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FII selling tapering off, expect stock specific action to continue

FInoux 41 Mins 20 Jan 2023

Nifty has made a strong base around 17,800 over past four weeks while discounting major earnings, FII selling and approaching Union Budget on a lighter note. Last week index made first higher high on weekly time frame after a gap of six weeks indicating end of corrective phase

  • Structurally, index undergone shallow retracement over seven weeks retracing preceding nine week rally by only 50%, a sign of inherent strength
  • We expect index to eventually surpass 18,300 and gradually head towards 18,900 in February 2023 while 17,800 remains immediate key support
  • Infra, IT, PSU, BFSI are expected to remain in focus
  • IT Sector: Index witnessed broad based buying last week post earnings with Midcap IT stocks, witnessing elevated buying demand. On relative basis, IT index gained 4% in Jan23 MTD while Nifty and Bank Nifty are flat signaling relative outperformance against both indices for first time since March 2022

FII Selling tapering off

  • FII’s selling pressure eased last week as they have turned net buyers in the second half of the month so far. While on last Friday, FIIs have sold Rs 3,750 crores, but since then they have turned net buyers and bought Rs 3,403 crores closing the week almost flat. We believe that the selling pressure was seen due to portfolio rebalancing in early part of the year and fresh inflows suggesting the exercise is almost over. Also, after the underperformance in the first half of the month, Indian indices once again have started outperforming. Moreover, we believe that fresh buying interest should be seen going into settlement week and we should see Index scaling higher levels towards 18,500.


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Major IT companies delivering better than expectation

Persistent - TCV up 20% QoQ; Top client recovery likely to help sustain growth momentum BUY rating, TGT of Rs 4,920, 26x FY25 EPS 

Reported 3.5% QoQ CC revenue growth. Dollar growth 3.4% QoQ (10 bps cross currency headwind). EBIT margins improved 80 bps QoQ to 15.4%. TCV won was highest ever at US$440.2mn (including all deals, new+ renewal). LTM attrition declined by 210 bps to 21.6%. net adds of 122 for Q3. The company has achieved US$1 bn revenue on a quarterly annualized basis and is now aiming at US$2 bn annual revenue in the medium term.

Persistent acquired five companies in FY22, building capabilities in payments, cloud, etc. It is not shying away from acquisitions in coming years as well.

Strong deal win momentum will help improve its revenue growth. We expect dollar revenue to grow at 24.2% CAGR in FY22-25E along with EBIT margin expansion of ~180 bps to 15.6% over FY22-25E.  BUY rating, TGT of Rs 4,920, 26x FY25 EPS 

Wipro - Revenue guidance: 11.5-12% in CC for FY23, BUY rating, TGT of Rs 455, 16x FY25 EPS 

Reported 0.6% QoQ CC revenue growth. Dollar growth 0.2% QoQ (40 bps cross currency headwind). EBIT margins improved 120 bps QoQ to 16.3%. TCV up 26% YoY to US$4.3bn, including 11 large deals of US$1bn (including all deals, new+ renewal). LTM attrition declined by 180 bps to 21.2%. net declines of 435 for Q3. Q3 revenues came in the guided range albeit on the lower end but margin expansion was a positive surprise. Total TCV number looks strong to us and even if it stays at this level for FY24, we are looking at US$13bn revenue opportunity in FY25, assuming conservative Book to Bill of 0.75x. However, order book to revenue conversion is the key which is yet to meaningfully play out in Wipro’s case due to execution delay from the client side and the company has to adopt their comfort. Management is confident of revenue conversion to play out in FY24/25. Vendor consolidation is another area where the company likely to be one of the beneficiaries in our view. The company also mentioned that 16.3% is the new base for margin and margins are likely to expand going forward on ease of supply side pressure and lower subcontracting costs. The company also indicated that they aspire to be in the high teen margin trajectory in the medium to long term which along with strong growth could be re-rating for the stock in our opinion. We estimate 8.8%/6.3%/6.6% Revenue/EBITDA/PAT CAGR over FY22-25E.  

Cyient - Revenue guidance: FY24 US$1bn & minimum EPS of Rs 60 per share, BUY rating, TGT of Rs 1,020, 15x FY25 EPS 

Reported 11.9% QoQ CC revenue growth with organic contribution of 3.7%. Dollar growth 11.2% QoQ (70 bps cross currency headwind). EBIT margins excl. acquisitions & exceptional items improved 190 bps QoQ to 15.1%. Order intake up 83.4% QoQ to US$237.1mn & 5 large deals with TCV potential of US$59.2mn. LTM attrition declined by 190 bps to 26.5%. net declines of 311 for Q3. Highest ever order intake as well as large deal wins in a quarter; revenue guidance increased to 22% compared to at least 20% CC given last quarter for FY23.

