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Nfty at 52 week high. Softer US inflation - the biggest positives in recent month

11 Nov 2022 1 COMMENT

Indian markets

Indian markets are expected to get a boost from softer inflation print in US as key heavyweight  

sectors like banking and technology could head higher from current levels

Indian Equities continued their winning streak for fourth week amid strong global cues, post favourable US CPI numbers. Nifty trades around 18300, up 1% for the week

We reiterate our positive stance and expect Nifty to challenge 18600 in coming week and gradually head towards 18900 in CY22 led by BFSI, IT, Consumption and Infra. Use any dips as buying opportunity as we expect 17800 to be held.

Our view is anchored on:

Breakout from 13 month consolidation: Nifty has given a resolute breakout from 13 month consolidation phase indicating end of corrective phase and beginning of structural uptrend

India VIX has breached six month low below reading of 15 indicating low risk perception from market participants

Sharp Reversals in Currency: USD/INR pair has reversed from its key resistance around 83 mark on expected lines

Global equity indices made sharp bullish reversal this week post favourable US CPI numbers. Dow Jones industrial average has given a breakout from 11 month long declining channel

Key Sectoral Development: Nifty IT index has concluded a breakout from 11-month declining channel signaling end of corrective phase both price/time wise.

US inflation

US Inflation cooled increased by 7.7% in October 2022 compared to 8.2% in September 2022. It has come down from 4 decade high reading of 9.1% seen in June. Also, it was the first reading below 8% in last 8 months. Core-CPI which excludes energy and food climbed 6.3% in October down from 6.6% in September.

Prices for the used cars and trucks which had contributed heavily to inflation last year has come down to 2% on annual basis. On month on month basis the prices for the cars and trucks has declined by 2.4%. Even the Food and Energy inflation has eased.

After the data huge volatility was witnessed across the asset class. Dollar Index plunged sharply to 107.32 levels and US stocks jumped to their biggest gains in more than 2 years. Even the US 10-year treasury yield’s slipped to 3.8% and US 2-year yields came down to 4.3%. Softer than expected inflation data reignited bets that Federal Reserve would slow down the pace of its rate hike. CME fed tool watch indicates 80.6% probability of 50bps rate hike in December meeting.

Technology companies to catch up – stocks preferred

Infosys: BUY TGT |1670 , 23x FY25 EPS.

The company is looking at minimum 15% CC growth in FY23. Large deal TCV continue to be robust at US$2.7bn which provides visibility for near term revenue growth. The company indicated following levers for margin expansion going ahead: a) moderation of attrition which is now visible both on LTM as well as on quarterly annualised basis , dip 130bps in Q2 to 27.1% b) Moderation of subcontractor costs to historical levels of around 7% of sales vs current at 10.1% of sales c) Utilisation improvement as freshers becomes billable ( ongoing process), currently at 76% ( vs historical high of 83.3%). There is a scope of valuation gap to narrow with TCS if margin gap narrows

HCL Tech: BUY TGT |1115 , 18x FY25 EPS. 

The company is guiding for 16-17% CC growth in FY23, ~5% CC growth in 4 out of last 5 quarters including Q2FY23. New deal TCV continue to be robust at US$2.4bn ( 5th consecutive quarter of US$2bn+ new deal TCV) which provides visibility for near term revenue growth. The company indicated following levers for margin expansion going ahead: a) They have been pushing for price increases from last 4-5 quarters and now started getting price hikes from the clients b) moderation of attrition which was flat QoQ to 23.1% c) Moderation of subcontractor costs to historical levels of around 12-13% of sales vs current at 15% of sales. There is a scope of valuation gap to narrow with TCS/Infosys if margin scale up from 18-19% to nearby to Infosys or TCS

Coforge:

BUY TGT |4570 , 24x FY25 EPS. The company is guiding for at least 20% CC growth in FY23, ~5% CC growth in last 4 consecutive quarters leading to Q2FY23. The company is looking to hit US$1bn annual revenue in FY23 and aspiring to reach US2$ annual revenues in next 5 years i.e FY23-28   Fresh order intake ( TCV)  continue to be robust at US$304bn ( 3rd consecutive quarter of US$300mn+) which provides visibility for near term revenue growth. Attrition for the company continue to be lowest in the industry at 16.4% ( down 160bps QoQ in Q2). It is guiding at 18.5-19% EBITDA margin.

