Nifty Headed for a new high

Market Outlook

• Indian markets continued to exhibit their resilience amid global volatility and gained more than 1% last week while rest of the world remained largely negative.  The gains in Index were led by lightweight stocks as Metal and Pharma sector were the top gainers for the week
• Nifty Midcap performed better (+2%) against Nifty, which gained 1.3% to trade at 18030
• We reiterate our constructive stance and expect the Nifty to challenge the all-time high of 18600 in coming couple of weeks. In the process, bouts of volatility owing to global uncertainty should be used as incremental buying opportunity.
• We expect BFSI, PSU, Infra and Telecom to outperform

US Fed – no respite from volatility

US Federal Reserve in its latest policy meeting raised its interest rate on expected lines by another 75bps for the 4^th consecutive time to 3.75%-4.00%. Fed also signaled that the magnitude of the hikes may be smaller in the future which led to the anticipation of 50bps rate hike next month. The CME fed tool also indicating 52% probability of 50bps rate hike in December meeting.

The focus point was the U-Turn when Fed said that they might raise borrowing costs next year more than projected earlier and also warned that reducing the size of rate increase in future does not mean that they are anywhere close to from raising rates. Which impacted market sentiments about the rate cycle will end soon. Also they reiterated their commitment for balance sheet tightening. As per the yesterday’s data, Fed has reduced its balance sheet by $82 billion in October against their projection of $90 billion. Since June they were able to reduce by almost $290 billion so far.

Fed rate hike and hawkish comments has supercharged yields on US government bonds, strengthen dollar index and weakened stocks.

Auto Volumes – October 2022

• Wholesale dispatches for the month of October 2022 tapered off post festive led pent up witnessed last month (Sep’22).

• Most of the segments reported MoM volume decline with Tractors as a space coming out as the sole shining star in a seasonally strong month wherein most OEM’s reported highest ever monthly sales volume.

• In the tractor space, M&M's tractor sales were up 10.6% YoY to 51,994 units whereas Escorts’ grew 7.2% YoY to 14,492 units.

• The 2-W space reported muted volume prints largely led by de-growth in the commuter segment with premium segment continuing with its positive momentum, Royal Enfield brand at Eicher Motors outran its peers by maintaining 80K+ units monthly run-rate.

• In the PV space, volumes at Maruti Suzuki de-grew 5.3% MoM at 1.65 lakh units led by decline in UV as well as Mini & Compact segment. M&M's volumes were down 6.4% MoM at 32,298 units while volumes at Tata Motors were down 5.1% MoM at 45,423 units. EV sales at Tata Motors came in at an all-time high of 4,277 units.

• In the CV segment, market leader Tata Motors (TML) reported volumes of 32,912 units, down 5.7% MoM. Ashok Leyland posted 15.3% decline to 14,836 units while VECV volumes de-grew 8.9% to 6,038 units.

• In the 3-W space, volumes were a mixed bag, with Bajaj Auto outperforming on an overall basis with ~15% MoM volume growth

• Encouragingly however, Most of OEM’s however witnessed absolute growth from the pre-festive period (Aug’22)

Our Top bets are Maruti Suzuki (target: ₹ 11,200), M&M (target: ₹ 1,590), Eicher Motors (target: ₹ 4,170)

NBFC displaying subdued price performance

• Unlike banks, substantial divergence witnessed in Q2FY23 performance across NBFCs

• NBFCs across segments – HFCs, auto financiers, affordable home loans delivered on business growth in Q2FY23 (more than 10% YoY) led by recovery in credit demand

• Asset quality witnessed improvement across segments both on sequential and yearly basis

• Amid lag in transmission of interest rate hike, liquidity squeeze in the system and subsequent higher increase in cost of funds, NBFCs remain relatively under pressure.

• Continued elevated opex, increasing competitive intensity from banks and steady credit cost kept earnings volatile.

• Thus, NBFCs did not witnessed run up across players as witnessed in banking sector

Best stock to Buy in NBFCs

Bajaj Finance (CMP – Rs 7111, Target – Rs 8650, BUY)

Best stocks to Buy in BFSI

MCX (CMP – Rs 1492, Target – Rs 1700, BUY)

Axis Bank (CMP – Rs 865, Target – Rs 1000, BUY)

IDFC First Bank (Rs 57, Target – Rs 70, BUY)

Sugar - 12% blending on the horizon

• Sugar stocks have seen correction in last few months after government kept sugar under restricted category. However, we believe government is allowing sugar exports in a regulated manner keeping in mind 5-6 million tonnes of sugar inventory maintained domestically as on 30^th September every year & it would allow sugar exports through mill wise quota based system. We believe government would come up with 6 million tonnes of sugar exports initially & then further allow 2-3 million tonnes of exports in January-February 2023 according to sugar production number in 2022-23 season.