The company’s revenue performance continue to be strong despite furlough impact in BFS and Insurance space for the quarter. Annual guidance translates into 3-4% QoQ CC growth in Q4 which we believe is not a challenge considering recoup of furlough impact in Q4. BFSI vertical witnessed furlough impact but out of 5 large deals it won during the quarter, 3 are from this vertical suggests recovery in the subsequent quarters. Attrition continue to the best which along with fresher deployment and continued focus on offshoring are likely margin levers going ahead. We remain bullish on the prospects of the company due to continued strong order wins and probably lowest attrition in the industry.

HUL Q3FY23 – Royalty hike a dampener  (CMP - Rs 2,650 MCap - Rs 6,22,700 crore), TGT- Rs 2,800

Volume growth at 5%; margin improves sequentially. HUL’s Q3FY23 results were in line with our estimates with revenue growth of 16.2% led by pricing growth of 11% & volume growth of 5%. Home care and Beauty & Personal care (BPC) segment saw sales growth of 31.6% & 10.5% respectively. Foods & Refreshment segment saw 6.8% growth during the quarter. Though, the company has taken price cuts in soaps after sharp fall in palm oil prices, the growth is still largely driven by pricing growth. Some of the categories related to mobility like detergent, Jams & Ketch-up are witnessing strong growth given base was still favourable.

Gross margins contracted by 463 bps however improved by 170 bps sequentially. Operating margins contracted by 182 bps to 23.6% however improved sequentially by 30 bps. Net profit grew by 11.7% to Rs 2,505 crore.

HUL Board approves new royalty agreement with Unilever, which would lead to the increase in royalty and central services fees from 2.65% (FY22) to 3.45% of turnover effected in a staggered manner over a period of 3 years. The impact on the earning of this royalty increase would be to the tune of 2.5% in FY24E & 3.3% in FY25E.

With the current correction in crude & related commodity costs along with benign palm oil prices, we believe the company would further take price cuts & grammge increase to pass on the benefits. This would help it recouping volume growth in coming quarters. We also believe the company would have leeway to spends higher in Advertisement & Promotions, which would also help it growing volumes.  The stock is fairly valued considering single digit volume growth & premium valuation multiples.  We maintain our Hold rating & Target price on the stock of Rs 2,800 /share.

Asian Paints – Q3FY23 Mixed bag performance (CMP: Rs 2,871  Mcap: Rs 2,75,386 crore)

Asian Paints reported a mixed bag performance in Q3FY23 wherein revenue came in below our estimates while EBITDA margin and PAT came in above our estimates.    

Asian paints consolidated revenue increased marginally by 1.3% YoY to ~Rs 8,636.7 crore (Vs I-direct estimate of Rs 8,988.5 crore) on a higher base of last year. Company has reported a flattish volume on a YoY basis mainly due to unfavourable base, lower rural demand and extended monsoon.

View: Going forward, management has maintained its double digit volume growth guidance through dealer additions and new product launches. Further, company has announced an additional capital outlay of Rs 2,000 crore (over Rs 6,750 crore announced in Q2) to expand its manufacturing base. The company plans to expand its manufacturing capacity by ~60% over the next 3-4 years. We believe the capex will help- maintain its leadership position through market share gains. However we believe recent entry of new players will disrupt pricing discipline of the industry thereby and despite easing raw material prices EBITDA margin is likely to remain flattish for market leader. We cut our target P/E multiple to 58x (from 68x) and revised our target price to Rs 3,215 /share (from Rs 3,685) factoring in slow margins recovery over FY23-24E. 

PVR – Q3FY23 (CMP: Rs 2,871  Mcap: Rs 2,75,386 crore)

  • Hindi movies box office performance trajectory to decide trend. PVR, on expected lines, reported a strong recovery QoQ led by improved content performance in Q3
  • PVR reported box office revenue of Rs 436 crore (up ~33% QoQ) with footfalls up ~22% QoQ at 22 million and ATP at Rs 244 was up ~9% QoQ owing content performance and movie slate mix. The ad revenues stood at Rs 79.2 crore, at ~65% of pre covid levels. The company reported Rs 288 crore of F&B revenues, up 25% QoQ, with SPH at Rs 133 was up 3% QoQ 
  • EBITDA  (without impact of Ind AS116) was at Rs 128.3 crore, with margins at 13.6% vs. losses in base quarter, given the box office performance and higher distribution revenues
  • Near term monitorable is big ticket content performance, which has seen inconsistency in performance, post covid. The pipeline of big movies in Q4 include Pathan, Bhola , Jon Wick 4 Sehzaada, Maidan, Tu Jhoothi Main Makkaar, Selfie, Ant Man, Creed 3, Babylon
  • For the medium to long term, key trigger will be merger (likely to be consummated within a month) post which the MergedCo will benefit from faster growth trajectory (the management is looking to add 200+ screens every year and ~2,000 screens over the next seven years). Key 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
  • While the near-term concerns over content volatility remain, we have a BUY on PVR at Target price of Rs 2,020 (~22% upside) valuing at 15x FY24E EBITDA, given the medium-term trigger of synergy (scale led benefits) post-merger

