Market Outlook: Earnings to drive sentiments in expiry week, consolidation to extend

Market turned stock specific while Nifty consolidated recent gains amid muted global cues. Nifty was down 1% while Midcaps continued winning streak for fourth week (up 0.6%).
Sectorally, IT was the key dragger (down 5%) while Pharma and chemicals outperformed.
FIIs no longer negative - turned net buyers so far in the month of April and bought nearly Rs 7,000 crores ($700 million) in the equity segment which is the highest among other emerging markets.

Outlook

Expect Nifty to consolidate in 17,500-17,800 band amid stock specific action as earnings season accelerates with focus on BFSI, Auto sectors.
Key sectoral theme: Sectors like Pharma, Chemicals, Realty that were out of favour for past eighteen months and undergone significant price/time correction are back in limelight. We expect these sectors to provide meaningful upsides (10%) over the next month.
Breadth indicate improved sentiment: Ratio of stocks at 52-week highs vs 52-week lows has improved significantly over past two weeks. From early April reading of 1:1, ratio is currently at 4:1 with new set of stocks from Pharma.

IT stocks - near term pain seems already in the price

Q4 Results of top 3 players (CC growth of 1.6% for HCL Tech, 0.6% for TCS and -3.2% for Infosys) largely factored in seasonality in Q4.
Deal win momentum is strong across all players, however TCV to revenue conversion likely to be slower due to execution delays/cancellation, etc.
Near term weakness in few pockets of BFSI, telecom, hi-tech and retail sector.
Valuation of TCS, HCL Tech currently at the level of long term average while Infosys is trading at a discount of ~15%.
HCL Tech company achieved FY23 revenue guidance at the company level. Though it missed services revenue guidance for the year but it is noteworthy that guidance miss for HCL Tech was only 20 bps vs 60 bps for Infosys which reflects relatively resilient business footing in a challenging environment.

HCL Tech: Reported 1.6% QoQ CC revenue growth (IT services). Dollar growth 2.6% QoQ (100 bps cross currency tailwind) while there is a decline in ER&D (-3.3%) and P&P (-14.1%) business resulting into 0.3% QoQ USD decline for the quarter. EBIT margins for IT services up 30 QoQ to 17.1%. TCV down 11.6% QoQ to US$2bn (Net new deals). LTM attrition down 220 bps to 19.5%. Net adds 3.7K for Q4. Revenue guidance: 6-8% in CC for FY23 (for company) while 6.5-8.5% for Services, EBIT margin guidance 18-19%. BUY rating

Cyient: Reported 6.6% QoQ CC revenue growth with organic contribution of 2.6%. Dollar growth 8.1% QoQ (150 bps cross currency headwind). EBIT margins excl. acquisitions & exceptional items improved ~120 bps QoQ to 15.1%. Order intake up 13.3% YoY to US$212.7mn & 5 large deals with TCV potential of US$185.1mn. LTM attrition declined by 150 bps to 25%. Net adds 479 for Q4. Revenue guidance: FY24 15-20% revenue growth, Normalised EBIT margin improvement of 100 bps, BUY rating

Normal Monsoon forecast by IMD brings FMCG and Consumer durables back in focus

IMD has predicted normal rainfall during monsoon (June-September), which is 96% of the long-term average. Though, El Nino conditions are likely to develop during monsoon, but ~40% of El Nino years in the past were years with normal or above normal monsoon.
With the possibility of normal monsoon, rural recovery would not be hindered.

FMCG Companies

Given the softening of commodity prices & price cuts taken by FMCG companies, volumes are expected to grow in mid-high single digit in FY24. Dabur & HUL would be the biggest beneficiaries of rural demand recovery given rural sales contribute 50% & 40% to their sales respectively.
Dabur has extended its existing brands in fruit drinks, health food, baby products, health supplement variants, which has increased the addressable market. This would help in offsetting the slower growth in saturated hair oil category. We have a Buy recommendation on Dabur with the target price of Rs 750/ share.
HUL’s strong growth in fabric wash segment to continue through market share gains, premiumization and innovation. Pricing cuts and grammage increase in low unit packs (LUPs) to aid volumes in rural India. We have a Hold rating on HUL with the target price of Rs 2,800 /share.

