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History suggests good returns in Nifty and Midcaps in the next 1 month

ICICI Securities 27 Mins 09 Dec 2022

Stock Market Outlook:

  • Indian equity benchmarks consolidated recent gains amid stock specific action during the week.
  • Our broader stance of structural bull market is intact as we expect Nifty to gradually head towards 19,400 in January 2023
  • In the coming week, we expect Nifty to consolidate in 18,400-18,900 range amid stock specific action, which will make overall trend healthier and help index to cool off overbought conditions after nine weeks of rally
  • From the seasonality point of view, December month has been largely positive for Nifty and in last 20 years, December month has closed positive on 15 occasions. The year-end flows into equities has resulted into large moves in Nifty. Since 2013, after making lows near mid-December, Index witnessed sharp up move with average gains of more than 7%


  • Mid/Small over Large: Ratio chart of Nifty500/Nifty100 has turned up from lower band of one year range, indicating outperformance of Mid/small caps. We expect both indices to head towards life highs in coming weeks
  • BFSI, Telecom, PSU, Infra, Metal, consumption are preferred sectors
  • Preferred large caps are: Reliance Industries, TCS, HDFC Bank, SBI, Ambuja Cement, L&T, Asian Paints, Adani Ports, Tata Steel, Bosch, PI Industries, Siemens
  • Preferred Midcaps are: Bharat Forge, PNC Infra, KEC, Rallis, Cummins India, Supreme Industries , Cochin Shipyard, JK Cement, Siyaram silk mills

RBI Monetary Policy

With a view to keep inflation expectations anchored, break core inflation persistence and contain second round effects, MPC took the view that further calibrated monetary policy action is needed.

Accordingly, MPC decided to increase the policy repo rate by 35 bps to 6.25%.


  • Factoring normal monsoon and average crude oil price (Indian basket) of US$ 100 per barrel, inflation projection is retained at 6.7% in 2022-23
  • CPI inflation for Q1:2023-24 is projected at 5.0% and Q2:2023-24 at 5.4%


  • Continued strong urban demand and gradual recovery seen in rural demand
  • Real GDP growth for 2022-23 is projected at 6.8% (from 7%). Real GDP growth for Q1:2023-24 is projected at 7.1% and 5.9% for Q2:2023-24

Impact on banks

  • Transmission of rate hike on loans to be undertaken in 2-3 quarters which could keep NIM elevated in H2FY23
  • Despite rate hike, credit growth anticipated to remain healthy at ~14% for FY23E

Infra stock to be in focus till budget

Capex spending has been one of the key focus of the government to drive overall economic growth. To put into perspective, government capex spend has grown at ~23% CAGR over the last 5 years to Rs 7.5 lakh crore in FY23BE. Out of ~Rs 7.5 lakh crore of budgeted capex of the government for FY23, Roads, Railways and Defence form ~2/3rd of the overall spending.  Going ahead, given the government’s intent to use capital spending to sustain strong economic growth, the media reports indicate that overall capex budget could be ~Rs 9 lakh crore for FY24. Thus, we believe key segments will benefit from sustained increase in spending. Furthermore, the infra spending will also percolate to key ancillaries such as Cement.

Best stocks to watch this week from Infrastructure Sector


  • Larsen & Toubro (L&T) is India’s largest engineering & construction (E&C) company, with interest in EPC projects, hi-tech manufacturing and services. The company primarily operates in infrastructure, heavy engineering, defense engineering, power, hydrocarbon, services business segments
  • For Q2FY23, L&T registered strong order inflows at group level worth Rs 51,914 crore, which grew by 23% YoY. International orders at Rs 17,341 crore comprised 33% of the total order inflow. Overall infrastructure segment secured orders worth Rs 25,058 crore (~48.2% of total inflows). L&T’s order backlog as on Q2FY23 stood at | 372381 crore with international orders contributing 28%
  • Company is optimistic about meeting its 15% growth guidance for revenue and order inflow in FY23. L&T has targeted their revenues and order inflow with CAGR of 15% and 14%, respectively, over FY21-26 with a consolidated RoE of 18%. Focus on asset monetization to further strengthen the balance sheet and improve return ratios. L&T has strong b/s, controlled working capital and strong cash generation and we value L&T at Rs 2,355 on an SoTP basis


  • Thermax Ltd offers integrated solutions in the areas of energy and environment – heating, cooling, power, water & waste management, air pollution control and chemicals
  • Thermax  commands the best balance sheet matrices in the capital goods industry with no leverage. The company’s hallmark has always been to avoid growth at the cost of margins and working capital for which it commands valuation premium. Over FY21-FY22, the company has garnered strong order inflows across the energy and environment segment. For FY23 Order booking was spread across multiple industries with core sectors like metal & steel, chemical, refinery & petrochemical continuing to show strength. Consolidated order book as on H1FY23 was at Rs 9,485 crore, up 46% YoY. Going ahead with pick up in execution and improvement in margins we expect, revenue and PAT CAGR of 17.4% and 25.4% over FY22-FY24E. We value Thermax at Rs 2,540 i.e. 45x on average on FY24E & FY25E EPS

