Market Outlook: 18,500 key hurdle for Nifty in expiry week, market to remain stock specific

• Global markets outperformed Nifty last week, in an attempt to catch up. Nifty trading at 18,100, down 1%, Nifty small cap inched up by 0.3%.
• Nikkei (4.8% up) and Nasdaq (3.7% up) were top performing markets while German Dax (up 1.6%) is within 0.5% of life highs( hit in CY21).
• We maintain the stance of consolidation at index level in expiry week with 18,500 being key resistance as profit taking is visible. Key support at 17,800.
• Small caps to find favor: Nifty small cap index is still ~16% away from highs. However, many small caps which are not part of small cap index are coming out of large consolidations. We believe money making opportunities are plenty beyond index and one should focus on quality names.
• Bank Nifty (43,640): Index hit new high last week after eight consecutive weeks of gains (15% up) Round of profit booking after sharp rally is on the cards.

US Debt Ceiling: Standoff should resolve sooner

• The concerns related to US debt ceiling are nothing new to the share markets and we have seen these in the past as well.
• We believe the same should happen this time as well and we should see some resolution before 1^st June.
• Even looking at US markets, NASDAQ has moved to 1 years highs, S&P is moving to 7 month highs while US VIX is near its 1 year lows. This suggests that markets are not perceiving any major concerns regarding US debt ceiling.
• However, if it blows like we have seen in 2011, then perhaps we might look at some short-term instability in the market. Last time, US credit rating was downgraded because of the same and markets have declined by more than 10%.
• However, we do not expect repeat of the same. Despite the ongoing noise, inflows of almost 3 billion were seen from FIIs in May which is the highest monthly figure since November last year and highest among the EMs in the month.

Strong tendering & awarding activity seen in the beginning of the fiscal 2024

• The Government of India has increased capital expenditure outlay for FY24E at Rs 10 lakh crore.
• In April 2023, projects tenders worth issued of Rs 1.07 lakh crores vis a vis Rs 81,517 crores in April 2022, an increase of 32% on YoY basis. In Mar 2023, tenders were issued of Rs 1.11 lakh crores.
• Given April being a soft month compared to March, which is seasonally the strongest month, the continued momentum seen in the tendering activity is a big positive.
• In terms of awarding projects in April 2023, Rs 47,794 crore were awarded vis a vis Rs 26,095 crores in April 2022 which grew by 83% on YoY basis. FY23 saw the highest ever awarding at Rs 7.11 lakh crores vs Rs 3.74 lakh crores in FY22.

Every April month tendering and awarding activity for last 5 years

Yearly tendering and awarding activity 

Front line PSU banks deliver best ever performances

SBI Net profit for FY23 crosses Rs 50,000 crores and stands at Rs 50,232 crores witnessing a growth of 58.58% YoY while Bank of Baroda reported highest quarterly net profit at Rs 4,775 crore.

SBI earnings were driven by by ~16% YoY growth in advances while BOB delivered credit growth of 18.5% YoY.

SBI margin improved 7 bps at 3.37%, highest seen in past several years, led to 8 year high RoA of 1.23%. BOB delivered and 16 bps QoQ improvement in margins.

GNPA and NNPA lowest in last 7-8 years at 2.78% and 0.67% for SBI while asset quality was its best with GNPA and NNPA lowest in last 6-7 years at 3.79% and 0.9% for BOB.

Continued healthy growth at 12-13%, lower slippages and recoveries from stressed assets to sustain RoA at 1-1.1% in FY24E for SBI. For BOB sustenance of healthy credit growth (guidance - 12-14%), steady margin and lower credit cost at ~50 bps to keep RoA at ~1% ahead.

Buy rating on both. SBI (Target price – Rs 725) - Fantastic quarter with earnings momentum surging. Bank of Baroda (Target Price – Rs 220) – Strong all-round performance; outlook remains intact.

PSU downstream companies refining margins on a high

• PSUs such as IOC have traditionally underperformed w.r.t. Singapore refining margins, however, since last 10 quarters (from Q3FY21), refining margins are on an uptrend.
• IOC adjusted refining margins arrived at US$15.3 per barrel vs expectation of US$10. Other PSU refiners such as Chennai Petro/MRPL/HPCL too achieved refining margins at a premium to Singapore GRMs at US$12.5/15.1/14 per barrel respectively.
• The reason is two pronged: a) Sanctions on Russian petroleum product exports (although later getting absorbed by nations Turkey and Morocco) b) higher imports of discounted Russian Ural grade crude by India (42% in April 23).
• Chennai Petro on its concall has confirmed purchasing Russian crude oil at US$5-8 discount to market price in recent times, which led to its strong operating performance.
• For FY24E and FY25E, we conservatively expect a US$2-3 premium for both IOC and HPCL at US$11 and US$10 per barrel respectively.

Top Picks

Indian Oil Corporation (CMP: Rs 86, Target Price: Rs 105, Upside: 22%, P/E Multiple: 7) - In Q1FY24-TD, GRMs are likely to be subdued but expected to be countered by strong marketing margins. However, we expect GRMs to improve in H2FY24 with expected rise in demand. IOC also plans to increase its refining capacity from current 80 MMT to 107 MMTPA by 2024-25. Higher dividend payout (7-8% yield).

