Partner With Us NRI

Market Outlook: Expect Nifty to reclaim all-time highs, with midcaps in focus

ICICIdirect 22 Mins 05 May 2023
  • Indian equities extended outperformance against global peers. Nifty gained 0.6% while Nifty midcap index is up 1.8% while Nifty Midcap50 index already hit new highs on closing basis.
  • Most developed markets were down ~2% amid prospects of mild recession in US given challenges within regional banks.
  • Nifty bottom in place, Nifty to reclaim all-time highs of 18,887 by June 2023 – Current index structure on many technical counts (chart pattern, breadth, other market internals) is comparable with CY13, CY16, CY19. In each of these instances index reclaimed new highs within three months once higher bottom was in place. In current context with higher bottom in place at 16,800 in March, we expect Nifty to reclaim all-time highs of 18,887 by June 2023.
  • Midcap index just 2.5% away from life highs: We expect midcap index to challenge life highs in May and outperform Nifty.
  • Brent – prices approached lower band around $70 which is a key support level. We expect upsides to be short lived with immediate hurdle at $80.
  • Bond yields: India 10y yields have softened further to 7% - Indication of interest cycle peaking out in US and lower crude prices would act as tail winds.
  • FII continuing their buying spree in May so far- After strong flows in April (approx. 10kcr), FII pumped in ~4,700 cr in cash market in first three sessions of May. Dollar index breaking below 100 mark could mean accelerated flows in EM.

US Fed Update

  • US Federal Reserve once again increased the rate by 25 bps brings its benchmark rate to a range between 5% - 5.25%, a 16-year high. Fed also signalled that they might be done raising interest rates for now and amplified attention to credit and other economic risk.
  • Further, policymakers had dropped a key phrase which they used in their previous statements that said “committee anticipated some additional increases might be appropriate” and replaced it with new language saying “they would carefully monitor the economy and the effects of their rapid increases over the past year.”
  • Even one more sentence related to banking crisis was replaced. “Recent developments are likely to result in tighter conditions” was removed and replaced with “Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation.”

ICICIdirect View: We expect a peak in interest rates and possible rate cut by the end of the year as the impact of higher borrowing cost is now evident in most of the economic data points.                                            

Cement Sector: Heathy volume off-take

  • Q4FY23 result season started on a positive note, with top three players (UltraTech, ACC & Ambuja) reporting record high-capacity utilization rate of ~97% in Q4FY23 (vs. 92% Q4FY22).
  • Cumulative volume growth for three players increased 13% YoY to 47.1 MT in Q4FY23 (vs. industry growth of 8-9%).
  • Pricing scenario remained weak during the quarter as realizations declined by 2.5% QoQ to Rs 5,768/t.
  • Despite weak realizations, EBITDA/T improved by Rs 150/T QoQ to Rs 930/T, mainly driven by positive operating leverage and partial benefit of moderation of fuel cost.
  • Companies are expected to attempt price hike by end of this week (~Rs 10-30/bag), however absorption for the same would be a critical factor to watch out for.
  • Cost tailwinds through reduction in fuel costs (domestic pet coke prices down 34% YoY to Rs 14,639/t) would entail positive profitable momentum in FY24E. We expect EBITDA/T to surpass Rs 1,000 levels for our coverage universe.

UltraTech Cement (CMP: Rs 7,505, TP: Rs 9,000, upside: 20%)

  • Volumes grew 16% YoY to 30.5 MT in Q4FY23 with capacity utilisation rate standing at ~95% (vs. 92% in Q4FY22). In the month of March, company operated at nearly 100% capacity utilisation. EBITDA/T surpassed Rs 1,000/t (Rs 1,030/t in Q4FY23, I-direct estimate: Rs 1,050, Q3FY23: Rs 869/t).
  • Company reached the landmark of clocking in 100MT volumes in FY23. It currently has capacity of 129 MT and in phase two of the expansion company would take its overall capacity to 154 MT by FY25E.

