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Earnings to drive stock specific moves while IT sector to remain in focus

08 Oct 2022 0 COMMENT

Market Outlook:

  • Indian equity benchmarks snapped three week losing streak. Midcaps outperformed with gains of ~2% for the week
  • Structurally we maintain our positive stance with Nifty target of 18100 in October with strong support at 16700 levels. Buy the dips
  • For the coming week, we expect Nifty to hold 16900 with target of 17500. Sustainability above 17500 would lead to acceleration.
  • Seasonality: Historically, September has been a volatile month. However, over past two decades, Q4 returns for Nifty has been positive (average 11% and minimum 5%) on 70% of the times. The history favours buying dips from hereon
  • Relative outperformance: Indian equities continued to relatively outperform global peers while pricing in many negatives in the process. We expect outperformance to continue
  • Sectorally, BFSI, Consumption, Pharma and PSU expected to outperform
  • Preferred Largecaps: TCS, Indusind Bank, Bank of Baroda, Reliance Industries, Sun Pharma, Titan, Tata Motors, Coal India
  • Preferred Midcaps: Havells, Bajaj Electricals, TCI Express, Tata communications, Tata Chemicals, Bharat Forge, Midhani, Cyient, Kewal Kiran Clothing

Brent (94) Technical Outlook

  • Brent prices gained 7% for the week after five weeks of decline and news of Opec+ output cut
  • Technically, last weeks gains are construed as technical pull back from oversold trajectory after 33% decline over past four months ($125-83)
  • Entire decline has been well channelled and current slower pace of pull back is expected to find stiff resistance in the |98-100 range being upper band of the channel and key retracements of preceding fall
  • Key support remains at $85 for coming week

IT Sector Preview

  • For IT companies growth continues in Q2 on account of deal execution momentum
  • We expect IT companies to post CC revenue growth between 3-5% for Q2FY23 with Infosys being at the higher end (5% CC revenue growth) in tier I IT companies while TCS, Wipro & HCL Tech (IT services) are expected to post constant currency (CC) revenue growth of 3%, 4% & 3.5% QoQ respectively. Among tier II IT companies we expect Mindtree to post a revenue growth of 5% QoQ in CC while TechM, LTI & Coforge are expected to post a growth of 2%, 3% & 4.5% respectively in CC terms
  • We expect cross currency headwinds in the range of 100-150 bps impacting the dollar revenues of the companies. We expect TCS, Infosys, Wipro & HCL Tech to post dollar revenue growth between 1.5-3.5% QoQ while TechM, LTI, Mindtree & Coforge are expected to post a revenue growth between 0.5-4% QoQ.
  • Despite wage hike for the companies like TCS, Infosys, LTI already factored in Q1, we expect margins expansion likely to be restricted in the range of 20-50bps QoQ for Top 4 companies due to continued high attrition which is expected to keep backfilling costs at elevated levels. For Mindtree, margins are expected to decline 130bps QoQ due to wage hike while that of Coforge is expected to improve by 155bps QoQ due to continued focus on offshoring, planned increase in utilisation
  • We expect Infosys to maintain its 14-16% CC revenue guidance for FY23E and we expect the company to maintain status quo as far guidance is concerned through the rest of the year. We also do not expect the company to change margin guidance of 21-23% as it already factored in cost pressures. Even for HCL Tech, we do not expect the company to change revenue/EBIT margin guidance from 12-14%/18-20% for FY23E

Stocks Preferred – Infosys, Mindtree, Coforge

Auto Sector Preview

We expect Auto space to report healthy results in Q2FY23 amidst QoQ uptick in sales volume, stable to positive gross margins, operating leverage led expansion in EBITDA margins and consequent PAT growth.

  • On the volume font, in the 2-W space, volumes at industry leader i.e. Hero MotoCorp for the quarter stood at 14.3 lakh units, up 2.7% QoQ while the same in the premium segment i.e. Royal Enfield at Eicher Motors stood at 2.1 lakh units, up 11% QoQ . In the PV domain, total volumes at Maruti Suzuki came in healthy at 5.2 lakh units, up 10.6% QoQ while the total automotive volumes at M&M stood at 1.8 lakh units, up 17.1% QoQ. In the CV space, volumes at Ashok Leyland came in healthy at 45,295 units, up 14% QoQ with stable product mix with M&HCV to LCV ratio at 61:39.
  • With management commentary guiding RM benefits to accrue from H2FY23, we expect gross margins to bottom out and marginally improve in the range of 20-50 bps QoQ for our coverage, given the magnitude of raw material price decline (metals, plastics down in the range of ~15-20% QoQ).  
  • With operating leverage at play, EBITDA margins for the universe is seen expanding 60-90 bps QoQ with OEM’s leading the growth charge in Auto space for Q2FY23.
  • In the Auto OEM space (ex-Tata Motors), we expect sales to grow 12% QoQ with 90 bps expansion in EBITDA margins and consequent PAT growth at 39% on QoQ basis.
  • While in the ancillary space, we expect sales to de-grow 1% QoQ with 60 bps expansion in EBITDA margins and consequent PAT remaining largely flat on YoY basis. Muted show in the ancillary space is primarily driven by somewhat muted prospects in the export markets given the macro uncertainty.

Key outperformer for Q2FY23: Ashok Leyland, M&M and Mauri Suzuki

We remain positive on the auto space given the expectation of double digit volume growth in the near term coupled with benign commodity price outlook leading to healthy margin recovery. Our Top bets are largely domestic oriented businesses with healthy growth prospects namely Maruti Suzuki (target price: ₹ 10,000), M&M (target price: ₹ 1,590), Eicher Motors (target price: ₹ 4,170) and Ashok Leyland (target price: ₹ 180) in the OEM space.

