Truncated week, stock specific action likely

• Ahead of the festive season, buying spree continued across the sectors which helped Nifty to clubbed in 2.5% for the week. At the same time, US equities recovered from there 52 weeks’ low due to better than earning from few US companies.
• While FII’s remained negative in the cash segment for the month of October where they sold above 7000 cr, there quantum has declined significantly this week and in few sessions they even turned positive. Nifty continued to show resilience against global cues as India VIX declined by more than 12% against US VIX which declined only 6%. This positive divergence in the volatility suggest traders comfort at current levels.
• We maintain our positive stance and expect Nifty to head towards 18100 in coming week amid progression of earnings season and monthly derivatives expiry. Sectorally, BFSI, PSU and Telecom are expected to lead the gains
• Banking index, which holds >35% weightage in Nifty, is expected to outperform as rallies are quicker and stronger while corrections are shallow, underpinning inherent strength
• PSU Banks: Nifty PSU bank index posted resolute breakout above CY21 highs and past five year down trend line indicating strong structural uptrend. While large caps have seen strong traction, we expect smaller PSU banks to catch-up and witness strong upward momentum
• In the current move above 17500 levels, heavyweights out-performed whereas mid-cap and small-caps rose less than 2%. However, overall set-up remains positive and we believe, mid-cap stocks from banking, pharma, cement and technology to attract some money inflow in coming days.
• Midcap and Small cap indices are expected to catch up Nifty as they are poised to surpass their three week highs
• Preferred Large caps: State bank of India, Axis bank, Reliance Industries, Bharti Airtel, Infosys, ITC, Titan, Ambuja Cement, Coal India, Dr Reddy
• Preferred Midcaps: CUB, Bank of Baroda, Concor, Coforge, TTK Prestige,  IRCTC, Bharat Dynamics, Jamna Auto, SCI

Consumption dominated results (Banking, FMCG, Multiples, Consumer durables)

Axis Bank (CMP – Rs 873, Target – Rs 1000, BUY)

• Axis Bank has reported robust performance ahead of estimates; asset quality trend continued to improve
• 36 bps QoQ improvement in margin was a positive surprise, led by faster transmission of rate hikes and focus on unsecured lending
• Focus on corporate and unsecured loans continued to keep advance growth strong at 17.6% YoY to Rs 7.3 lakh
• Healthy business growth (16-18%), improvement in NIM (3.8-3.9%), controlled opex (2.2-2.4% of assets) and benign credit cost (
• Thus, we remain positive and value the stock at 2.3x FY24E ABV

Bajaj Finance (CMP – Rs 7326, Target – Rs 8650, BUY)

• Bajaj Finance reported strong results, though positives seems to be largely priced in
• Client addition continued steady at 2.61 million in Q2FY23. Booked 6.76 million new loans, slightly lower in number, but ticket size moved up
• Continued strong AUM growth at 31% YoY to Rs 2,18,566 crore, led by traction across retail and MSME segments
• Stable CI ratio at 35.9% and steady provisioning supported earnings growth at 88% YoY & 7% QoQ to Rs 2781 crore. Steady asset quality with gradual decline in GNPA at 1.17%
• Strong liabilities franchise and customer addition expected to keep AUM growth strong at 25-27% in FY23E. Further, controlled opex and steady provision to keep RoA at >4% and RoE > 18-19%
• Omnipresence strategy and organic momentum building up offers comfort on growth sustainability. Fintech story embedded in this business to keep valuations at premium

IndusInd Bank (CMP – 1149, Target – Rs 1350, BUY)

• IndusInd Bank reported a largely in line performance with decline in stressed book. However, elevated expectations lead to correction in stock price
• Top-line growth supported by healthy advances growth at 17.8% YoY & 4.9% QoQ coupled with 3 bps improvement in margins (which was not anticipated). Further, steady opex trajectory enabled 60.5% YoY and 11.4% QoQ jump in earnings to Rs 1787 crore
• However, higher credit cost and subdued liabilities accretion remain near term overhang
• Revival in credit growth (led by corporate & MFI segment), steady margin (at ~4.2%) and lower credit cost (at 1.2-1.5%) provides visibility to deliver RoA of 1.7-1.8% in FY23-24E. Thus, we remain positive and value the stock at 1.8x FY24E ABV

ITC (Target – Rs 405, BUY)

• ITC witnessed sales growth of 26.6% to |17159.6 crore led by splendid growth in cigarettes, FMCG & paperboard segments. Agri & Hotels business also grew at stronger pace on the back of lower base quarter sales. Cigarettes business sales was up by 23.3% led by ~20% volume growth & ~3% product mix improvement.  FMCG, Paperboard, agri & Hotels business saw robust growth of 21%, 25%, 44% & 81.8% respectively.
• ITC continued its growth momentum across categories in Q2FY23. The cigarettes category has been benefited by stable taxation, market share gains with aggressive trade promotions and newly launched premium brands in last one year
• FMCG business growth was led by strong performance across categories except hygiene product portfolio. FMCG margins (EBITDA) contracted by 50 bps to 9.5% in Q2FY23. It is important to note that operating margins expanded by 280 bps compared to Q2FY20 (pre-pandemic quarter).  
• Hotels business occupancy levels have crossed 70% (except for newer properties). Further Average Room Revenue (ARRs) have been higher than pre-Covid levels. Moreover, hotels business operating margins was higher by 860 bps compared to the Q2FY20 (pre-Covid period).
• The company maintained its gross & operating margins despite huge commodity pressure in FMCG business.
• We believe ITC would continue to grow sales in its core business of Cigarettes and FMCG with stable taxation & softening of raw material prices. We remain positive on the stock & maintain our Buy recommendation with the Target price of | 405 / share