Bigger banks could benefit from higher FII inflows

  • Bank profits boosted by healthy operational performance (coverage banks)
  • Banks seems to be on a strong footing led by revival of business growth, improvement in margin and declining NPA ratio with healthy PCR.
  • Credit growth continues to remain strong at 17.9% YoY (as of 21 Oct 2022) mainly driven by retail and MSME segment.
  • Faster transmission of rate hikes on assets compared to liabilities and healthy proportion of low cost deposits led to strong sequential improvement in margins (10-40 bps QoQ). Management commentary suggest margins to remain steady at current level in 2HFY23
  • Absence of treasury losses seen in Q1FY23
  • NPA continue to trend downward from GNPA at 4.4% in Q2FY22 to 3.5% in Q1FY23 and further to 3.1% in Q2FY23 (coverage universe).

Preferred Stocks

HDFC Bank (CMP – Rs 1600, Target – Rs 1750, BUY)

  • Continued focus on towards CRB & retail and further rate transmission to aid margins
  • Deposits accretion will be supported by branch expansion and relationship building, though it will keep opex elevated in the near term
  • Steady asset quality, adequate provision with contingent provision positive. No substantial impact of regularisation of moratorium book
  • Expected to deliver higher than industry growth along with RoA of ~2% in FY24E. Thus, we value HDFC Bank at ~3.1x FY24E ABV & | 50 for subsidiaries

Axis Bank (CMP – Rs 852, Target – Rs 1000, BUY)

  • Focus on risk adjusted business & unsecured segment to aid growth. Expect credit growth at 16.6% CAGR in FY22-24E
  • Improvement in business mix & faster asset repricing to aid yields.
  • Efforts to keep cost to asset at 2-2.5% and adequate cumulative provisions of 160% of GNPA provide comfort on earnings volatility
  • Focus on pedalling business growth and improving margin trajectory to aid return ratios expected at 1.8% in FY24E. thus, we remain positive on the stock with target of Rs 1000, valuing the bank at 2.3x FY24E ABV

SBI (CMP – Rs 603, Target – Rs 700, BUY)

  • Credit growth guidance of ~14-16% to be driven by steady margins, healthy deposit franchise and strong demand pipeline, which will also aid business growth and overall performance
  • Steady NIMs at ~3% with adequate provision buffer to aid healthy earning momentum ahead. Expect PAT to grow at 24% CAGR in FY22-24E.
  • Thus, improving RoE trajectory at ~14.1% and RoA at 0.9% to aid improvement in valuations
  • We remain positive on the stock and value the bank at ~1.3x FY24E ABV and subsidiaries at ~| 192/share

Auto OEM results result a mixed bag

Tata Motors (CMP: ₹ 415, MCap: ₹ 1.5 lakh crore, Target Price: ₹ 465, Rating: HOLD)

  • Tata Motors reported muted performance in Q2FY23 with company reporting loss at the PAT level amounting to ₹ 945 crore. The results were below our expectations.
  • India CV business reported EBITDA margins of 5% (down 50 bps QoQ) while the same in India PV business stood at 5.4% (down 70 bps QoQ) and at JLR stood at 10.3%.
  • More importantly, In the Concall, company guided for securing supplies for semi-conductors however volume recovery at JLR to be gradual in nature with real sequential volume growth expected in Q4FY23. It also lowered the profitability (EBIT margin guidance from 5% to just positive) as well as FCF (from 1 billion pound to breakeven levels) guidance at JLR for FY23E.
  • Consequently, with delay in reduction of debt on its B/S amidst muted show at JLR, we have downgraded the stock from BUY to HOLD

Eicher Motors (CMP: ₹ 3,700, MCap: ₹ 1 lakh crore, Target Price: ₹ 4,310, Rating: BUY)