ACC Cement (CMP: Rs 1,770, TP: Rs 2,130, upside: 20%)

  • Recorded healthy volume growth of 10.2% YoY to 8.5 MT. The volume numbers are impressive in the context of challenges faced by the company regarding the shutdown of plant operations in Himachal Pradesh for ~50 days.
  • Through better operational efficiency coupled with synergising Adani group expertise, production cost per tonne (QoQ) declined by ~ Rs 312/t to Rs 5,088/t.
  • We find the risk reward favourable at the CMP as ACC trades at reasonable valuations of EV/t of US$85/t (~8x EV/EBITDA), which is ~25% lower than the replacement cost. Further, we find comfort owing to its b/s strength with cash & investment of Rs 3000+ crore. Maintain BUY with a TP of Rs 2,130 (10x FY25E EV/EBITDA)

Ambuja Cements (CMP: Rs 390, TP: Rs 470, Upside: 21%)

  • Volumes grew 8% YoY to 8.1 MT with plant operating at nearly 100% utilisation levels. EBITDA/T improved QoQ to Rs 973/t (Q3FY23: Rs 813/t).
  • We build in cost savings initiatives of Rs 345/t during FY23-25E and expect the company to clock in EBITDA/t of Rs 1,240/t by FY25E. The company remains committed to doubling its consolidated capacity from current 68 MT to 140 MT by FY28 (CAGR: 16%).

Real Estate: Rate hike cycle pause to drive recovery in stock performance

  • Real Estate has been top performing sector in April, 2023 with ~13% return. This was led by RBI rate pause bringing the much-needed relief. We highlight that the sector has underperformed (Nifty Realty returned ~5% in last 1 year vs ~9% return for Nifty) owing to various concerns such as home loan rates (up 200 bps over the past 12 months as there was repo rate hike by ~250 bps in the same period), stamp duty normalisation in Maharashtra and increased supply across markets especially Mumbai market. Rate cycle pause, therefore, was a much need breather with eventual rate cut cycle being a major catalyst ahead.
  • The sales volumes numbers of residential real estate have been resilient. As per Anarock, the housing sales rose ~54% in 2022 to 3.65 lakh units as against 2.37 lakh units in 2021 across the top seven cities. Q4FY23 remained quite healthy with 1,13,770 units sold in the period, up ~14% YoY. Top players like Godrej Properties (saw 25% sales value growth in Q1), Sobha (~26% pre sales value growth), DLF (likely to report strong volumes given new project worth US$ 1 bn sold out in Q4).
  • The overall demand-supply scenario construct remains decent with decadal high absorption and decadal low inventory (20 months).
  • The top developers will continue taking market share given their superior balance sheet, execution record and brand. Most of the top developers in this cycle are sitting on lean balance sheet (net debt to equity ranging for 0.1x to 0.7x) which is among life time best levels. The players in high end user markets such as Bengaluru, Pune, Hyderabad as well as diversified players are better placed in our view.
  • Brigade Enterprises (CMP: Rs 533, TP: Rs 620, ~17% upside), and Mahindra Lifespace (CMP: Rs 374, TP: Rs 470, ~25% upside) are our preferred picks in the space. Phoenix Mills is a play on malls (CMP: Rs 1,450, TP: Rs 1,650).

CRAMs Q4 numbers- early cues mixed but outlook promising

  • Global clients have started focusing on non-covid opportunities gradually in 2023.
  • While the new client addition is yet to reach the pre-Covid level, there is a rise in incremental orders from the existing clients.
  • Lead indicators of orderbook visibility could be 1) maintaining of capex guidance announced before Covid and 2) frontloading of expenses of new idle plants to P&L. Laurus and Syngene have maintained Rs 800 crore and Rs 500 crore capex respectively.
  • Upbeat guidance from Syngene which derives ~1/3rd of the revenues from Discovery services which precedes Development and Manufacturing.
  • Clients looking to secure their supply chains in the backdrop of global geopolitical issues and are preferring vertically integrated CRAMs models.
  • PI Industries’ maiden foray into Pharma CRAMs.
  • Syngene- TP – Rs 740 - Well-rounded growth, Upbeat guidance - Q4 Sales grew 31% YoY while EBITDA grew 27% YoY driven by incremental orders from existing clients, new contract executions, reflecting revival signs of the CRAMs ecosystem.
  • Laurus Labs-TP - Rs 300 - Numbers reflect execution fatigue, Cautious guidance - Higher CRAMs base (large Covid execution) impacted Q4 numbers with sales de-grew 3% YoY and EBITDA de-grew 28% YoY. 