Banking Business updates - credit growth

  • Continued robust traction witnessed in banking credit at 16.2% YoY for the fortnight ended 9th Sep 2022.
  • Credit demand from retail (19.5% YoY in August 2022) & MSME remain buoyant, rising working capital utilization by large corporates (6.4% YoY growth vs negative growth in previous fiscal).
  • Business updates across lenders indicate continued strong disbursement in Q2FY23E

 

Banks

Advances (Rs crore)

YoY growth (%)

QoQ growth (%)

HDFC Bank

1480000

23.5

6.1

IndusInd Bank

259647

17.6

4.7

Federal Bank

163956

19.4

6.2

AU SFB

52452

12.0

6.0

CSB Bank

17661

23.6

8.1

 

  • Management commentary suggests strong credit demand in festive season specially in retail segment – home, auto loans and uptick expected in unsecured credit. Expect to end fiscal with credit growth in double digit.

Preferred Stocks

 

 

CMP

Target

FY24E multiple

Potential upside

SBI

537

650

130%

21%

BoB

135

160

90%

19%

 

 

 

 

 

Axis Bank

755

970

230%

28%

IndusInd Bank

1200

1330

180%

11%

Multiplex business update and result preview

  • Given the weak movies collection with only 2 movies crossing | 100 crore during the quarter, the multiplexes are expected to witness ~35-40% QoQ decline in box office revenues with weak footfall (down 25-35% QoQ) and ATP (average ticket price) decline ranging from 5-12% QoQ for Inox and PVR. PVR, relatively will witness relatively lesser decline of ~25% QoQ in footfall, aided by South movies footfall, albeit same will result in lower ATP at | 220, down by ~12% QoQ, given the movie mix and promotional discounts offered by the company. Advertisement remain at 65% of pre covid for both the multiplexes.
  • We expect both PVR and Inox to report EBITDA losses (at ex- IND AS) of | 6 crore and | 13 crore, respectively given the weak content performance. Content performance in Q3 will be key for overall recovery of multiplexes operating profits, going ahead.
  • For the medium term, key trigger will be merger post which PVR Inox will become the largest film exhibition company in India with ~1600 screens, at ~50% multiplex screen market share and ~42% box office collection market share. The MergedCo will benefit from faster growth trajectory (the management is looking to add 200+ screens every year and ~2000 screens over the next seven years). Key synergy, in our view, will be bargaining power across the value chain given the scale boosting the revenues – for example in advertisement, where Inox is at ~36% discount] and in distribution revenues opportunities (the combined entity would have 80%+ share in Hollywood movies collection in India.

Sony Zee Merger

  • The Competition Commission of India (CCI) on October 4 granted conditional approval to the proposed merger of Zee Entertainment Enterprises Ltd with Culver Max Entertainment Pvt Ltd (CME), formerly known as Sony Pictures Networks India.
  • Most importantly, the approval paves the way for consummation of merger by Q4 as indicated by the company. On fundamental front, we expect ad growth recovery in Q3 led by festive season, while Q2 (quarter gone by) would be relatively weak. We have baked in strong doubled digit growth advertisement in H2FY23 and 13% growth in FY23.
  • While the conditions are not yet divulged by the companies or CCI, media reports indicate it involves shutting down of some channel. We expect either of any regional channel or second GEC segment to be sold/shut down. However, shut down of any major channel would impact revenues and thus we would await clarity on the conditions.
  • For Zee, Strong ad recovery from H2 and likely merger consummation with no visible impediment is the key triggers. We had a BUY rating with target price of | 300

Titan Company business update (CMP: 2710, TP: 3080, upside: 14%)

  • Titan reported yet another robust quarter with healthy beat on consensus estimates. Company witnessed strong double-digit growth across most segments (except eyewear division) with overall sales increasing 18% YoY in Q2FY23. The revenue is ~ 9-10% higher than consensus estimates. Management indicated that outlook for festive season (from Navratri in end Sep'22) continues to be optimistic and is visible in positive consumer sentiment across categories.
  • Jewellery segment continued to glitter with 18% sales growth (85% of sales). The growth is impressive (3-year CAGR: 28%) considering the fact that previous quarter (Q2FY22) was a high base which had elements of pent-up demand and spill over purchases of a Covid disrupted Q1FY22. Furthermore, studded sales were higher than the overall division driven by good activations and better contribution from high value purchases (will result in better gross margins).  CaratLane (72% owned subsidiary), continues to scale up rapidly with sales growth of 56% YoY. Watches division (10% of sales) too continued its healthy trajectory with topline growth of 20% (3-year CAGR: 5%).
  • Company has clocked in robust growth in H1FY23 (3-year CAGR: 22%) and as per our estimates we expect Titan to exit with more than 30% YoY revenue growth in FY23E (driven by jewellery segment). Over the longer term company aspires to grow jewellery revenues by 2.5x by FY27 (implied CAGR: 20% from FY22 base of | 24000 crore). Titan’s new growth engine CaratLane has already clocked in ~ | 1000 crore sales in H1FY23 (FY22: | 1250 crore) and is on track to achieve | 2000+ crore sales in FY23.
  • Sustained market share gains without compromising on the balance sheet strength (FY22: RoCE 33%, cash & investments: | 1500+ crore) has led to P/E multiple expansion over the last couple of years. We continue to remain structurally positive on the stock as high growth visibility justifies premium valuations (Huge headroom for growth with current market share at ~6% in | 4 lakh crore market). We build in revenue and earnings CAGR of 24% and 34% over FY22-24E).
 
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