D- Mart - Subdued operational performance (Mcap: Rs 23,00,00 crore, TP: Rs 4,000, Rating: Hold)

  • D-Mart reported a subdued operational performance with profitability coming below our/consensus estimates in Q3FY23. Discretionary non-FMCG business (general merchandise & apparel), which yields better margins continued to perform below expectations and led to moderation of profitability
  • On a favourable base, revenue grew by 26% YoY to Rs 11,569 crore with three year CAGR of 19%. Company has maintained its trajectory of 19-20% CAGR witnessed in the previous 4-5 quarters, however it is below its historical levels of 25-30% YoY growth
  • Revenue per square feet stood at Rs 9,180 and continued to remain below pre-covid levels (93% of pre-covid levels). Over the last three years, the company has expanded its square feet addition by an impressive three-year CAGR of ~ 23% to 12.6 million square feet with average size of new stores being bigger (~60,000+ vs. average 35,000 sq ft). The new larger stores which were designed to provide more space for discretionary products (GM & apparel) have never got an opportunity to function in normal circumstances over the last two years. Hence, the revenue throughput per sq ft has remained below pre-Covid levels
  • The management highlighted FMCG and staples continued to outperform general merchandise and apparel segment. With the discretionary product mix being impacted, gross margins for the quarter declined by 60 bps YoY to 14.8%. On the back of festive purchases in the GM & apparel segment, Q3 generally tends to yield gross margins in excess of 15%. However multi-year low margins recorded in Q3FY23 reflects some grave challenges which could possibly be on account of heightened competitive intensity over the past two years and inflationary stress still pertaining in discretionary value segment. EBITDA margins declined by 110 bps YoY to 8.3% vs. I-direct estimate: 8.8%
  • We expect the company to exit FY23E with RoIC of 22% (up 500 bps YoY but still ~500 bps below FY19 levels). D-Mart continues to remain India’s most profitable low cost retailer and a strong play on India’s retail growth story and a key beneficiary of unorganised to organised segment shift. We introduce FY25E estimates and bake in earnings CAGR of 22% in FY23-25E (vs. CAGR of 24% witnessed in FY20-23E). Company continues trades at rich valuations of 80x FY24E EPS and hence, we maintain our HOLD rating on the stock.

Banking – Firing all cylinders

HDFC Bank (CMP – Rs 1,662, Target – Rs 1,920, BUY)

  • HDFC Bank reported better than estimated NII (25% YoY) and PAT (19% YoY) growth as business continued its healthy traction (loans up 20% YoY) with steady asset quality (GNPA at 1.23%, NNPA at 0.33%)
  • Main highlight was continued traction in deposit at 19.9% YoY. As per management, the same focus is expected to continue ahead driven by both branch & digital distribution
  • Merger approvals are running well ahead of stipulated timelines and NCLT final hearing related to merger is on Jan 27th
  • We value HDFC Bank at ~2.8x FY25E ABV and Rs 50 for subsidiaries with a target price of Rs 1,920

Federal Bank (CMP – Rs 136, Target – Rs 165, BUY)

  • Federal Bank reported strong all-round performance with advances growth at 19% YoY and continued improvement in margin (19 bps QoQ) at 3.5%. Asset quality also remained steady with GNPA at 2.4% and restructured book at 1.8%
  • Healthy guidance maintained with business growth targeted in high teens, improvement in margin at ~3.2-3.4% (vs earlier 3.25%) and further 10 bps uptick in RoA at 1.35% in FY24E
  • We value Federal Bank at ~1.4x FY25E ABV with a target price of Rs 165

IndusInd Bank (CMP – Rs 1,210, Target – Rs 1,450, BUY)