Tyre stocks in focus on record gross margin expansion and decline in crude prices

  • Natural rubber and crude derivatives form a majority (~65-70%) of raw material costs for tyre manufacturing.
  • The stocks are in focus post record ~500 bps gross margin on QoQ basis reported by listed players namely MRF and CEAT. This is more than anticipated expansion in gross margins as most of the companies had guided for ~3-4% QoQ decline in raw material prices for Q4FY23 while the realised raw material price decline is to the tune of ~8-9%.
  • To add to this, the crude price has corrected sharply over the past fortnight i.e. down ~16% and is presently quoting at US$73/barrel.
  • Natural rubber prices on the other hand have been largely stable and presently quoting at Rs 155/kg in domestic markets; with prices to remain under check amidst record rubber production domestically at ~8.4 lakh tonnes, up 8.3% YoY.
  • Domestically, over FY23-25E, tyre manufacturers are also expected to benefit from cyclical upswing in the M&HCV space and steady demand prospects in the PV domain.
  • In this space, our top bets are Apollo Tyres (Buy rating, Target Price: Rs 390) and JK Tyre.
  • Apollo Tyres stands to gain from its focus on capital efficiency, sweating of assets and controlled capex spends. With turnaround already in place at its European operations and benign commodity price outlook, PAT at the company is seen growing healthy double digit over FY22-25E. With reduction in debt, RoCE at the company is seen at 15% by FY25E. We have a target price of Rs 390 on Apollo Tyres, valuing the company at 6x EV/EBITDA on FY25E.
  • JK Tyre & Industries is more a tactical play wherein we had upgraded the stock post last quarter, trading at inexpensive valuations of ~4.5x EV/EBITDA on FY25E.

Major Results

HDFC Limited (Target Price – Rs 3,150) – Steady performance; fundamentals to be back in focus

HDFC Ltd reported slower credit off-take at 9.2% YoY, however, individual book (contributing 83% of portfolio) grew at healthy 15.7% YoY. Improvement of ~10 bps in margins at 3.6%, steadier opex at ~10% and lower credit cost at 25 bps led to healthy growth in earnings at 22.2% YoY to Rs 4,425 crore. Asset quality continued to remain resilient with GNPA at 1.18% on the back of 99% collection in individual segment.

As per MSCI, weightage of HDFC Bank (after merger) in global indices is expected to remain largely steady (HDFC Banks weight seen at ~6.5% vs HDFC Ltd current weight of 6.74%) ; contrary to earlier expectation of an increase (which would have led to an inflow of $3 bn). Though unfavourable change in weight, contrary to expectations could have near term impact on the price, clarity on RBIs approval and index inclusion & weight should put fundamentals back in focus and drive stock price from hereon.

Havells India (Target Price – Rs 1,425) - focus on margin recovery

  1. Havells witnessed pick up in construction activities and continued focus on market share gains in the AC business helped drive overall revenue growth at ~10% in Q4FY23. New product launches and dealer additions in the new geographies drove Lloyd revenue up by 32% YoY in Q4FY23. The Electrical Consumer Durable revenues were adversely impacted by rationalisation of fan inventory due to change in BEE norms. We expect revenue to grow at a CAGR of 13% over FY23-25E led by higher government spends on infrastructure and housing, capacity expansion, and dealer additions in new geographies. 
  2. The EBITDA margin at ~11% in Q4 has witnessed continuous recovery in FY23 (much better as compared to 8.5% in Q1). We believe, easing raw material cost, launch of premium products and continuous focus on trimming losses of its Lloyd segment will drive EBITDA margin up by 270 bps over FY23-25E.
  3. We maintain our Buy rating on the stock with target price Rs 1,425/share considering its diversified product portfolio, strong brand and robust balance sheet condition.

Hidden Gems

Newgen (CMP: Rs 557, TP: Rs 660, Upside: 18%) - Growth and margins likely to sustain

  • Newgen reported 25% revenue growth in FY23, which was higher than its guidance (20%+ growth, given at the start of the year). Growth was driven by strong growth in its traditional markets of India & EMEA (31-32% mix each) which grew by 40% and 28% respectively while growth in US market (relatively new market) didn’t pan out as expected. Vertical wise Banking & Insurance (74% mix together) grew by 27.6% and 42.3% respectively.
  • The company expects strong growth momentum to continue in FY24 on account of i) continued growth in traditional markets ii) recovery in US markets and additional growth through GSI (Global system integrators) iii) account mining iv) pursuing large deals.
  • The growth is also expected to come through structural change of more annuity business now (61% in FY23 vs 43% in FY18) eliminating lumpiness of license based revenues.  
  • The company reiterated its goal to reach US$500 mn annual revenues in the medium term. The company expects EBITDA margins in the range of 20-21% for FY24
  • We have factored in 20.9% CAGR revenue growth and 18.4% CAGR earnings growth over FY23-25. We value Newgen at 19x FY25 EPS


In coming week, expect Nifty to consolidate in 17,900-18,500 zone while midcaps to outperform.

Source: ICICIdirect Research

Enjoy the new Native experience

ICICIdirect APP - All in 1

Download our App and get started with your investment and trading journey with features such as Basket Orders, Stock SIP, Research Recommendations and much more at one place.