Tata Consumer Target – Rs 950, BUY

• Tata Consumer witnessed a growth of 10.9% to | 3363.1 crore led by 29% growth in India foods business, India beverage business de-grew by 2% largely on the back of lower tea prices & dismal volumes. International tea business also saw flat revenue on constant currency basis.
• The 29% sales growth in India foods business was entirely contributed by prices given very high inflation in salt prices due to high energy costs. India tea business witnessed 7% revenue decline with 6% cut in prices & 1% volume dip. The company lost market share by 20 bps in India tea business.
• Gross margins contracted by 101 bps with waning benefits of lower tea prices, extremely high inflation in salt. Operating profit grew by 5% to | 433.8 crore with operating margin contraction of 73 bps to 12.9%.
• Adjusting for exceptional income, Net profit grew by 3.2% to |307.5 crore. Profit from associates grew by 41.1% on account of higher income from tea plantation associate company & strong performance from Starbucks JV. Starbucks JV saw strong 57% growth during the quarter with continued profit at EBIT level.
• Tata Consumer remain our top pick in the sector given strong growth opportunity in foods & beverage business & its aggressive strategy of foraying, acquiring newer large opportunity size categories.

Colgate – Rs 1610, HOLD, Volume growth still missing; cautious outlook

• Colgate’s saw muted sales growth of 2.6% to |1387.5 crore largely driven by pricing growth. We estimate volumes would have de-grown during the quarter given most of the FMCG companies were holding high cost raw material inventory. The correction in commodity inflation would be reflected in price cuts & grammage increase from Q3FY23 onwards.
• Gross margins contracted by 308 bps & operating margins contracted by 23 bps to 29.4%. Led by stable operating profit, net profit grew by 3.3% to |278 crore.
• Oral care category is saturated with more than 90% of the penetration in both rural & urban regions.
• We maintain our HOLD rating on the stock with a revised target price of | 1610/share

Asian Paints Buy 3710

• As expected, Asian Paints at 10% volume growth, has maintained its double digit volume growth trajectory in Q2FY23 translating to 3-years volume CAGR of ~18%. However, delay in price hikes and adverse product mix dragged the gross margin by 200 bps QoQ to 36%. EBITDA margin at 14.5% therefore came in below ours and street expectation
• Going forward, management has maintained its double digit volume growth guidance through dealer additions and new product launches. Further, company has announced | 6750 crore capex plan for the next three years to strengthen its backward integration and product portfolio. We believe the capex will help- maintain its leadership position through market share gains & will be margin accretive.
• We have revised our target price to | 3710 /share (from | 4045) factoring in slow margins recovery over FY23-24E.

Havells India Buy 1565

• Havells’s Q2FY23 performance was again negatively impacted by high cost inventory dragging overall gross margin. Addition to this, advertisement expenditure back to its pre-covid has led Havells EBITDA margin at multiyear low at 7.8% in Q2FY23. According to management, company will see a gradual recovery in gross margins from Q3FY23 onwards supported by softening raw material prices and improved product mix.
• On the revenue front, company has reported an encouraging three-year revenue CAGR of 18% supported by new product launches and market share gains. Going forward, we build in revenue CAGR of 16% over FY22-24E led by ~29% revenue CAGR in Lloyds. We believe, new product launches and dealer additions will be key growth drivers of overall revenue. We cut our FY23E, FY24E earnings estimates by ~10%, 1.2% respectively factoring in slow margin recovery in H1FY23.
• We maintain our BUY rating on the stock and value the stock at 58x P/E FY24E EPS with a revised target price of | 1565/share 

Multiplexes

• Q2 was a weak quarter with major big budget/starrer turning flops. only two films (Brahmastra, Thor) crossed the | 100 crore mark
• Consequently, the footfalls were down by ~30-37% QoQ for the multiplexes. The Average Ticket Prices were also down by 6-10% QoQ. The ad recovery was also muted (currently at 62-65% of pre-pandemic – similar to last quarter). Consequently, both PVR and Inox reported losses of Rs. 9 crore and Rs. 3 crore, respectively on EBITDA levels
• We highlight that content pipeline in Q3 is strong with releases like Avatar, Drishyam 2, Ram Setu, Cirkus, Kisi ka Bhai Kisi ki Jaan, etc slated to release
• For the medium term, key trigger will be the synergy, in our view, will be bargaining power across the value chain, given the scale boosting the revenues across segments such as advertisements and distribution. Thus, we remain constructive on multiplexes with medium to long term consolidation benefits in sight.
• We value both Inox and PVR at 15x FY24 EV/EBITDA. Target price of PVR is Rs. 2130 (upside of 23%) while Target price for Inox is Rs. 675 (upside of 33%)