  • IndusInd Bank reported steady performance with decent growth in NII (18.5% YoY), steady margins (~4.27%) and improved credit cost resulting in PAT growth of 68.7% YoY
  • NPAs largely steady (GNPA at ~2%, NNPA at ~0.62%) with further decline of ~24 bps in restructured book to ~1.25%
  • Healthy guidance with credit growth at 18-20% and steady margin at 4.15-4.25% (despite launching of low yielding home loan business). Accretion of granular liabilities to remain in focus
  • We value IndusInd Bank at ~1.6x FY25E ABV with a target price of Rs 1,450

Tata Motors Fundraising - vision to retire net automotive debt to near zero levels by FY24/25E

Firstly, post the board approval for partial stake sale in its subsidiary i.e. Tata Technologies (74.4% stake), as per media sources, Tata Motors is likely to raise Rs 3,500-4,000 crore from the potential stake sale during IPO of Tata Technologies thereby valuing the entity at ~Rs 20,000 crore. This will have twin benefits for us, (i) valuation pegging to the stake which was currently valued at book value i.e. potential target price increase of ~Rs 40/share and (ii) retirement of debt on Tata Motors balance sheet amid its vision to retire net automotive debt to near zero levels by FY24/25E.

Secondly, as per media sources, Tata Motors is looking to raise further US$ 600 million in its Electric PV arm at a valuation which is 15-20% premium to the last fund raise i.e. US$ 9.1 billion. This we believe is a part of its overall guidance 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 secured US$ 1 billion funding sufficient for capex needs in this initial phase, we believe this further equity raise will take care of its capex spend over the longer term and bodes well for the company. Electric PV arm currently contributes nearly 34% in our target price calculation at ~Rs 160/share and with revised valuation pegging & stake sale it could be valued at ~Rs 190/share i.e. ~Rs 30/share upside to our target price calculation.

Combing both the events, there makes a case to upgrade Tata Motors with revised target price seen in excess of Rs 500/share    

Sun Pharma recent US acquisition – a risky proposition

Sun Pharma will acquire US based NASDAQ listed Concert Pharma for US$ 576 million.

This acquisition will be funded from Sun’s net cash balance of ~ US 1.60 billion and since it is in late stage of development it is likely to hit the market earlier and Sun is expected to use its specialty marketing team to market the same.

Lower funding implications notwithstanding, this deal is indeed a risky proposition with uncertainties about approval, acceptance and success with front loaded P&L hit.

Concert is a late-stage biotechnology company which is developing dermatology drug for the treatment of for the Treatment of Alopecia Areata, a disease , resulting in partial or complete loss of hair on the scalp and body. This disease is estimated to affect up to 2.5% of the United States and global population during their lifetime.

The product is in late stage of development (stage III) with studies completed in US and Europe. Concert plans to submit a New Drug Application (NDA) to the USFDA in the first half of 2023.

Concert is an early stage company with miniscule non-business revenues with an annualised R&D spend of US$ 100 million. It owns cash of ~US$ 150 million on the balance sheet and very few intangibles.

Action packed results next week

Reliance Industries 

  • RIL's consolidated EBITDA is estimated to increase 9.7% QoQ to Rs 34,249.2 crore
  • Jio is expected to lead sub addition with ~6 mn net sub additions during Q3. The monthly ARPU, like peers, will witness modest growth, driven by mix improvement, at ~1.5% QoQ at Rs 180. Overall revenues are expected at Rs 23,206 crore, up 3% QoQ. EBITDA at Rs 11,944 crore, is likely to grow 4% QoQ. Overall EBITDA margins are expected at 51.5%, up 50 bps QoQ. Key monitorable : Commentary on ARPU trajectory, Jio Fiber
  • Reliance Retail is expected to report healthy operational performance in Q3 with revenues increasing 22% YoY to Rs 70,461 crore (up 8% QoQ). Core retail revenues (excluding connectivity) is expected to increase 24% YoY led by strong recovery in fashion and grocery segment. EBITDA excluding other income (the base quarter had other income worth Rs 300 crore) to increase by 32% YoY to Rs 4,650 crore with margins at 6.6%
  • Improvement in GRMs is expected to lead to a growth of 5.3% QoQ in O2C EBITDA to Rs 12,607 crore. E&P EBITDA is expected to improve 14.4% QoQ to Rs 3,626.2 crore on account of revision in domestic gas prices

Axis Bank (CMP – Rs 930, Target – Rs 1,000, BUY)

  • Axis Bank is expected steady performance with credit growth at ~16% YoY (5.2% QoQ), improvement in margin at ~4% (led by faster transmission of rate hikes) percolating in strong earnings growth (50% YoY and 2.1% QoQ)
  • Outlook on growth and margins in FY24E coupled with any capital raising plan will be watchful