Consumer durables - small appliance companies in focus

Small appliances companies like fans among others have faced demand disruptions owing to factors such as inventory rationalization (transition to new BEE norms), supressed rural demand amid high inflationary pressure.
Share prices of Bajaj Electricals, Crompton Greaves & V-Guard have contracted in the range of ~6-15% during Jan-March'23.
We expect pick-up in demand of small appliances from Q1FY24.
On the margin front, prices of raw materials such as PVC & aluminium have declined ~32% and ~19% YoY, respectively. As a result, we expect improvement in gross margin of small appliances players - Havells, Bajaj Electricals, Crompton Greaves & V-Guard.
We believe that recovery in demand coupled with improvement in margins will help drive the share prices of these companies. We have a Buy rating on Havells (TP: Rs 1,420) & V-Guard (TP: Rs 310) and Hold rating on Bajaj Electricals (TP: Rs 1,275) & Crompton Greaves (TP: Rs 335).

Smaller banks could witness under-performance in near term

Emergency Credit Line Guarantee Scheme (ECLGS) was extended to ~1.13 crore MSME borrowers with guaranteed amount of Rs 2.4 lakh crore (as of Feb 2023) during covid. Out of these borrowers, 97.6% (~1.1 crore borrowers) were micro and small units.

GNPA for MSME segment has declined from 8.9% in FY20 to 7.3% in FY21 and 6.1% as of Dec’22. However, elevated slippages from micro enterprises (~16.9% of borrowers have slipped into NPA as of Sep’22) remain watchful.

Keeping in perspective the elevated interest rates, mid-sized banks with substantial exposure to MSME segment face near term challenge with regards to asset quality.

Rising cost of funds amid heightened competitive intensity in liabilities seems to put pressure on margins as well as could limit business growth ahead.

Thus, stock price of mid-sized banks could remain in a narrow band in near term. We remain selective in mid-sized lenders segment and prefer IDFC First Bank and Federal Bank.

IDFC First Bank (CMP- Rs 56, Mcap – Rs 37,492 crore, Target Price: Rs 70, BUY)

IDFC First Bank has been delivering well on its guidance across parameters. The bank is well ahead of its target with retail/commercial book at Rs 1.1 lakh crore (~75% of funded asset) and CASA deposits at ~51.3% (earlier target of 30%). With balance sheet restructuring largely done, pedalling growth with entry in new segment (digital, gold, personal loans and credit cards) is in focus.

Rising retail mix, focus towards high yield segment and replacement of high cost borrowings with relatively lower cost deposits to enable steady margin at ~6%.

Improvement in GNPA at 3.18% coupled with adequate provision buffer on legacy infrastructure exposure provides confidence on credit cost remaining at ~1.5-1.7% in FY23-24E.

Improvement in CI ratio from 73.3% to targeted 55% in FY25E to act as key catalyst. Thus, strong retail execution, steady credit cost and improving efficiency should drive RoE at 10-12% in FY24-25E and thus valuation.

Metal stocks are currently side-ways; Chinese construction season likely to provide direction

Metal stocks have remained sideways over the last couple of months. While demand in China is currently relatively subdued, April to June is the period when construction season picks up in China and hence remains a key monitorable for the metal sector, going forward. Thereby, the future direction of metal sector would be closely depended on demand recovery during China’s peak construction season.
Recently, China also released its GDP data for Q1CY23. During Q1CY23, Chinese GDP grew by 4.5% YoY, higher than consensus estimate of 4.0%, wherein recovery in services sector is the bright spot. Tertiary industry (which includes services) grew 5.4% YoY, fastest pace in last 18 months. Primary industry grew 3.7% YoY, while secondary industry (which includes mining, manufacturing, construction, etc) registered a mere 3.3% YoY growth.
The fortunes of metal sector is closely linked with the growth in Chinese secondary industry. For Q1CY23, a muted 3.3% YoY growth of China’s secondary indicates that the demand growth in China is muted. Furthermore, China’s consumer price index (CPI) for the month of March 2023 increased by a mere 0.7% YoY (below the consensus estimate of 1%), also indicating that domestic demand in China is still soft.

JLR to accelerate EV push, commits 15 billion pound investment over next five years!

