Extended consolidation on cards for Nifty amid stock specific play

Indian equity benchmarks declined 2%, in tandem with global markets and has undergone 8% correction from December 2022 lifetime highs, over past three months, taking cognizance of hawkish stance of Central banks for extended period than earlier anticipated.
Markets have approached oversold zone. Expect index to hold key support around 17,200 and pose a technical pull back towards 17,800 in coming week. Recent trends suggest extended consolidation in 17,200-18,000 zone for Nifty.
Since 2008, in each of seven instances of Nifty correcting for three consecutive months, the following month produced an average 5% return. Going by this rhythm, we may expect Nifty to head towards 18,300 in March 2023.
Key index heavyweights from BFSI, Telecom, Auto and IT to lend the support in coming weeks.
The recent resilience from pharma names indicates ongoing accumulation and they are likely to outperform markets where stocks like Dr Reddy are likely to do better.
FIIs Update: Despite weakening markets, FIIs haven’t been negative in February across the emerging markets and it seems like selling pressure seen in January is over. FIIs have been the net buyers in Equity space worth 3,000 crores during Feb so far amid market-wide low volumes. Hence, the recent weakness can be attributed to jitteriness due to US Fed actions instead of FIIs selling.

El Nino occurrence & early summer may prolong the recovery in rural consumption

With the rising temperature as early as in the month of February, Wheat & Sugarcane crops could see second consecutive year of drop in yield & decline in production. This would keep wheat prices higher at Rs 23-24/kg compared to minimal support price of Rs 21/kg. Further, lower sugarcane yield could result in decline in sugar production as well, which could lead to Rs 2-3/kg spike in sugar prices from the current Rs 34-35/kg.

Further, US National Oceanic and Atmospheric Administration (NOAA) predicated 57% chances of occurrence of El Nino in 2023. El Nino generally results in drought like situation in Indian sub-continent, which was seen in 2009 as well as 2016 earlier. Lower rains could adversely impact kharif crop given it largely depends on Monsoon rains (June-September). This could keep the agri commodity prices higher.

Rural consumption was impacted by high commodity inflation in last one year which resulted in 6-7% decline in rural consumption (reflected from FMCG companies’ volume de-growth). The occurrence of El Nino could result in higher commodity prices & higher Income levels specifically for farmers in northern India (Punjab, Haryana, UP) given high ground water availability & sufficient irrigation facilities.
Given, rural consumption is already impacted by high commodity inflation in last one year which resulted in 6-7% decline in rural consumption (reflected from FMCG companies volume de-growth). The occurrence of El Nino or drought would prolong the recovery in rural consumption. Rural sales account for 30-50% of FMCG companies (HUL, Dabur, Marico, Colgate & Jyothy lab) total sales.

However, there are some silver linings as well. The early summer is likely to benefit companies like Varun Beverages & Zydus wellness that have strong summer product portfolio. These companies witness high volume growth between March-June period. We have a Buy recommendation of Zydus Wellness with target price of Rs 2,000 / share. We have a Hold recommendation of Varun Beverages with target price of Rs 1,340 / share.

Early onset of summer would also boost demand of cooling products like Room ACs, air coolers, refrigerators and fans. We expect companies such as Havells and Voltas to post strong double digit (~15%) volume growth in Q4FY23. We have a BUY rating on Havells (Target price: Rs 1,420) and Hold Rating on Voltas (Target price: Rs 940).
2-W space, especially the commuter segment is not out of woods yet (volumes well below 2019 peaks) and further pressure on farm income could potentially delay the recovery in this space. We have a neutral rating on stocks in this domain namely Hero MotoCorp (HOLD rating, Target price: Rs 2,770) and Bajaj Auto (HOLD rating, Target price: Rs 4,100).

