Nifty to slowly inch towards new high, stock specific moves likely to continue

• Buying spree continued for the 2nd week in a row where both Nifty and Bank Nifty gained another 1% on the back of strong recovery in global markets.
• We reiterate our structurally positive stance and expect Nifty to gradually head towards 18100 in coming week while strong support exist at 17300 levels.

Our positive stance is based on:

• Implicated target of past three weeks consolidation (17500-16900) is placed at 18100
• Relative outperformance of Indian equities against global peers
• The Dollar index has registered breakdown four weeks range
• Post the US GDP data, US 10 years bond yields declined and slipped below 4% whereas Dollar index remained near its one-month low.
• FIIs have turned net buyers on the back of a recovery in global markets form lower levels. They have been net buyers of almost | 4150 crore during the week. FIIs quantum of selling declined for the 2nd week in a row due to which their net sell in cash segment for October series stands only near 5000cr.
• Seactorally, we expect BFSI, Capital Goods, Consumption and PSU to outperform
• Preferred Large caps: State bank of India, Indusind bank, M&M, Reliance Industries, Infosys, Titan, Coal India, Sun Pharma
• Preferred Midcaps: CUB, Bank of Baroda, Concor, Granules, Coforge, ABFRL, HAL, SCI, VIP

Expected Auto Nos

• Last month auto volumes came in healthy with MoM growth witnessed across segments.
• Part of it was a function of already strong retail demand especially in the PV segment and part of it was on account of inventory build-up ahead of the festive season. While we await festive flavour from FADA as well as OEM’s, we expect broader M-o-M growth trend to continue especially in the PV and CV domain while it is expected to be a seasonally strong month for the Tractor space.

• Key outperformance is expected from M&M in the PV space, Eicher Motors in the 2-W space and Ashok Leyland in the CV space.
• On the Exports front, we expect volumes to gradually improve in October 2022 tracking commentary from Bajaj Auto in the 2-W space

We remain positive on the auto sector 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: ₹ 10,000), M&M (target: ₹ 1,590), Eicher Motors (target: ₹ 4,170) and Ashok Leyland (target: ₹ 180) in the OEM space.

Rally in Metal stocks 

Recently uptick witnessed in Steel and Aluminium prices 

The downtick in the dollar index has aided the recent rally in the Metal stocks. Dollar index has cooled off from ~114.6 levels a month back to ~ 110 levels currently, aiding the up move in metal stocks. Furthermore domestic spot steel prices have witnessed an uptick of ~ Rs1500/tonne during the last one month thereby auguring well for domestic steel players. Also, during last one week Aluminium prices on the LME have increased by ~6% to ~ US 2300/tonne, thereby auguring well for domestic aluminum players.

JSW Steel - Results commentary 

(Target price - Rs 600, CMP - 680, Rating - Hold).

EBITDA/tonne have bottom out in Q2FY23, improvement likely in Q3FY23 on declining coking coal costs 

For JSW Steel, sequentially coking coal consumption is expected to decline by ~US$ 80/tonne during Q3FY23 when compared to Q2FY23 , thereby auguring well for JSW Steel. During Q2FY23, JSW Steel's coking coal consumption costs stood at US$ 381/tonne and for Q3FY23 JSW Steel's coking coal consumption cost is expected to be ~ US$ 300/tonne.

The company also indicated that steel prices have bottomed out and is expected to remain stable going forward. Hence stable steel prices coupled with decline in coking coal costs is expected to result in an uptick in EBITDA/tonne of JSW Steel during Q3FY23 when compared with Q2FY23 (During Q2FY23 JSW Steel reported EBITDA/tonne of Rs 3477/tonne).

NMDC Demerger 

Shares of the new steel entity to be listed in next few months (by H2FY23)

NMDC has demerged it's steel business, wherein 28th October was the record date for the demerger. NMDC shareholders will receive one share of the new entity (NMDC steel) for every share of NMDC held on the record date. The shares of the new entity is expected to be listed on the exchanges in the next few months (by H2FY23). NMDC stock is currently trading excluding the value of steel business. 

Till May 2022, for the upcoming steel plant NMDC has invested Rs 20420 crore as against expected capex of ~ Rs 22000 crore and this demerger is expected unlock value for the shareholders. The steel plant located in Nagarnar, Chhattisgarh has a planned capacity of 3 million tonnes (MT) and is yet to be commissioned and the company is hopeful of producing Hot Rolled Coil steel by March 2023. As the demerger has happened, there are also plans invite preliminary bids for the strategic sale of NMDC's Nagarnar steel plant by March 2023.