Bajaj Finance

  • As per provisional numbers, client addition remained strong at 31 lakhs in Q3FY23, AUM growth remained a tad lower sequentially at 27% YoY. Expect steady operational performance with 23% YoY growth in NII and 38% YoY growth in PAT
  • Status of new digital strategy (placing all products/services on app) and commentary on growth and competitive intensity in consumer lending space should remain key


Result expectation: Revenues are expected to grow ~13% YoY to Rs 6,178 crore, mainly due to 12% YoY growth in domestic formulations at Rs 2,820 crore accompanied by US growth of ~24% YoY to Rs 1,399 crore. RoW and South Africa market likely to showcase 5% & 10% YoY growth, respectively, to Rs 1,058 crore and Rs 685 crore, respectively. EBITDA is expected to grow 15.4% YoY to Rs 1,421 crore. EBITDA margins are expected to increase 50 bps YoY to 23%. Subsequently, adjusted PAT is likely to grow ~20.5% YoY to Rs 878 crore.


Result expectation: Revenues are likely to show growth ~13% YoY to Rs 6,021 crore mainly due to ~21% growth in US business at Rs 2,254 crore. Europe revenues are expected to grow 9% YoY to Rs 442 crore. Russia & CIS revenues are likely to grow 8% YoY to Rs 767 crore while RoW markets are expected to grow 10% to Rs 484 crore. EBITDA is expected to increase ~13% YoY at Rs 1,373 crore. EBITDA margins are likely to remain flat YoY to 22.8%. Adjusted PAT is likely to show an uptick ~7.2% YoY to Rs 740 crore.

Torrent Pharma

Result expectation: Revenues are expected grow ~17% YoY to Rs 2,469 crore mainly due to ~21% YoY growth in domestic formulations (including Curatio) to Rs 1,302 crore and 15% YoY growth in Brazil business to Rs 209 crore. US is likely to grow ~6% YoY to Rs 249 crore. EBITDA margins is expected to increase 430 bps YoY to 29.8%. EBITDA is likely to grow 37% YoY to Rs 734 crore. PAT is expected to increase 25% YoY to Rs 311 crore.


Result expectation: Maruti Suzuki is expected to report a steady performance in Q3FY23. Net sales for the quarter are expected at Rs 28,281 crore, down 5.5% QoQ amid 10% QoQ de-growth in volumes at 4.7 lakh units and 5% QoQ rise in ASPs to Rs 5.8 lakh/unit. Product mix for Q3FY23 came in positive with share of UVs in total volumes mix at 24% vs. 19% in Q2FY23. EBITDA in Q3FY23 is expected at Rs 2,824 crore with EBITDA margins at 10%, up 70 bps QoQ. Consequent PAT is expected at Rs 1,940 crore.

Tata Motors

Result expectation: Tata Motors is expected to report stable performance in Q3FY23 and beat our estimates given that the wholesale volume at JLR stood at 92,345 units higher than our estimated 88,101 units. Nevertheless, at the consolidated level, EBITDA in Q3FY23 is expected at Rs 8,931 crore with corresponding EBITDA margins at 11%, flat QoQ. JLR’s EBITDA margins are expected at 11.5%. At the PAT level, we expect the company to report a loss of Rs 981 crore in Q3FY23.

Hidden Gems

Persistent Systems BUY rating, TGT of Rs 4,920, 26x FY25 EPS 

Persistent Systems (Persistent) offers cloud, data, product & design led services to BFSI, healthcare & hi-tech verticals.

Persistent had a strong year (FY22) with revenue growth of 35.2% in dollar terms, out of which organic growth was 32.8%.

Net debt free and healthy double digit return ratio (with RoCE of 20%).

Q3FY23 Results: Persistent reported steady revenue growth in Q3FY23. Revenue grew 3.5% QoQ in CC terms and 3.4% QoQ dollar terms. EBIT margins improved ~80 bps QoQ to 15.4

TCV up 20% QoQ; Top client recovery likely to help sustain growth momentum.

Reported TCV was US$440.2 mn, up 19.7% QoQ & 31.7% YoY. The company has achieved US$1 bn revenue on a quarterly annualised basis and is now aiming at US$2 bn annual revenue in the medium term. It acquired five companies in FY22, building capabilities in payments, cloud, etc. It is not shying away from acquisitions in coming years as well

Strong deal win momentum will help improve its revenue growth. We expect dollar revenue to grow at 24.2% CAGR in FY22-25E along with EBIT margin expansion of ~180 bps to 15.6% over FY22-25E. BUY rating, TGT of Rs 4,920, 26x FY25 EPS   


Stock specific action to happen while Nifty is seen consolidation and holding key support levels as FII selling tapering off

Source: ICICIdirect Research

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