KEC International

  • KEC International (KEC) is one of the EPC majors in key infrastructure sectors such as power T&D, railways, civil, urban infrastructure, solar, smart infrastructure, oil & gas pipelines and cables
  • KEC over the past years has significantly derisked its business from a core T&D player to an all-round infra player with sizeable scalability happening in the railways and the civil segment. Non T&D business is now almost 50% of the overall revenue pie. With strong backlog and execution low margins orders behind us, we believe KEC is entering a strong growth trajectory. With PAT CAGR of 53.2 % over FY22-FY24E and reducing interest cost intensity, we expect rerating to happen for the stock. We value KEC at Rs 515 i.e. 17x P/E on FY24E EPS

PSP Projects

PSP Projects is set to enter the big league mainly backed by a) its rich construction experience, b) eligibility to bid for higher ticket size project of  Rs 2,500 crore, with improvement in pre- qualification criteria post completion of Surat Diamond Bourse and c) geographical diversification. Healthy order inflows of Rs 1500 crore+ secured at YTDFY23 level and robust bidding pipeline brightens company’s prospects with revenue CAGR of 15.3%, in FY22-24E.

We have BUY with TP of Rs 720.

Road Infrastructure

KNR Constructions Target Price: Rs 290

  • Road is one of the key segment of infrastructure spending. To put into perspective, out of ~7.5 lakh crore of budgeted capex of the government for FY23, road capex is ~1.88 lakh or 25% of the total.  Going ahead, FM has spelt out the government’s intent to use capital spending to sustain strong economic growth, and media reports indicate that overall capex budget could be ~9 lakh crore for FY24. Thus, we believe roads, being a key spending will benefit from sustained increase in spending
  • KNR is likely to be one of the prime beneficiaries of roads & water segment. KNR Constructions is one of the leading companies in the Roads and Highways sector having executed 6,000+ lane km of projects across 12 states in India. Reported 16.3% revenue CAGR over FY17-22 and has consistently delivered industry-leading operating margin of ~20% throughout past 3 years. It enjoys prudent management, robust return ratios (RoCE: 20%+)
  • Strong order book position, receipt of appointed date in most of its projects, and execution pick-up to translate into 11.2% topline CAGR over FY22-24E, with stable margins at ~19%

We have a BUY rating with target price of Rs 290

PNC Infratech

  • PNC Infratech has established itself as a strong executor in the roads, water infra segments. Reported 30.3% revenue CAGR during FY17-22; operating margin was in the range of 13-15%. The company has a strong balance sheet and is net cash at standalone levels
  • PNC is likely to be one of the major beneficiaries of the thriving roads and water supply segment (Jal Jeevan Mission). Strong order book position (Rs 19,261 crore (2.8x book to TTM revenues) with receipt of appointed date in most of its projects and execution pick-up are expected to translate to ~12% topline CAGR over FY22-24E along with stable margins. Furthermore, it has guided for inflows worth ~Rs 8,000-10,000 crore during FY23E with key focus on roads, which if fructified, could lead to upside in revenues estimates, going ahead
  • PNC is currently in various stages of discussions with potential investors to monetize its six completed HAM, one – BOT toll and one BOT-annuity project (total equity infusion: ~Rs 940 crore). One of the investors has already commenced due-diligence for three HAM projects. The management expects positive development on this front by FY23 end

We have BUY with a Target price Rs 350/share (~21% upside from CMP)

HG Infra

  • HG Infra Engineering is a Jaipur (Rajasthan) based infrastructure company having primary focus on roads and allied sectors. The company reported 27.9% revenue CAGR over FY17-22 with improved operating margin of ~16%.  HG Infra’s balance sheet has remained lean (net debt to equity of 0.2x) over the years backed by its prudent strategy to mainly focus on an asset light business model and efficient manage working capital
  • With Strong order book position of Rs 10,851.6 crore (2.9x book to TTM revenues) and having receipt of appointed date in most of its projects, coupled with guidance of further Rs 5000 crore inflows in H2FY23, we expect ~17%% topline CAGR over FY22-24E with stable margins at 15.5-16%
  • HG Infra is in advanced stage of discussions with three potential investors for monetization of its four HAM assets, the fructication of which will can further provide growth ammunition

We have BUY with a Target price Rs 700/share (~19% upside from CMP)

Cement sector –beneficiary of the capex cycle 

  • The construction activities have picked-up post monsoon. Further, likely higher budgetary allocation towards capex in the upcoming budget (up 20% to Rs 9 lac crore) and speed-up in the execution in run-up to the general election 2024 to provide strong demand support
  • The impact of softening of fuel prices is expected to reflect from Q3FY23 onwards. Expect fuel cost/t to decline by ~Rs 250-300/tonne in H2FY23 while cement price hikes (Rs 15-20/bag) would scale up margin to over 22% (or EBITDA/tonne of Rs 1,300/t) by Q4
  • We also expect fresh rounds of consolidation in the Industry due entry of strong aggressive player in the Industry