Banks – Recent correction offer good entry point

Banking stocks have witnessed correction recently with private banks declining ~10-12% while PSU banks corrected 15-20%.
Recent correction in banking stocks offers a good entry level. Among peers, we prefer large players (PSU & private banks) with healthy liabilities franchise, higher floating rate asset, adequate PCR and capital buffer.
Credit demand from the retail segment is anticipated to remain steady. Overall credit growth seen at 12-14% in next 3 years.
RoA expected to remain steady with upward bias led by normalization in margin offset by improvement in efficiency and steady provision in FY24-25E.
Asset quality is expected to remain steady with slippages from retail and MSME segment offset by recovery from resolution of large, stressed assets.

Preferred stocks

SBI (CMP – Rs 521, Target – Rs 700, Buy)

Management maintained credit growth guidance of ~14-16%, which should be supported by steady margins, healthy deposit franchise and strong demand pipeline.

Healthy recoveries trend to continue in the coming quarter (to the tune of Rs 3,000-3,500 crore). Adequate provision buffer to aid healthy earnings and, thus, RoA trajectory. Expect earnings growth at 24% CAGR in FY23-25E and RoA at ~1% in FY25E.

Currently, stock is trading at ~0.7x FY25E standalone ABV which seems reasonably valuation.

Axis Bank (CMP – Rs 844, Target – Rs 1,100, Buy)

Healthy credit growth (guidance of >5-6% compared to industry) and focus on risk adjusted exposure to aid operational performance. Expect advances to grow at ~17% CAGR in FY24-25E.

Granular liabilities profile (CASA at ~45%), improving efficiency (cost to asset at ~2%) and steady provisioning to boost earnings momentum at ~29% CAGR in FY24-25E.

Healthy growth with calibrates risk selection to enable improvement in RoA at 1.7-1.8% ahead, though acquisition of Citi acquisition could exert some pressure on capital in near term.

Axis Bank trading at 1.7x FY25E ABV remains attractive level to enter the stock from long term horizon.

HDFC Bank (CMP – Rs 1,603, Target – Rs 1,920, Buy)

Building of physical and digital capabilities to aid customer acquisition and business growth ahead. Expect advance growth at 18% CAGR in FY24-25E.

Diversified asset mix, healthy liabilities franchise (CASA at 44%), relatively superior efficiency (CI ratio below 40%) and prudent under-writing to keep RoA strong at ~2% ahead.

Merger with parent (HDFC Ltd) to induce long term benefit, liabilities accretion to be in focus in medium term. At current price, stock is available at 2.4x FY25E ABV which remains attractive. Thus, near term volatility in stock price owing to uncertainty related to regulatory approvals offers investment opportunity.

Outlook for logistics companies after rough quarter

Logistics stocks have seen correction from Q3 onwards (1^st Oct’22), in the range of 8% to 32% (average correction: 17% in 12 stocks).
Within the sector, the large cap leaders (APSEZ, Delhivery, CONCOR) have seen an average price decline of 29%, whereas small caps have corrected by 13%.
The average P/E multiple of I-direct logistics universe has corrected from 23 (from Oct’22) to 19.5 (Current).
Except Gujarat Pipavav (up 23%), all other logistics stocks saw correction in prices.

Outlook:

Sector leaders have seen correction due to company specific issues, which we believe has hampered multiples of small caps in the segment, in spite of continued strong macro numbers.
E-Way bills/Ports Container Traffic/Rail Container volumes continued momentum in January at 20%/4%/5.5% YoY growth respectively.
Express companies and 3PLs (TCI, TCI Express) mostly indicated returning of strong margins in Q4 (Except Mahindra Logistics, which would take another quarter to mean-revert, due to acquisition of loss making Rivigo B2B business).
Ports continue to see subdued growth due to volatility in Global EXIM cargo and Chinese New Year in Q4, however, FY24 prospects look better. Adani Ports has prioritized loan repayment and pre-payment in FY24 and has maintained its volume growth guidance of 500 MMT by FY25.
On CTOs such as CONCOR, we await reversion in Market Share loss, as seen in Q3 (by 400-500 bps to 58%) mostly due to container unavailability. We currently have a Hold rating on the stock.

