Market Outlook: All eyes on FOMC and earnings in truncated week

• Indian equities outperformed global peers as Nifty gained 1.8%. Small caps outperformed with 3% rise for the week.
• Globally, barring Nasdaq (1.2%), most major equity indices lagged and closed negative.
• May has been month for accumulation historically – Over past two decades in 83% of the times index has generated average double digit returns between May-December period. While May has been a volatile month, buying with conviction during such volatility has been rewarding for investors.
• Nifty surpassed hurdle of 17,800 signaling resumption of up move. Expect index to head towards 18,200 in coming truncated week with elevated support at last week’s low of 17,600.
• Brent - expect prices to test lower band of $70 in coming weeks.
• Key monitorable: Global and domestic yields movement post FOMC will have bearing on sentiments. Prospect of monsoon for India will be another key monitorable and 10Y going below 7 would be key positive for rate sensitives.

Banking earnings continue to remain strong across with robust outlook intact

• Credit growth averaged 16-19% for most banks with retail remaining top growth sector.
• Deposits grew in 9-10% range and seen on an upward trajectory.
• Margin expanded for banks but we believe NIM’s peaking out in Q4FY23, as managements have guided pressure on cost of funds.
• Sequentially all banks witnessed asset quality improvements leading to lower credit costs and guidance continues to remain low too.
• IndusInd Bank reported healthy NII (17.2% YoY), steady margins (~4.28%) and improved credit cost resulting in PAT growth of 49.9% YoY. Axis credit growth came at 19.4% YoY (ex-Citi 16% YoY). Retail book up 22% YoY. The bank saw strong 10% QOQ (ex Citi 7% QoQ) growth in deposits.
• Axis Bank posted loss of Rs 5,728 crore (as anticipated exceptional item of Rs 12,489 crore led by Citi acquisition). Profit growth except Axis bank was highest leading to all large private banks reaching closer to 2% RoA.
• IndusInd Bank (trades ~1.7x FY25E ABV; Target Price: Rs 1,450, Buy) Axis Bank (trades at 1.5x FY25E ABV, Target Price: Rs 1,100, Buy)

Auto Space Continues to Surprise on the Earnings front

• Auto Space results declared so far has been healthy and ahead of estimates.
• Most of the companies have guided for stable margin profile going forward.
• Maruti EBITDA margins came in at 10.5%, up ~70 bps QoQ (est 9.8%). Bajaj auto margins came in at 19.3%, up 20 bps QoQ (est. of 18.6%).
• Maruti expects volumes to grow above industry growth rate (5-7%) in FY24 with ambition to clock ~5 lakh unit of UV sales amid flattish entry level segment while Bajaj expects domestic 2W space to grow ~6-8% on YoY basis with rural space showing signs of demand improvement.
• Maruti is targeting capacity of 42.5 lakh units in about 5-6 years’ time frame vs. ~20 lakh units of sales volume clocked in FY23 by announcing fresh capacity expansion of 10 lakh units besides existing expansion underway for similar capacity i.e. 10 lakh units.
• We maintain BUY rating on Maruti (Target Price Rs 11,000; 26x FY25E EPS) amidst its strong intent to outpace industry growth, reignited focus on SUVs, market share gain ambition, clear timeframe for EV launch and robust order book (>4 lakh units). Bajaj Auto is assigned HOLD rating (Target price Rs 4,530; 15x FY25E EPS) with limited growth in the offering and competition from new age OEM’s in the EV space.

Tier II IT Companies - Coforge stand out while LTIM recovery expected from Q2FY24 onwards

• Coforge’s achieved FY23 revenue guidance (achieved 22.4% CC revenue growth vs 22% CC growth guided) on strong deal execution. Order book in FY23 stands at all time high of US$1.3bn which provides visibility for FY24 numbers and which also reflects in 13-16% CC revenue guidance given by the company for FY24.
• LTIM Q4 numbers were impacted due to some slower execution as they reported only 0.7% CC QoQ revenue growth in Q4. The order book is strong at US$4.87bn which along with some momentum of deal execution is giving them confidence on double digit revenue growth for FY24.
• Coforge guiding for flat margins for FY24 (adj. EBITDA margins at 18.3% for FY24) and aspiring US$2bn in revenues (US$1bn revenue in FY23 milestone achieved). LTIM though didn’t guide specific margin numbers for FY24 but they aspire to reach 17-18% EBIT margins in the medium term (16.2% achieved in FY23).
• Coforge: Revenue guidance: 13-16% in CC for FY24, Adj. EBITDA margin guidance 18.3%. BUY rating, TGT of Rs 4,725, 25x FY25 EPS.
• LTIM: Revenue Guidance: Double digit growth in FY24 BUY rating, TGT of Rs 5,320, 24x FY25 EPS.
• Wipro & TechM continue to lag as both posted weak performance and guidance.