• Given global white sugar prices are trading at |38-|40 / kg compared to domestic sugar prices of | 36/kg, many sugar companies with high refined sugar capacity would be exporting refined white sugar in 2022-23 season. We believe Dalmia Bharat Sugar, Triveni Engineering would be benefiting from higher refined sugar capacity.

• OMCs intend to procure ~550 crore litres in 2022-23 season considering 12% ethanol blending.  The government has increased ethanol prices by | 2 / litre for 2022-23 (December to November) ethanol procurement to encourage sugar millers to divert more sugarcane towards ethanol . Moreover, expected high sugarcane availability would keep sugar prices under pressure. All these factors would result in higher sugarcane diversion towards ethanol. Sugar companies would continue to see strong distillery volume growth given most of them have commissioned capacity recently.

• We believe Dalmia Bharat Sugar, Triveni engineering & Dwarikesh Sugar would be completely debt-free (even on working capital level) in next 12 months. Considering capex requirement is not very large in near future, shareholders payout (dividend, buybacks) would increase significantly in future

Air conditioner segment remain muted

1. The leading AC companies (exlc. Blue Star) have witnessed ~8-10% price correction on weak Q2 results. The Q2 usually happens to be a lean period for Air conditioner industry. Further, this time extend monsoon season, lower discretionary spends amid high inflation and unfavourable base have impacted overall AC volumes. Market leader Voltas volumes on YoY basis was flat. The company faced increased competitive intensity leading to market share loss by 1% QoQ, while Havells’ gained market share but at the cost of margin.
2. High cost inventory, absence of price hikes and increased advertisement expenditure (back to its pre-covid level) have put dent on the margin of AC companies. Voltas’ segment margin at ~7% is one of the lowest margin in the last fifteen quarters, while Havells EBIT loss widened by ~4.5x YoY in Q2.
3. We believe, margin recovery for our coverage companies to start from Q4FY22 onwards supported by easing of raw material prices and building up of fresh inventory for the upcoming summer season. Under our AC coverage companies, we have BUY rating on Havells (TP | 1565) considering its diversified product portfolios and focus on narrowing Lloyd losses going forward. We have maintain our Hold rating on Voltas with revised target price of 1005/share

Bharti Airtel - Maintain BUY with Target price of | 960 (18% upside)

• ARPU growth drives revenues: The performance of Bharti Airtel was robust with healthy growth on ARPUs and margins improvement. Overall India revenues were at | 24333 crore, up 4.3% QoQ, largely driven by healthy traction in India wireless business. Airtel’s India ARPU at | 190, up 3.6% QoQ (vs. 2% growth expectations), was driven by higher number of days and subscriber mix improvement. We highlight the overall ARPU improvement was better than Jio and Vodafone , which saw ~0.9%/2% QoQ growth in ARPU.
• Healthy 4G subscriber and postpaid addition: Overall sub base saw a modest addition of 0.5 mn QoQ at 327. 8 mn. It witnessed healthy 4G Net adds of ~5 mn during the quarter, with 4G data sub base at 210.3 mn (overall data customers base of 219.1 mn). The postpaid subscriber base also saw robust addition of ~283,000 subscribers at 18.3 million (mn).
• Margins expand: Consolidated EBITDA margins of 51%, were up 57 bps QoQ led by India wireless margins which were at 52.4% (up 116 bps QoQ), driven by lower SUC charges after new spectrum purchase
• Maintains need for tariff hike; to focus on rural customer: The company maintained its stance of near term tariff hike, to boost return ratios. It is also looking to accelerate post-paid customer base (riding on weak competitive position of Vodafone Idea) and expand rural coverage (rural customer form 40% of new 4G addition for industry) to bridge gap with Jio.
• Remain constructive and Maintain BUY: Bharti Airtel continues to report resilient numbers especially on the Indian wireless business front. The improvement in ARPUs and continued margin expansion remain a key positive. The non-wireless business momentum along with Africa performance, continues to be robust. Favourable industry structure of three players (two being strong), government relief, tariff hike and fund raise puts Airtel in sweet spot to maintain its relative strength among peers with a formidable digital ecosystem offering.