Tata Motors fund raise

As per media sources, Tata Motors is looking to raise further US$ 1 billion in its Electric PV arm at a valuation which is ~15% premium (at US$ 10.5 billion) to the last fund raise i.e. US$ 9.1 billion in October 2021. In rupee terms the valuation is at ~25% premium given that there is a corresponding depreciation of Indian rupee in that time frame (from 75 then to 82 now) with valuation in rupee terms now pegged at ~Rs 86,000 crore vs. ~Rs 68,000 crore in the past.
Tata Motors had guided for a total capex spend of ~US$ 2 billion over 5 years at the time of last equity raise (Oct’21) primarily for products, platforms, drive trains, dedicated EV manufacturing, charging infrastructure and advanced technologies within the overall aim to launch 10 EV’s by FY26. With US$1 billion funding already received which we believe is sufficient for capex needs in this initial phase, the present equity raise is aimed at secondary stake stale by Tata Motors to pare debt on its consolidated books. They have an aim to reduce net automotive debt to near zero levels by FY24/25E.
Electric PV arm currently contributes nearly 30% in our target price calculation at ~Rs 160/share and with revised valuation pegging & stake sale it could be valued at ~Rs 200/share i.e. ~Rs 40/share upside to our target price calculation.
We have a BUY rating on the stock with a SOTP based target price of Rs 530 (10x, 2.5x FY24E EV/EBITDA on India, JLR; Rs 160 value to Indian EV business).

Zee: Group companies exposure haunts

NCLT has admitted IndusInd Bank's insolvency plea against Zee Entertainment Enterprises. The matter pertains to 2019 where Zee had guaranteed IndusInd Bank's Rs. 150 crore loan to Siti Networks, which was expected to maintain an amount equal to one quarter’s interest and one quarter’s principal at all times for debt servicing. Provision regarding the same has been already undertaken by the company.
The way ahead is company may go to appellate tribunal against the order. Another way is to pay the amount under protest (Zee has cash of Rs 750 crore+) and make sure merger is completed in time. However, any legal action may delay the merger proceedings. Note that NCLT meeting for merger was slated for 9th March.
The company had earlier indicated that all liabilities will be absorbed by merged entity. In terms of trigger, merger is key which will result in complete overhaul of promoter holding with company under Sony umbrella and bigger entity play in the bigger segments of Sports and OTT.
We had earlier given BUY with TP of Rs 260, (With 20% upside then) with a belief that with likely merger will result in superior entity. The stock has declined to below 200 levels (correction of over 20% in past 3 months). The recent new flows creates anxiety related to merger. Thus, one may monitor the events ahead before taking a constructive view.

Hidden Gems

ABB India (CMP : Rs 3,150, Target Price : Rs 3,735, Upside 18%)

ABB India (ABB) is a leader in technology solutions connecting software to its electrification, robotics, automation, and motion portfolio. It operates in mainly three key segments including Robotics & Motion (41%), Electrification (38%), Industrial/process automation (22%).
ABB reported a strong performance in Q4CY22 (Dec Ending) with revenue came at Rs 2,426.9 crore, grew 15.5% YoY, owing to better execution and value-added volume mix. EBITDA came in at Rs 364.3 crore with margins of 15%. Strong margin growth was led by revenue mix, operational efficiencies coupled with cost optimization and favorable forex fluctuation. Hence, PAT came in at Rs 305.9 crore, up 58% YoY.
ABB reported order inflows for Q4CY22 at ~Rs 2,335 crore, up 4% YoY and for CY22, it came at Rs 10,028 crore vs. Rs 7,666 crore in CY21 with order backlog of Rs 6,468 crore, up 32% YoY.
Going Forward, ABB will continue to focus on recovery of growth industries like Electronics, Railways & Metros, Datacentre, Warehousing and other large core industries amid revival of long due capex cycle. We expect revenue, EBITDA to grow at CAGR of ~18.5%, 26.7%, respectively, in CY21-24E due to strong traction in short cycle products and services and value ABB at Rs 3,735 (65x on CY24E EPS).

Conclusion

Overall derivative data suggests caution to continue considering high short rollover in banking space and that may keep upsides restricted to 17,800 levels. Any short covering in banking is likely to provide much needed thrust.

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