Partner With Us NRI

Open Free Trading Account Online with ICICIDIRECT

Incur '0' Brokerage upto ₹500

Historically Q4 returns for Nifty has been positive, Results to drive stock specific moves

25 Mins 15 Oct 2022 0 COMMENT

Market Outlook:

  • Indian equity benchmarks consolidated last week amid global volatility to end the week marginally lower
  • Going forward, we expect Nifty to gradually surpass 17500 levels in a non-linear fashion and head towards 18000 in coming weeks, amid onset of Q2FY23 earnings and festive season
  • Over past six weeks, on numerous occasions index witnessed buying demand near 200-dema (16900) , thereby rewarding buying on dips strategy amid global volatility. We maintain our stance of buying dips as we expect 16700 to be held
  • Seasonality: Historically, over past two decades, Q4 returns for Nifty has been positive (average 11% and minimum 5%) on 15 out of 21 occasions (70%). The history favours buying dips from hereon
  • Indian Rupee: US Dollar/INR pair has approached key trend line resistance around 83.30 mark. Since 2015 on multiple occasions pair has reversed lower from this trend line amid extreme overbought readings on weekly timeframe. Stability in rupee against US dollar would support Indian equities in coming weeks
  • Sectorally, BFSI, Consumption, IT and PSU are preferred
  • Preferred Largecaps: Axis Bank, Bank of Baroda, Bharti Airtel, TCS, L&T, Maruti Suzuki, Sun Pharma, Titan,  Coal India
  • Preferred Midcaps: ABB, CUB, Bharat Forge, Coforge, Birla Soft, Navin Fluorine, TTK Prestige, Laurus Labs, SCI , Kalyan Jewellers

Technology results –

Mindtree, HCL Tech good set of number, Infosys upping revenue guidance was major positive

  • TCS: Reported 4% QoQ CC revenue growth. Dollar growth 1.4% QoQ ( 260bps cross currency headwinds). EBIT margins improved 90bps QoQ to 24%. TCV remained steady at US$8.1bn (including all deals, new+ renewal). LTM attrition 21.5% up from 19.7%. net adds 9,840 for Q2. Buy Maintained with Target Price 3630
  • Infosys: Reported 4% QoQ CC revenue growth. Dollar growth 2.5% QoQ ( 150bps cross currency headwinds). EBIT margins improved150bps QoQ to 21.5%. TCV up 58% QoQ to US$2.7bn ( Only large deals). LTM attrition down 130bps 27.1% net adds 10,032 for Q2. Revenue guidance: 15-16% in CC for FY23, EBIT margin guidance 21-22%. Buyback of |9,300 crore at 1850 per share. Buy Maintained with Target Price
  • Wipro IT services: Reported 4.1% QoQ CC revenue growth (2.9% organic). Dollar growth 2.3% QoQ ( 180bps cross currency headwinds). EBIT margins improved 10bps QoQ to 15.1%. TCV US$725mn ( Large deals only). LTM attrition down 30bps to 23%. net adds 650 for Q2. Maintain Hold
  • HCL Tech IT services: Reported 5.3% QoQ CC revenue growth. Dollar growth 3.1% QoQ (220bps cross currency headwinds). EBIT margins improved 100bps QoQ to 16.7%. TCV US$2,384mn ( new deals only). LTM attrition flat QoQ  to 23.8%. net adds 8369 for Q2. Revenue guidance: 16-17% in CC for FY23 for IT services ,13.5 to 14.5 at company level, EBIT margin guidance 18-19%. Buy Maintained with Target Price 1115
  • Mindtree: Reported 7.2% QoQ CC revenue growth (7th consecutive quarter of 5%+ growth). Dollar growth 5.7% QoQ ( 150bps cross currency headwinds). EBIT margins declined 60bps QoQ to 18.6% (wage hike). TCV at US$518 mn ( including all deals, new+ renewal). LTM attrition down 40bps QoQ to 24.1% , net adds  835 for Q2