  • Eicher Motors reported a steady performance in Q2FY23 and was broadly in line with our estimates
  • Consolidated revenues for Q2FY23 stood at ₹ 3,519 crore (up 3.6% QoQ). ASPs for Royal Enfield (RE), de-grew by 5.7% QoQ to ~₹ 1.61 lakh/unit.
  • Hunter 350 sales volumes for the quarter is pegged at ~35,300 units i.e. ~17% of total RE sales volume ( ~2.08 lakh units, up 11% QoQ)
  • EBITDA for the quarter stood at ₹ 822 crore with attendant EBITDA margins placed at 23.3%, down 112 bps QoQ. The company reported ~154 bps gross margin decline (amid adverse product mix) and was partially offset by operating leverage gains (primarily savings realised in employee costs as a % of sales, down 40 bps). Consequent consolidated PAT stood at ₹ 657 crore, up 7.6% QoQ
  • Going forward management commentary was upbeat on demand prospects both domestically as well as globally, gross margin expansion on the anvil starting Q3FY23 and strong new product launch pipeline.
  • Building the positives, we expect sales volume at Royal Enfield to grow at a CAGR of 27% over FY22-24E at 9.7 lakh units in FY24 with company well poised to surpass its last volume peak this year itself at 8.5 lakh units. We have retained our BUY rating on the stock valuing the RE franchise at 34x PE and share of profits from CV domain at 30x PE on FY24E.

Ashok Leyland (CMP: ₹ 147, MCap: ₹ 43,000 crore, Target Price: ₹ 180, Rating: BUY)

  • Ashok Leyland reported steady performance in Q2FY23 and was broadly in line with our estimates
  • Standalone total operating income came in at ₹ 8,266 crore (up 14.4% QoQ). Total volumes for the quarter were at 45,295 units, up 14.2% sequentially with ASPs for the quarter coming in at ₹ 18.2 lakh/unit, flat QoQ amid marginal decline in share of M&HCV volumes in the total sales volume mix (~61.5% in Q2FY23 vs. ~63% in Q1FY23) 
  • EBITDA for the quarter came in at ₹ 537 crore with corresponding margins at 6.5%, up 210 bps QoQ. Gross margin expanded by ~131 bps QoQ & was further supported by other expense which declined 96 bps QoQ. Consequent reported profit after tax stood at ₹ 199 crore vs. ₹ 68 crore in Q1FY23.
  • The company also shared that it has gained market share in the truck segment during the quarter. 
  • We remain positive on company amidst ongoing cyclical recovery in the domestic commercial vehicle space amid greater infrastructure spend by the government as well as revival in private capex cycle. Further company is also expanding in EV space through its investment in Switch Mobility & is a likely beneficiary of National Electric Bus Programme which aims to deploy ~50,000 e-Buses across the country. 
  • We are yet to revise our financial estimates of the company amidst impending management call, however as per our last update, building in 20% sales volume CAGR, we had valued the stock at ₹ 180 i.e. 16x EV/EBITDA to its core CV business on FY24E.

Takeaways from overall CRAMs Q2 numbers-

Most of the Chemical CRAMs companies reported stellar set of numbers propelled by improved capex based execution and incremental order book based on visibility.

  • A case in point is PI Industries which registered ~ 30% YoY growth in CRAMs ( ~75% of the sales ) also witnessed significant order book expansion from US$ 1.4 billion in Q1 to US$ 1.8 billion in Q2 and based on which the company has maintained +20% revenue guidance for FY23. We remain positive on the stock with a target price of | 3930 (Positive hold due to recent run-up).
  • Another example is that of Neogen Chemicals, which is instrumental in Bromine and Lithium based chemicals and derives ~25-30% of the sales from CRAMs reported  ~30% sales growth in Q2 and the company has added five customers in the last quarter in Europe and Japan across agrochemicals flavour, fragrance and engineering segment where projects moved from pilot phase to Phase I with combined revenue potential of more than | 200 crore. The company is working with 15 customers actively. We are positive on the company’s prospects with a target price of | 1680 (BUY)

On the Pharma CRAMs front, most of the players such as Divi’s Labs witnessed dent in performances mainly due to significant shrinkage in Covid execution as the Innovators have started moving on from Covid work. However, on the positive side the new inquiries for new molecules are now trending to the pre-Covid level.

Hidden Gem-

Coforge:

BUY TGT |4570 , 24x FY25 EPS. The company is guiding for at least 20% CC growth in FY23, ~5% CC growth in last 4 consecutive quarters leading to Q2FY23. The company is looking to hit US$1bn annual revenue in FY23 and aspiring to reach US$2 annual revenues in next 5 years i.e FY23-28   Fresh order intake ( TCV)  continue to be robust at US$304mn ( 3rd consecutive quarter of US$300mn+) which provides visibility for near term revenue growth. Attrition for the company continue to be lowest in the industry at 16.4% ( down 160bps QoQ in Q2). It is guiding at 18.5-19% EBITDA margin.

Concluding remark

Softer US inflation to drive help technology and banking sector to accelerate market momentum

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