Preferred picks 

  • Our preferred picks include Ultratech Cement (TP: Rs 7,700/share) & JK Cement (TP: Rs 3,600/share) which are likely to grow at faster space over next 3-4 years
  • Companies trading below current replacement cost below $110-130/t like JK Lakshmi ($88/tonne), Orient Cement ($45/tonne) may see a valuation catch-up  
  • Few probable M&A candidates in our view are Nuvoco Vistas (relatively new player in the industry), Sanghi (having high debt) and Heidelberg cement (foreign promoter)  

Best stocks to watch from PSU banks: Uptick in PSU Banks; still headroom left

  • PSU banks have witnessed a strong rally. Nifty PSU banks index is up ~71% YTD compared to 5.3% run up in Nifty
  • Expect further re-rating in PSU banks driven by relatively lower valuation coupled with sustained loan growth, improvement in margins and lower credit cost
  • PSU banks are expected to witness relatively higher margin expansion driven by continued transmission of rate hikes, higher focus on retail segments & moderation in NPA reversals
  • Gradual improvement in tech capabilities to aid business growth as well provide operational leverage
  • Recent announcement on continuity of leadership will aid better accountability & enable implementation of long term strategies
  • While continue to remain bullish on overall segment. Prefer SBI, BoB and Indian Bank among the pack

SBI (CMP – Rs 614, Target – Rs 700, BUY)

  • Continued healthy credit growth (14-16%), steady margins (at ~3%) to aid PAT growth (~24% CAGR in FY22-24E) and further improvement in RoA to ~1%
  • Thus, we remain positive on the stock and value the bank at ~1.3x FY24E ABV and subsidiaries at ~Rs 192/share

BoB (CMP – Rs 193, Target – Rs 170, BUY)

  • Continued healthy credit growth (14-15%) with focus on retail segment, healthy margins (at ~3.2%) and lower credit cost (guidance lowered from 1.5% to 1.25%) to aid improvement in RoA to from 0.6% to ~0.8%
  • Management confidence on achieving RoA of 1% in FY24E
  • With continued business growth and improvement in RoA, we remain positive and value the bank at ~0.9x FY24E ABV at ~Rs 170/share

Indian Bank (CMP – Rs 292, Target – Rs 300, BUY)

  • Expect RoA to improve from 0.6% to 0.8% in FY23-24E, driven by uptick in advances (10-12%) with focus on high yielding retail & MSME segment, improvement in CD ratio (72-74%) and further transmission of rate hike to aid margins (~3.2%) and moderation in provision (to
  • Pick up business growth coupled with multiple re-rating (at ~1x ABV) to drive valuation further. Thus, we remain positive

HCL Tech – Commentary on Future Outlook

HCL Tech in its analyst day in New York yesterday indicated the following: i) The company in Q2FY23 has revised revenue guidance at company level from 12-14% to 13.5 to 14.5% which were based on normal furloughs in H2. The company is now indicating that revenue growth at the company level in CC likely to be at lower end of the guided band of 13.5%-14.5% due to a) higher than normal furloughs in H2 b) macro concerns in Hi-Tech, Telecom and few other pockets c) Selective Pricing growth.

There was no specific comment on growth guidance of IT services business within HCL Tech (74% of mix in Q2FY23) which could mean that HCLT Tech may have a confidence on the growth there but they may end up at lower end there as well, The comments on weakness in few sectors by HCL Tech were in line with few pockets of weakness already called out by other IT players and hence issues that HCL Tech is facing are likely also being faced by other IT players. We can’t rule out possibility of similar comments from Infosys about growth for FY23 being at lower end of their guidance but we do not see Infosys revising guidance downward for FY23. while growth being normalized this year, IT companies continue to focus on costs to improve margins and that will continue.

Hidden Gems- Stock of the week

Techno Electric & Engineering

  • Techno Electric Engineering Company (TEEC) is one of the leading power-infrastructure companies engaged in three primary business segments; EPC (construction), renewable power generation (wind power) and public-private partnership (PPP) projects in transmission & distribution (T&D).
  • EPC Business: Contributed ~92% to FY22 revenue, generated excellent RoCE of 50-75% over the past five years. PPP projects business: It is present in BOOT/BOOM transmission projects in PPP mode. Wind Power: TEEC owns ~130 MW of wind power generation capacity
  • Entry into data centre, smart meters and FGD market and becoming significant EPC player that improves revenue visibility over the next few years. Company has healthy balance sheet and cash balance of Rs 1200 crore
  • During Q2FY23, the company booked orders worth Rs 400 crores  against Rs 500mn in Q2FY22 and Rs 1,900 crores in Q1FY23. Current order-book stands at Rs 3,600 crores. For FY23, management has maintained its order inflow guidance of Rs 3000 crores across from FGD, T&D, smart metering and data centres
  • We expect revenue, EBITDA to grow at CAGR of ~25.8%, 29.9%, respectively, in FY22-24E, and value TEEC at Rs 385 i.e. 13x PE on FY24E


Post Fed Meeting, market to find direction and head towards 19,400 in the coming week with participation coming from Nifty and Midcaps

Source: ICICIdirect Research

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