In our Q1FY23 result update, based on SoTP valuation we had given a target of Rs 135 for NMDC, wherein we had given Rs 113/share to the core iron ore business and Rs 22/share to the steel plant. In our Q1FY23 result update, we had valued the steel plant at 35% of the CWIP as on March 2022.

BFSI result insights

Kotak Bank ( CMP – Rs 1885, Target – Rs 2250, BUY)

• Kotak Bank delivered continued its upward trajectory on growth with steady operational performance and asset quality.
• Strong NII growth at 26.8% YoY, aided by 25 bps QoQ expansion in NIMs to 5.17% and 25.1% YoY growth in advances. Healthy fee income (24% YoY), steadier CI ratio (49.4%) and credit cost at 26 bps led to 27% YoY growth in PAT at Rs 2580 crore
• Business growth is expected to continue with unsecured segment being in focus (target to increase proportion from current 8.5% to mid-teens). However, accretion of liabilities (deposits) at competitive interest rate remains a challenge ahead
• Valuing the standalone bank at 3.75x FY24 ABV and allocating Rs 488 to subsidiaries, we have target of Rs 2250

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

• IDFC First Bank delivered on guided trajectory on business growth, profitability as well as asset quality
• Funded assets were up 24% YoY and 5.6% QoQ to | 1.45 lakh crore while customer deposit growth was at 26.3% YoY to | 1.14 lakh crore
• Strong business growth at 24% YoY, NIM expansion of 9 bps QoQ to 5.98%, core fee income growth at 44% YoY and steady credit cost led to 266% YoY and 17.1% QoQ jump in earnings at Rs 555 crore
• Delivery on retailization of balance sheet and gradual improvement in operational performance as per earlier guidance remains positive.
• Further, given continued shifting from borrowing to deposits, engaging in sweating business from existing resources is set to lead to gradual decline in CoF (target saving of Rs 800 crore), CI ratio (target at 65% vs current 75%) should boost RoA from current 1% to 1.4-1.5%. Thus, we remain positive and value the bank at 1.75x FY24 ABV.

MCX (CMP – Rs 1512, Target – Rs 1700, BUY)

• Revenue grew 53.1% YoY and 17.1% QoQ at | 127.4 crore, led by continued uptick in options volume (Revenue from futures – Rs 62 crore and options – Rs 43 crore)
• ADTO in commodity futures declined 7% YoY to | 23918 crore; Options ADTO reported at | 31381 crore in Q2FY23 vs. | 19539 crore in Q1FY23 and | 6023 crore in Q2FY22
• Robust top-line boost earnings at | 63.3 crore, up 93.8% YoY, 52.6% QoQ
• New product launch/initiatives - electricity contracts, option gold contract to drive next leg of re-rating, though clarity is awaited on the launch of any new product
• Going ahead, continued non-linear growth in option volume to aid revenue & earnings. Thus, we remain positive and value the company at 33x FY24E EPS

Tier 2 IT companies

• Coforge: Reported 6.2% QoQ CC revenue growth. Dollar growth 3.4% QoQ. Adjusted EBITDA margins ( ex-ESOP) improved 190bps QoQ to 18.4%. TCV (fresh order intake) remained healthy at US$304mn. LTM attrition was 16.4% down from 18.0%. net adds 464 ( IT business) for Q2. Maintained at least 20% CC growth guidance for FY23 and 18.5-19% EBITDA margin. The company is looking to reach US$2bn revenues in FY23-28. TGT : |4570 per share, Rating BUY

• Birlasoft : Reported 1.1% QoQ CC revenue growth. Dollar growth 0.1% QoQ. EBITDA margins improved 10bps QoQ to 14.8%. TCV remained steady at US$166mn ( including new deal wins at US$138mn). LTM attrition 27.4% down from 29.7%. net adds 193 for Q2. Revenue guidance for FY23 downgraded from 15% to lower end of double digit growth. TGT : |310 per share, Rating HOLD

• Persistent  : Reported 6.6% QoQ CC revenue growth. Dollar growth 5.8% QoQ. EBITDA margins improved 20bps QoQ to 18%. TCV remained steady at US$368mn ( including all deals new+renewal). LTM attrition 23.7% down from 24.8%. net adds 838 for Q2. TGT : |4370 per share, Rating BUY

• Zensar Tech : Reported 1.6% QoQ CC revenue growth. Dollar growth -0.5% QoQ. EBITDA margins down 270bps QoQ to 8.5% ( wage hike impact of 320bps). TCV remained steady at US$141mn including all deals new+renewal). LTM attrition 26.3% down from 28.1%. net declines of 309 for Q2. TGT : |225 per share, Rating HOLD