Banks Q2FY23 preview

  • Credit growth is to remain robust at 16.7% YoY (our coverage universe) driven by retail and MSME segment. Resultantly, NII is expected to grow at 13.6% YoY
  • Other income should remain healthy, PSBs to witness spike as no treasury loss expected in Q2FY23
  • Lower slippages and adequate provision buffer to keep credit cost steady, thus PAT is seen to jump 47.8% YoY & 22% QoQ. GNPA to reduce QoQ by ~10 bps to 3.4% (in our coverage).
  • Management commentary on credit demand and behaviour of restructured pool to remain watchful
  • Stock to outperform – SBI, Federal Bank, IndusInd Bank, Bajaj Finance

SBI - Strong loan growth of ~17-18% YoY expected in this quarter; one of the highest in last 5 years. NII growth seen  at ~7% YoY due to high base in Q2FY22. Slippages expected at ~|8000-9000 crore, overall NPA  provisions seen moderating to |6600 crore. Investment provisions write-back can lead to reduced overall provisions, thus expect strong profit growth at ~| 9270 crore.

IndusInd Bank - IndusInd Bank has reported robust business growth with 18% YoY and 5% QoQ growth in advances to ₹ 2.59 lakh crore. Healthy disbursement is expected to enable steady margins and NII at ₹ 4265 crore, up 16.6% YoY. Building of business capabilities to keep CI higher at 44.2%, however, lower credit cost at ~45 bps (non annualised) to boost earnings at ₹ 1760 crore; up 10% QoQ and 58% YoY. Asset quality is expected to remain steady with GNPA ratio at 2.3%.

Bajaj Finance - Better than expected AUM growth at 31% YoY & 3.4% QoQ to |218350 crore, was reported by BAF. Increase in ticket size had offset marginal moderation in customer accretion (26 lakh vs 27.2 lakh). NII seen to surge at 35% YoY to | 7212 crore with steady margin. Provision to witness marginal uptick to | 830 crore. With C/I ratio under control, PAT estimated to increase 90% YoY & 8% QoQ to | 2815 crore.

FMCG Results

  • Despite a sharp correction in edible oil, crude & related commodities, FMCG companies have not taken any major price cuts during the quarter given most companies were holding high cost raw material inventory. The industry would continue to witness price led revenue growth in Q2FY23. Our FMCG coverage universe revenue growth of 15.8% (ex-ITC 11%) largely driven by pricing growth
  • Palm oil prices have declined 50% from the peak in May 2022. Further, crude prices are down 27% from the peak in June 2022.
  • High inflation has slowed down rural consumption in the last few quarters, we expect a dip in commodity inflation along with stronger agri growth to help the FMCG industry in regaining volumes in H2FY23. We also believe new product launches would accelerate given companies are expected to increase ad-spends with the dip in major commodity prices.
  • ITC is likely to continue to report strong numbers with 25.3% revenue growth. We estimate cigarette business sales of 16.9% led by strong volumes. We estimate 10% volume growth during the quarter. We expect 10.7% sales growth in FMCG largely led by prices, improved product mix and higher contribution of stationary brands. Tata Consumer operating margins is expected to expand by 71 bps to 14.3% while Revenue growth would be 11.6%.

Pharma Results

Pharma companies are expected to report a decent Q2FY23 numbers amid strong YoY growth in domestic formulations and a stable US portfolio amid favorable currency movement and some key launches. The universe is expected to post YoY growth of ~12%.

Domestic formulations are expected to post robust growth of 12% YoY on the back of 1) uptick in volumes of chronic and sub-chronic therapies 2) full quarter impact of price hikes and 3) benefits from new introductions and field force expansion.

On the US front, we expect 9% YoY growth (despite base business price erosion) to be driven by 1) new launches, 2) continued momentum in specialty/complex portfolio and 3) ~8% YoY INR depreciation vis-à-vis last quarter.