Life Insurance quarter buoyed by tax amendment, valuations reasonable

• Led by tax amendment, a sudden surge in high ticket insurance policies was witnessed in March 2023 which boosted overall Q4FY23 premium growth. SBI life was relatively less benefitted due to its lower high ticket exposures.
• Higher non par and protection focus led to better VNB margin for players across the industry (HDFC Life- 27.6% and SBI Life- 31%).
• Managements clarified that new EOM (expenses cap) regulation seen to provide flexibility on cost management structure and they do not believe any increase in cost would be a structural challenge to long-term VNB growth as long as there is business growth.
• Post recent consolidation in stock prices, valuations are reasonable for Life Insurance players. Declining interest rate scenario should augur well for the stocks.
• HDFC Life (Target Price: Rs 570, Hold) - sustainability of business growth and margins remain watchful.
• SBI Life (Target Price: Rs 1,350, Buy) - Lower proportion of high ticket business, strong distribution and diversified product mix along with lowest cost on relative basis is seen to aid business growth as well VNB margin.

FMCG volume growth recouping; albeit at slower pace

• FMCG companies saw volume recovering albeit at slower pace.
• Nestle witnessed stronger growth in Noodles & chocolate categories. Similarly, tata consumer saw single digit volume growth in salt & 50%+ growth in newly forayed categories (Ready to eat, Ready to cook, Pulses among others). HUL also continue to witness strong growth in Home care business (Detergents) despite higher pricing growth. However, personal care & Foods (Horlicks, Boost MFD) business is still struggling to grow despite price cuts taken by the company in last six months.
• With commodity price decline, gross margins have been improving sequentially all these companies. HUL has sequentially increased the advertisement spends to perk up volumes however spends remained lower (at 8% of sales) compared to 12% in pre-covid period. We believe margins would improve going forward for most of the FMCG companies.
• We are positive on Tata Consumer (Buy; target price of Rs 980/ share given it is trading at 39x FY25 PE). We have a Hold rating on Nestle India & HUL with target price of Rs 23,000/share & 2780/share respectively given these companies are trading at premium valuation multiples (50-60x FY25E PE).

Retail Sector – demand holding up in metros. 

• As per our channel checks, demand for the lifestyle segment started waning off during January-February on lower pent-up demand. Higher inflation is leading to decline in consumers’ share of wallet towards discretionary mainly in Tier II-III cities.  
• Shoppers Stop and Trent performed relatively better in terms of revenue as they majorly operate in metro cities.
• Trent continues to deliver industry best growth rates. In Q4FY23, revenue grew by 75% YoY to Rs 2,077.1 crore on a favourable base. On a three-year CAGR basis, revenue growth stood at an impressive 42%, which is the highest amongst other lifestyle retailers.
• Shoppers Stop recorded its highest ever Q4FY23 sales as it added 10 stores in FY23 (highest in decade), improvement in share of private label (100 bps YoY to 14%) and higher focus on beauty segment. Revenue grew by 29% YoY to Rs 916.5 crore.
• For Trent, Westside format has been performing well with SSSG of 23%, however, the real game changer has been acceptance of Zudio as a value fashion format.
• Trent is rated BUY with Target Price of  Rs 1,730, upside 29%). Shoppers Stop is also BUY with Target Price of Rs 850, upside: 31% as focus on enhancing the share of high margin private labels (targeting 20% share) and reasonable valuations of 2x FY25E EV/Sales.

Hidden Gems

Mahindra CIE (CMP: Rs 400, Target Price: Rs 520, Market Capitalisation: Rs 15,000 crore; Potential upside: 30%)

• Mahindra CIE (MCI) is part of the Spain-based CIE Automotive Group. It is a multi-technology, multi-product automotive component supplier. In terms of technology, forging forms 59% of consolidated sales. Segment-wise contribution is skewed towards PV, 2-W and Tractors in India and PV in Europe. Hence it is more a PV centric forging player – a key differentiator vs. its competition which are more of a CV centric forging businesses.
• Post its re-classification of German forging business as asset held for sale, it derives ~65% of consolidated sales from India and the rest (~35%) from Europe.
• India is typically a high margin business for the company clocking ~15% EBITDA margins and is a key focus area for growth. While Europe is a tad low margin business at ~<15% margin profile with focus here on efficiencies. In the recent quarterly result however, company reported 17.6% as EBITDA margins at its European operations, a big positive surprise, with management guiding for sustenance of the same amidst tailwinds of lower energy and power costs.
• The stock got significantly re-rated post Q1CY23 results & upbeat management commentary and is up ~15% from thereon. At the consol level, Company’s intent is to take this margin profiles at par with CIE’s global average of ~17-19%.  
• Building upon the same our forward earnings stagged a smart upgrade of ~15% and consequently remained bullish on this stock.
• We build 12% sales CAGR over CY22-24E along with an uptick in margins to 15.8% by CY24E. We have a BUY rating on the stock, tracking portfolio attributes namely strong CFO/FCF yields (~9%/6%) and healthy return ratios profile (~18%). We value it at Rs 520 i.e. 18x PE on CY24E EPS of Rs 29/share and assign BUY.
• Improving order win momentum including EV order book, thrust on exports and shift in global automotive supply chain away from China are seen as being some of the tailwinds for MCI in coming years.

Conclusion

Globally almost every asset class has remained under pressure amid continued weak economic data from US.  Despite marginal recovery seen towards the end of the week, almost every risk asset closed the week in red. So, Fed meeting holds the key.

Source: ICICIdirect Research