• Mastek : Reported 10.7% QoQ CC revenue growth ( driven by acquisition, organic growth is low single digit). Dollar growth 6.1% QoQ. EBITDA margins down 277bps QoQ to 17.2% ( wage hike impact). TCV remained steady at US$187.1mn (including all deals new+renewal). LTM attrition 24.2% down from 25%. net declines of 257 for Q2. TGT : |1800 per share, Rating HOLD

Reliance Industries (Target: | 2700)

• O2C revenue was at | 159671 crore, up 32.5% YoY (down 1.3% QoQ) mainly due to increase in crude oil prices. EBITDA declined 5.9% YoY and 40% QoQ to | 11968 crore on account of the special additional excise duty levied on export of fuels and lower polymer deltas. 
• Oil & Gas segment revenue at | 3853 crore was up 134.4% YoY and 6.3% QoQ driven by higher realisation. EBITDA was at | 3171 crore, up 196.1% YoY and 15.9% QoQ. Domestic production stood at 13.4 mmscmd and as per management commentary, production from MJ field is expected to commence by the end of the year. This would lead to an increase in Oil & Gas segment volumes and is expected to contribute around 30% of India’s gas production.
• Reliance Retail revenue for the quarter grew by 43% YoY to | 64920 crore with core retail revenue (excluding JIO sales) increasing by ~60% YoY (three year CAGR: 19%). On the segmental front, grocery segment delivered the best performance with sales doubling YoY, followed by fashion and consumer electronics segment which grew 40%. Footfalls were at an all-time high of ~180 million. Absolute EBITDA grew robustly by 76% YoY to | 4286 crore. During Q2FY23, addition in terms of square feet has been humongous at 9.2 million square feet (Q1FY23: 4.3 million). Retail coverage area now has crossed 50 million (three year CAGR: 30%), which is more than 4x the size of the second largest retailer. Reliance Retail’s widespread physical store network would further enhance its omni-channel capabilities (~18% of revenues) and position it as a frontrunner to garner consistent business growth by capturing a larger pie of the Indian retail sector opportunity

United Spirits (Target: | 1050)

• Net revenues grew 18% YoY to | 2880 crore driven by resilient demand in off-trade channels, on-trade recovery and product mix improvement. Prestige & Above segment volumes grew 14% YoY to 13 million cases driven by premiumisation trend while Popular segment remained flat at 9 million cases. Reported EBITDA grew 5% to | 446 crore led by cost control measures employed by the company. Reported PAT grew 2x YoY | 563 crore as stong operational performance was further uplifted by an exceptional profit of | 372 crore, due to the slump sale
• Gross margins have improved 144 bps QoQ, inspite of the full impact of higher inventory costs in the current quarter. The reason can be attributed to strong P&A sales during the quarter. Also, the portfolio reshape strategy employed by the company will reduce the current net sale by |351 crore (with a near 10% EBITDA margin profile). However, the premiumisation will likely go upwards 85%+from next quarter onwards and thereby improve margin profile. 

FMCG

Dabur India

• Dabur witnessed revenue growth of 6% entirely led by pricing growth. On a three-year CAGR basis, sales growth is 10.5%. Foods (Homemade), beverages (Real) continued to witness strong growth of 21.2%, 30.5%, respectively. The company is looking to grow fruit drinks sales to | 500 crore (FY22 : | 100 crore) in the next three years
• Gross margins contracted 346 bps given most FMCG companies were holding high cost raw material inventories during the quarter.
• The company acquired 51% stake in Badshah Masala Pvt Ltd (BMPL) for a consideration of | 587.5 crore valuing the company at | 1152 crore. BMPL FY22 sales was | 189.1 crore and its estimate FY23 sales of | 256 crore with 22.9% operating (EBITDA) margins. This translates into acquisition multiple of 4.5x to FY23 sales & 19.6x FY23 EBITDA. The company would acquire remaining 49% stake after five years at similar valuation multiples. With this acquisition, Dabur has forayed into | 25,000 spices & seasoning category
• Dabur is looking to leverage its rural reach, ecommerce & modern trade channel strength, procurement efficiency & manufacturing automation capability to grow Badshah brand at a CAGR of 20%+ to reach | 700 crore sales in next five years. It is also looking to extend ‘Badshah’ brand in other food categories
• Given some of the categories like hair oils and oral care are saturated categories with high penetration levels, FMCG companies are required to enter newer underpenetrated categories to sustain the growth momentum of the last one decade. We believe Dabur has been concentrating on increasing its addressable market specifically in multiple foods categories with high share of unorganised market. We remain positive on Dabur from a growth as well as margin expansion perspective. We maintain our BUY recommendation and target price of | 700/ share