Stock Preference with good Q2FY23 expectations-

Laurus Labs- We expect 28% YoY sales growth to be backed by robust CRAMs order book.

Sun Pharma - We expect 16% YoY sales growth on the back of strong domestic growth and strong US specialty growth.

Hospitals are likely to maintain revenue growth tempo in Q2FY23 on the back of 1) rise in elective surgeries 2) higher in-patient volume and 3) improving international patients and insurance payee mix. We expect 5% sequential revenue growth of our Hospitals universe.

Strong trajectory is also expected on the EBITDA front on the back of maturing profile of hospitals, reduction in ALOS along with ramp up in occupancy and ARPOB levels with improved case mix. We expect 20% sequential EBITDA growth of our Hospitals universe.

Stock Preference with good Q2FY23 expectations-

Narayana Hrudayalaya -  8% sequential revenue growth and 9% sequential EBITDA growth

Apollo Hospitals-  7% sequential revenue growth and 17% sequential EBITDA growth

Chemical Results

Chemical companies are likely to maintain strong sales growth trajectory for Q2FY23 amid strong traction from Specialty chemicals and agro chemicals segments besides healthy CRAMs order book. Most of the players have initiated aggressive capex over the last few quarters which expected to maintain the momentum. Our Chemical universe is expected to register ~32% YoY sales growth.

On EBITDA front the universe is expected to post robust growth of 46%YoY as increase in key raw material prices and power and fuel cost is likely to get offset by better realization and healthy product mix.

Stock Preference with good Q2FY23 expectations-

Sumitomo Chemicals- 30% YoY revenue growth expected on the back of key agri- molecules in the domestic markets.

Neogen Chemicals- ~48% YoY revenue growth expected on the back of commissioning of new plant in the Organic Chemicals segment.

Astec Life sciences – ~144% YoY growth expected on the back of better utilization of Herbicides plant and spillover of orders from the earlier quarter.


Capital Goods & Defence Results

  • In Q2FY23 we expect the execution of all EPC and capital goods companies to improve YoY on a strong order book. We expect EBITDA margin to start getting the benefit from the recent cool off in commodity prices while the full impact will be visible from 2HFY23. In defence, overall execution has been better which will reflect in the earnings of the companies.
  • Overall our capital goods coverage universe revenue to grow by 18.3%, EBITDA to grow by 16.2% YoY and PAT to grow by 9.1% on improved execution. We expect healthy growth in revenues for ABB, Siemens, L&T and Thermax on a YoY basis, on strong inflows received in the past few quarters.
  • This quarter, companies like Data Patterns, Bharat Dynamics and Mazgaon Dock are likely to report better numbers led by better execution. Bharat Dynamics has received major orders for different types of missiles like Surface to Air missiles, Anti-tank Guided missiles, Air to Air missiles in the last 2 years. Execution period is also relatively shorter for these companies
  • For Data Patterns, we expect ~29% YoY growth in revenues and 39% YoY growth in PAT. Bharat Dynamics is likely to see ~21% YoY revenue growth and improvement in margins which will lead to significant growth of ~70% YoY in PAT. Mazagon Dock Shipbuilders is also likely to see 20% YoY revenue growth driven by pick-up in execution across its existing contracts of submarines and warships.
  • We prefer Bharat Dynamics considering the strong earnings growth of ~25% CAGR expected over the next 2 years led by healthy execution. The current order backlog implies 3.8x book to bill ratio on TTM revenues. Our target price of Rs 1070 on BDL implies over 24% upside from the current levels.

Metals Results

Q2FY23 to be a muted quarter for metal players on the back of subdued pricing

Q2FY23 is likely to be a subdued quarter for majority of Metal companies On subdued pricing. Q2FY23 would also be the first full quarter impacted by export duty (Export duty was levied in May’22). On a QoQ basis steel prices are down ~Rs. 12000-13000/tonne sequentially (~16%-17% QoQ), while for Q2FY23 Aluminium prices are down ~18% QoQ. On the back of weakness witnessed in steel pricing, EBITDA/tonne of steel companies is likely to witness a decline of ~ Rs 4000 – Rs 11000/tonne on a QoQ basis.

