difficulties in customer retention?

Due to growing competition in this sector, companies find it difficult to retain customers for longer periods. Companies that offer personalisation, automation, and easy access are better able to retain customers.

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