Tata Motors informed about its foreign subsidiary i.e. JLR planning to invest £15 billion over next 5 years amid accelerated push towards electrification in the luxury car segment globally. It plans to invest this sum in JLR’s industrial footprint, vehicle programmes, autonomous, AI and digital technologies and people skills.
It also plans to open pre-bookings for first all-electric Range Rover later this year (likely launch in 2025) while first of three reimagined modern luxury electric Jaguars will be a 4-door GT (range at ~700 kms, indicative pricing at £1,00,000)
The capex committed by JLR over the next 5 years i.e. £3 billion per year is on a higher side amidst its usual capex trend of £2-2.5 billion per year. However with company retaining its financial goals i.e. cash positive balance sheet by FY25 (existing net debt at ~ £3 billion as of FY23 end) and double digit EBIT margin by FY26, makes us believe that volumes at the company and margin profile will substantially improve going forward (FY24-25).
This coupled with its actions on value unlocking at its Indian EV arm as well as Tata Technologies stake makes us positive on the stock.
We have a BUY rating on the stock with a target price of Rs 530/share.

Major Results

Reliance Industries

RIL's consolidated EBITDA is estimated to increase 6.5% QoQ to Rs 37,540.6 crore. Reliance Jio (Jio) will lead sub addition with ~6.5 mn net sub additions during Q4. The monthly ARPU, like peers, is expected to witness modest growth amid lower number of days, at ~0.6% QoQ at Rs 179. Overall revenues are expected at Rs 23,455 crore, up 2% QoQ. Overall EBITDA margins are expected at 51.6%, down 60 bps QoQ due to higher network expenses on account of 5G. Key monitorable: Commentary on ARPU trajectory, Jio Fiber.
On the back of robust store addition trajectory (added 2,100 new outlets in 9MFY23) and favorable base, we expect Reliance Retail to register revenue growth of 20% YoY to Rs 69,415 crore. Excluding JIO connectivity, we expect core retail revenue to increase by 24% YoY. We expect EBITDA margins (excluding other income) to improve 70 bps YoY to 6.9%.
Improvement in GRMs is expected to lead to growth of 10.5% QoQ in O2C EBITDA to Rs 15,387 crore. E&P EBITDA is expected to remain flat QoQ at Rs 3,854 crore.

Bajaj Auto is expected to report a muted performance in Q4FY23 with total volumes down 12.8% QoQ at 8.6 lakh units. Export volumes are down 21% QoQ while domestic volumes are down 6% QoQ with exports share in volumes at 40% vs. 45% in Q3FY23. The 3-W share in volume mix improved ~300 bps QoQ to 16%. For the quarter, we expect company to report net sales of Rs 8,526 crore, down 8.5% QoQ. EBITDA margins at 18.6%, down 50 bps QoQ. Consequent PAT for the quarter is expected at Rs 1,357 crore, down 9% QoQ. Key monitorable from the results would be management commentary on recovery in volumes at its key export markets.

Maruti Suzuki is expected to report a healthy performance in Q4FY23. Net sales for the quarter are expected at Rs 32,470 crore, up 11.8% QoQ amid 11% QoQ growth in volumes at 5.15 lakh units. The product mix for Q4FY23 remained broadly unchanged with share of UVs in total volumes mix at 24%. EBITDA margins at 9.8%, flat QoQ. Operating leverage gains on account of a QoQ rise in volumes is expected to be negated by Auto Expo expenses held in January 2023. Consequent PAT is expected at Rs 2,403 crore, up 2.2% QoQ. Key monitorable from the results would be management commentary on gross margins as well as expected volume ramp up from new launches.

Hidden Gems

CreditAccess Grameen Ltd (CMP - Rs 983, Mcap – Rs 15,365 crore, Target Price - Rs 1,100)

CreditAccess Grameen Ltd (CAG) is a niche player in MFI space with sustained market leadership and consistent performance across cycles depicting robust business model.
CAGs deeper penetration in rural markets and strong position in key states like Karnataka, Maharashtra and Tamil Nadu along with focus on new geographies, borrower base with high retention rate (>80%) augurs well to capture huge untapped opportunity.
Expect healthy business and earnings growth led by 1) substantial untapped opportunity, 2) favourable regulatory changes, 3) new borrowers accretion with geographical expansion and 4) increase in ticket size.
We expect loan book to grow at 22% and earnings at 53% CAGR over FY22-25E resulting in RoE and RoA at ~20% and ~4.5%, respectively by FY25E. At current price, stock is available at ~2.5x FY25E ABV.

Conclusion

After a range bound last week, we expect ongoing consolidation to extend despite results from index heavyweights.

Source: ICICIdirect Research