L&T  Target : Rs 2355

• Larsen & Toubro (L&T) is India’s largest engineering & construction (E&C) company, with interest in EPC projects, hi-tech manufacturing and services. The company primarily operates in infrastructure, heavy engineering, defence engineering, power, hydrocarbon, services business segments. Infrastructure segment contributes ~45% to consolidated revenue followed by services (~30%).
• In Q2FY23 L&T reported strong execution with decent order inflows. L&T’s adjusted standalone revenues (Ex- E&A) for the quarter grew by 21.1% YoY to | 25769.8 crore (vs. our estimate of | 23205.6 crore). On a consolidated basis, adjusted revenues grew by 23% to | 42763 crore YoY basis. For Q2FY23, L&T registered strong order inflows at group level worth | 51914 crore, which grew by 23% YoY. International orders at ₹ 17,341 crore comprised 33% of the total order inflow. Overall infrastructure segment secured orders worth | 25058 crore (~48.2% of total inflows). L&T’s order backlog as on Q2FY23 stood at | 372381 crore with international orders contributing 28% which provides strong revenue visibility over next 2-3 years.
• Going ahead, we expect the company to deliver 14% and 16.2% revenue and PAT CAGR over FY22-24E.We believe the company is on track to meets its 15% growth guidance for revenue and order inflow in FY23. L&T has targeted their revenues and order inflow with CAGR of 15% and 14%, respectively, over FY21-26 with a consolidated RoE of 18%, we value L&T at | 2355 on an SoTP basis. Focus on monetisation of non-core assets, reduction in working capital intensity ,enhancing ROE’s and reducing debt makes it an attractive portfolio bet to ride the infrastructure and manufacturing cycle revival theme.

Dr Reddy’s Laboratories- TP | 5215

• Dr Reddy’s Q2FY23 results were propelled by launch of a complex blood cancer drug in the US,  gRevlimid (lenalidomide) and better than expected Russia sales on account of favourable currency impact and new launches.

• gRevlimid launch epitomises DRL’s complex product focus in the US and we expect focus to continue with ~25 complex generic launches in the US to overcome persisting pricing pressure in the base business.

• DRL’s pending US launch pipeline comprises 40% of complex \ injectable products.

• This complex products focus in the US and simultaneous launches across major geographies such as Russia, India and ROW markets along with cost rationalisation is likely to improve Gross margins profile from 65.5% in FY22 to 67.5% by FY24E which in turn would support strong FCF generation.

Sun Pharma- TP | 1225

• Despite significantly muted Taro (major US based subsidiary in US generics) numbers, Sun Pharma reported commendable Q2FY23  numbers mainly driven by US focused speciality and decent domestic and ROW market growth.

• We believe higher contribution from specialty to overall revenues (from 7% in FY18 to 11% in FY21 and further to ~15% by FY24E) & sustained momentum in India branded formulations to improve product mix and margins profile for Sun Pharma. We expect Gross Margins to improve from ~73% in FY22 to ~ 76% by FY24E

• Launch momentum in India (32 launches in Q2), pick-up in demand for chronic and sub-chronic segment backed by high PCPM and field expansion by 10% in FY23 to sustain India branded formulations growth for Sun pharma.

Hidden Gems by Icicidirect

United Spirits (USL) Target Price 1050

• United Spirits (USL) is India’s leading alcoholic beverage company and subsidiary of global leader Diageo plc. It manufactures, sells premium liquor brands such as Johnnie Walker, Black Dog, Black & White, Vat 69, Antiquity, Signature, Royal Challenge, McDowell’s No 1, Smirnoff and Captain Morgan. 
• Prestige and above segment comprises 80% of its volumes 
• Post slump sale of its 32 popular brands (for | 820 crore, on 30th Sept 22), USL is undergoing a complete revamp of its product mix (with premiumisation accelerating over 90% of revenue mix). Thus, it is strengthening its already existing moat around the business (duopoly with Pernod Richard) and further improve return ratios in the longer term 
• The company remains debt-free (closing cash balance of | 777 cr) and has mostly invested the slump sale proceeds into short term investments (| 275 crore) and working cap (|313 crore) 
• The management aims to grow its revenues in double digits and expects its operating margin to remain in mid to high-teen levels in the medium term 
• The management has indicated that it will publish its dividend distribution policy in next 3 months and thereby, distribute dividends accordingly 
• USL WOS subsidiary Royal Challengers Sports Pvt Ltd reported revenue of |292 crore (PAT of |66 crore) in FY22. In FY22, IPL team asset values rose up due to bidding of two new teams (bid went up 3 times than base price of |2000 crore) 
• We remain positive on the long term growth prospects of the stock and maintain our BUY recommendation. We value USL at | 1050 i.e. 64x P/E on FY24E EPS 

• Risks: Gross margin pressure continues to remain high for the industry, due to continued double digit inflation in paper, glass, ENA prices. However, the management continues to focus on cost control measures and reshaping the product portfolio to counter it.