HPCL: (CMP: Rs 256, Target Price: 310, Upside: 22%, P/E Multiple: 5) - HPCL’s refining capacity is expected to increase from 8.3 MMTPA to 15 MMTPA. HPCL has the highest Marketing: Refining capacity mix, which would work favorably in current environment of higher marketing margins. Higher dividend payout (5-6% yield).

Fluorochemicals, CRAMS businesses stand out in a tough Q4 environment, agrochemical suffer

• Our chemicals universe registered YoY revenues and EBITDA growth of 15% and 17% respectively, mainly driven by Fluorochemicals (45% YoY revenues growth) and CRAMs (23% YoY revenues growth) even as players from Agrochem space witnessed muted 1% YoY revenues growth.
• Fluorochemicals - All players in Fluorochemicals and Fluoropolymers (45% YoY revenues growth) space reported stronger than expected sales growth and margin improvement. All the three players SRF, Navin and GFL reported YoY sales growth of 34%, 70% and 56% respectively with significant margin expansion.
• CRAMS - Companies (23% YoY revenues growth) with significant specialty chemicals CRAMs business presence continued to benefit from China +1 and Europe + 1 strategies in the post Covid era. Companies like Navin, PI Industries, Astec reported CRAMs growth of 131%, 15% and 11% respectively.
• On the flip side, agrochemical players (Both domestic and exports) had a tough Q4 largely laid by sluggish demand in the domestic market and international market along with higher inventory piling up at customers' end. Companies like Astec Lifesciences witnessed YoY de-growth of 22% in the domestic markets and a de-growth of 66% in the international markets.
• Top Picks - SRF (TP:  Rs 3,000) -Sustained efforts and opportunity-focused capex to ride on the increasing opportunities for specialty + fluorochemicals across key industries.

Tata Motors – well-rounded performance

• Tata Motors Q4 was an all-round performance with both Indian and overseas business reporting healthy operating margins.
• On the Indian operations front, its CV business reporting 10.1% margin (up ~170 bps QoQ, highest ever in recent past) and PV business reporting margins of 7.3% (up ~40 bps QoQ).
• On the overseas operations front, JLR reported 14.6% margins up 270 bps QoQ.
• The company reported positive PAT on full year basis for FY23 at Rs 2,414 crore, after a gap of 4 years and consequently declared dividend of Rs 2/share after a gap of nearly 7 years.
• Going forward, key positive surprise was management commentary on net debt reduction on JLR front to in FY24 vs current ~£3 billion in FY23 with robust FCF generation of >£2 billion amidst accelerated capex plans on the EV front amounting to ~£3 billion.
• Further management guided about wholesale of ~4 lakhs+ units on JLR front for FY24E & retained its guidance of cash positive balance sheet by FY25 and double-digit EBIT margin by FY26.
• We now expect healthy 20.1% revenue CAGR at Tata Motors over FY23-25E driven by 10% total volume CAGR. We now value Tata Motors at Rs 650 on SOTP basis (8x, 2x FY25E EV/EBITDA on India, JLR; Rs 150 value to Indian EV business, stake in Tata Technologies).

ITC – Cigarette volume grows, FMCG margin in top gear

• ITC witnessed revenue growth of 6.6% to Rs 17,506.1 led by 14.2% growth in cigarette business & 19.4% growth in FMCG business. Hotels business saw 100% growth.
• The 14.2% growth in cigarettes business was led by ~12% volume growth. Market share gains from illicit, contraband cigarettes & stable taxation helped.
• FMCG business growth of 19.4% was led by ~8% volume growth. Strong growth in Atta (led by high pricing growth), Biscuits, Noodles, Juices & Snacks.
• FMCG business saw 352 bps operating margin improvement (EBITDA) to 13.3%.
• We estimate cigarettes volume growth of 8% & 5% in FY24E & FY25E respectively. The company is expected to grow operating margins by 100-150 bps every year.
• We remain positive on long term growth outlook for the company & maintain our BUY recommendation with the target price on stock to Rs 500 /share.

Hidden Gem

Siyaram Silk Mills (Target Price: Rs 710, MCap:  Rs 2,708 crore; Upside: 23%)

• Siyaram Silk Mills (SSML) is of India’s leading fabric manufacturer and retailer largely catering to Tier II and Tier III towns. Siyaram’s brand portfolio consists of reputed brands like Siyaram (flagship brand), Oxemberg, MSD and J Hampstead.
• Over the last decade, the company has gradually expanded its fabric and garment capacities and simultaneously managed to reduce the debt/equity from 1.0x in FY12 to 0.2x in FY23.
• The number of EBOs with sale or return (SoR) has reduced from 83 in FY19 to only four in FY23. With focus on becoming asset light, the company has reduced company owned company operated (COCO) exclusive brand outlets (EBO) from 31 in FY19 to nil in FY23.
• The company continues to be selective with its product strategy and has increased focus on fast running stock keeping units (SKUs) with a target to maintain lower inventory level and reduce working capital cycle.
• We expect the company to report revenue and earning CAGR of 13% and 15% over FY23 to FY25E. Enhanced capital efficiency (low leverage, controlled working capital cycle) and better profitability are expected to result in SSML maintaining healthy RoCE of ~23% by FY25E.
• The company trades at an attractive PE multiple of 8.1x FY25 EPS. We value SSML at Rs 710 i.e. ~10x FY25E EPS.