Defence Expo 2022 highlights

• Faster induction of unmanned combat ariel vehicles (UCAVs), 4.5^th & 5^th generation combat aircrafts and multi role helicopters – IAF is looking for right mix of unmanned and manned aircrafts for combat role in future though more indigenisation
• The variant of GE engine which will be used in Tejas LCA MK2 and Advanced Medium Combat Aircraft (AMCA) MK1 will be manufactured in India through tech transfer. This will increase the indigenisation level of these manned aircrafts significantly as compared to the current indigenisation level of 60-65% in Tejas MK1A.
• Regarding the unmanned ariel vehicles, DRDO has already developed Rustom and Tapas which will be manufactured by HAL with indigenised kaveri engine. CATS (combat air teaming system) warrior, which is the unmanned ariel vehicle for combat role with higher version of kaveri engine are also under development. So overall, with these new high tech aircrafts, players like HAL, BEL, Data Patterns will benefit in the future.
• Navy’s plans of inducting next generation destroyers, frigates and corvettes and other vessels were already in place but now larger projects like the landing platform docks (with displacement of about 30000-40000 tonnes), third indigenous aircraft carrier (INS Vishal) with about 65000 tonnes displacement and the next submarine project (P-75I) are also on cards with a longer term perspective. We believe that these projects give a longer term visibility to defence shipyard companies like Mazagon Dock, Cochin Shipyard and Garden Reach.
• We like HAL and BDL in defence considering the huge opportunity in the coming years for new aircrafts and new missiles. HAL will be the main beneficiary of indigenous unmanned and manned combat aircrafts with tech transfer for engines is already in place. Increasing level of indigenisation in aircrafts and helicopter will help in faster execution and delivery and would open more opportunities for exports also. The current order book of Rs 84800 crore implies 3.2x book to bill on TTM basis. We have a Buy rating on HAL with target price of Rs 2860.
• BDL is also witnessing huge opportunity with rise in demand for new generation of missiles from armed forces. The current order book is already strong at 3.8x TTM revenues and large amount of orders are in pipeline. High indigenisation level of 80-85% in most of the missiles and torpedoes offer export opportunities also. In the next 2 years, we see strong earnings growth of ~25% CAGR led by healthy execution in manufacturing of indigenous missiles & torpedoes. We have a Buy recommendation on BDL with target price of Rs 1070.

Cement companies (ACC, Ultratech & Shree Cements)

Given the seasonally weak quarter, this quarter saw a double whammy impact on the operating margin as the impact of higher international petcoke/coal was fully visible.  

Cost of production increased further by 6% QoQ (ie. |276/t) to |5022/t. It was also higher by 21% YoY mainly due to higher power & fuel expenses. In addition, moderate pricing environment on account of monsoon led to companies reporting margins at multi quarter low levels to ~9% vs 23% last year and 17% last quarter.  

In terms of companies, ACC reported lowest EBITDA margin of 0.4% while Ultratech EBITDA margins stayed at over ~12%. Shree cement reported margin of ~10% during Q2. The average EBITDA/t for Q2FY23 came in at ~|580/t (dip of ~480/tonne QoQ). It declined by 54% YoY, 45% QoQ.     

On the positive side, sales volume growth broadly remained in-line with our estimates. It grew by 9.4% YoY to 36.4MT.

we expect, margin to recover from Q3 onwards on softening in the international fuel prices, pick-up in the construction activities (post monsoon).  

Our preferred pick continues to remain Ultratech with revised TP of |7,700 (20% upside) as the company is adding new capacities at much lower capital cost (US$76/t) that will help in boosting return ratios (to generate 16-18% IRR. We have also turned positive on ACC with revised TP of |2,700 (22% upside) despite its current subdued performance as we believe that the structural change in the ownership as well as aggressive expansion strategy through organic/inorganic route could pave the way for growth as well as margin expansion.  

Operating matrix summary

Hidden gems

Polycab India Tgt Price 3300

• Polycab’s Q2FY23 performance came in better than ours and street estimates, led by its core wire & cable business which contributes ~87% to its overall topline. Despite a sharp correction in copper prices (~17% YoY), company surprised the street by clocking segment revenue growth of 12% led by 18% volume growth. Company managed significant fall in copper prices through judicious price revision and improved product mix.
• The FMEG segment (10% of revenue) was marred by de-stocking of fans by trade channels and subdued rural demand. We believe, the segment will start performing from H2FY23 onwards supported by revival in demand and launch of new products.
• On the margin front, the EBITDA margin at 12.8% in Q2FY23 was in line with management’s margin guidance range of 11%-13%.
• Going forward, the company has maintained its FY26E revenue guidance of | 20,000 crore (implied revenue CAGR of 13% FY22-26E) even after a sharp correction in copper prices from their peak. We value Polycab at 38x P/E FY24E EPS and maintain our BUY rating on the stock with revised target price of | 3300/share

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