HUL

• HUL witnessed revenue growth of 16% largely led by pricing growth. Volumes have grown at 4% during the quarter. Home care and beauty & personal care (BPC) segment saw sales growth of 34% (double digit volume as well as pricing) & 11.2% (pricing growth), respectively. Foods & refreshment segment saw 3.7% growth in Q2. On a three-year CAGR basis, FMCG market (Industry) value growth is 5% with 1% volume decline with similar trend for both urban & rural markets. We believe HUL’s volume growth on a three-year CAGR basis is close to 3%.
• Inflation in crude, soda ash & skimmed milk powder (SMP) still remains high. Moreover, currency depreciation accentuated margin pressure during the quarter. Hence, HUL has taken further price hikes in home care categories.  
• Gross margins contracted 580 bps considering the company was holding high cost raw material (palm oil, crude derivatives) inventory. The 580 bps contraction includes 70 bps increase in consumer promotions.  
• Rural income levels and festive season demand are showing favourable signs for volume growth however long term sustainable volumes would define future performance.  
• At current valuation multiples, most positives are discounted. We maintain our HOLD rating with a revised target price of | 2800/share

Bharat Electronics

• Overall execution remained strong which is visible in revenue growth of 7.8% YoY and 26.8% QoQ during this quarter
• EBITDA and PAT were flattish on YoY basis as EBITDA margin contracted by 170 bps on YoY basis due to higher others cost
• Order Backlog remains strong at Rs 52,795 crore which implies 3.1x TTM revenues. Order inflows stood at Rs 1408 crore during Q2FY23 but as on date order inflows are more than 10,000 crore led by the significant order of Rs 8060 crore for Li-Ion battery packs received during this month
• Orders in pipeline looks very healthy for H2FY23 and FY24E from both defence and non-defence areas. Orders inflow during FY23 is expected at Rs 18,000-20,000 crore. Major contracts in defence are expected from missile systems, radars and electronic warfare etc. In non-defence space, venturing into high growth areas like lithium ion batteries, charging stations, space launch vehicles, space electronics, railways, smart city projects etc. provides more comfort and visibility in terms of order inflows for the coming years.
• Going ahead, we expect overall execution to pick-up further as the increasing procurement of raw material & other required components through MSMEs & private players. Also, the share of non-defence is expected to increase gradually in the coming years which would further aid the overall revenue growth and margins going ahead. We expect profitability CAGR of ~18% during FY22-24E.
• We have a Buy recommendation on BEL with a target price of | 135.

Hidden Gems

VIP Industries – Q2FY23 , (CMP: | 702   MCap: | 9950 crore, TP: | 850, upside 21% )

• VIP’s revenue performance exceeded expectations in Q2FY23 with highest ever sales in Q2. On a favourable base, sales grew by 56% YoY to | 514.7 crore (I-direct estimate: | 463 crore). On a pre-covid base, revenue recovery rate is the highest at 125% in Q2FY23 vs. 105% in Q1FY23. On an average Q2 revenues are ~75% of Q1 sales, however Q2FY23 sales stood at 87% of Q1FY23 revenues which is the highest ever compared to any pre-covid year. Demand recovery continues to be more pronounced towards the mass category than the premium category which is also fuelled by market share gains from unorganised players. Share of Aristocrat brand (value brand) was at 37% vs. 22% pre-Covid while share of VIP brand declined to 21% vs. 27% 
• On the profitability front, gross margins improved 100 bps YoY to 48.1%, however continued to remain below pre-covid levels (~53%) on account of significantly higher RM and freight expenses (65% crude based derivatives) and change in product mix (value segment contributed 37% currently vs. 22% in Q2FY20). Subsequently EBITDA margins stood at 13.9% (up 120 bps YoY, Q2FY20: 16%). With softness in raw material prices, the management expects gradual improvement in gross margins in the ensuing quarter (gross margin range: 50-52%). Post stabilisation of commodity inflation, demand environment, VIP has an aspiration to touch EBITDA margins of 20%
• Own manufacturing contribution (Bangladesh & India) has increased significantly over last two years and it is currently contributing ~66% of revenue in Q2FY23 (vs. 35% in Q2FY20). The Company is aspiring to achieve 70-75% of revenue from its India and Bangladesh plants in FY23. The management highlighted that the company had significantly curtailed its dependence of finished goods from China toTo further strengthen its manufacturing capacity, the company has embarked on a | 100 crore capex plan to enhance its capacity by ~25% by FY24E.
• We expect the company to surpass | 2000 crore revenue in FY23 and model revenue CAGR of 37% in FY22-24E (on a favourable base). Stabilising RM prices and increased proportion of in-house manufacturing both from India and Bangladesh to translate into better margins, going forward. Company continues to have healthy balance sheet with net debt/equity ratio comfortably placed at 0.1x.