Coal India to be a standout performer, aided by healthy e-auction realisations

Within the Metal space Coal India is likely to be a standout performer aided by healthy e-auction realisations. For Q2FY23, Coal India is likely to report sales volume of 154 Million tonne (MT), up 5% YoY. E-auction realisations is likely to come in at Rs 4800/tonne (up 11% QoQ and 201% YoY). E-auction volumes is likely to come in at 16 MT in Q2FY23 as compared to 21 MT in Q2FY22.

For Q2FY23, we expect CIL's consolidated topline to increase 24% YoY to Rs. 28960 crore. Consolidated EBITDA margin is likely to come in at 30.7% for Q2FY23E compared to 16.9% in Q2FY22. For Q2FY23E, we expect Coal India to clock an EBITDA/tonne of | 575/tonne as compared to | 267/tonne in Q2FY22. Ensuing consolidated PAT for the quarter is likely to come at | 6251 crore, up 113% YoY.

Stock preference - Coal India -(CMP – Rs 235, target Rs – 275, upside 17% - Rating - BUY)

  • Healthy e-auction realisations to support consolidated earnings, For FY23, CIL is targeting sales e-auction sales volume of ~80-90 MT
  • Trading at an attractive valuation (at a P/E of 6.4x FY24E EPS, and at 3.5x FY24E EV/EBITDA)
  • Healthy dividend yield
  • CIL has guided for ~5% reduction in manpower annually for the next five to 10 years (FY22 base of 248550 employees)

Consumer Discretionary Results

  • In the ongoing result season, our Consumer Discretionary universe (excluding paints) is likely to see price led revenue growth of 10% YoY in Q2FY23. The volume offtake of electrical goods and plastic pipes is likely to be muted owing to lower rural spending, volatile PVC prices and high base impact.
  • On the margin front, the Q2 EBITDA margin is likely to contract by ~220 bps YoY dragged by high cost inventory and higher ad spends. This will result in 12% decline in net profits of our CD universe (excl. Paints). Going forward, we expect strong sequential recovery in the margins supported by cooling raw material prices.
  • Paint companies are likely to report strong revenue growth of ~20% in Q2FY23 supported by higher realisations. However, volume growth is likely to be in the range of 6-7% mainly due to high base and lower consumer spending in the rural regions. We expect volume recovery to start kick in from Q3FY23 onwards on a normalised base and strong festive demand
  • We maintain our positive stance on leading FMEG players such as Havells (TP 1650) and Bajaj Electricals (TP 1470) supported by demand recovery in H2FY23 and maximum benefit of softening raw material prices to start flowing from Q3FY23 onwards. Under the paint segment, Asian Paints continue to be our best pick with TP of | 4045

Hidden Gems

Federal Bank (CMP – Rs 128 Target Price - 150)

Strong performance on growth, earnings as well as asset quality front.  

Credit growth (provisional number already announced) remain robust at 19.9% YoY, thus NII came at Rs 1762 crore, up 19.1% YoY and 9.8% QoQ

Robust other income reported at Rs 609 crore, up 24% YoY, while opex increased at a slower pace (9.5% YoY) resulting in strong growth in PPP at 33% YoY to Rs 1212 crore

Provision came higher at Rs 268 crore i.e 17 bps of advances (non-annualised). However, robust top-line and operational efficiency led to 52% YoY growth in PAT at Rs 704 crore, ahead of estimates.

Asset quality continued to remain resilient with 23 bps QOQ decline in GNPA ratio to 2.46%.


Disclaimer: ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is a SEBI registered with SEBI as a Research Analyst vide registration no. INH000000990. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The non-broking products / services like Research, etc. are not exchange traded products / services and all disputes with respect to such activities would not have access to Exchange investor redressal or Arbitration mechanism.