Market Outlook: Markets to turn stock specific amid onset of Q4 earnings

Banking - Strong business momentum to boost profitability

• Indian banking system credit growth continued to remain healthy at ~15%.
• Credit growth for our universe is expected to be better than industry at 16.2%, led by retail and MSME.
• NIM are expected to remain elevated driven by continued repricing of asset and increasing proportion of high yielding assets.
• Asset quality to improve further as we expect GNPA ratio to decline by 10-15 bps.
• Axis Bank is expected to report loss in Q4FY23 owing to knocking off goodwill related to Citi acquisition). Excluding the same, PAT for our coverage is expected to grow at 36% YoY.
• SBI expected to deliver industry in-line growth at 15% while Kotak Mahindra Bank is expected to report a strong growth of ~22% YoY.
• Bank to report healthy PAT. SBI with anticipated earnings growth of 65% YoY remains ahead of peers

Preferred stock

SBI (CMP – Rs 530, Mcap – Rs 4,72,737 crore, Target – Rs 700)

• Credit growth remain in-line with industry with margin expected to remain resilient.
• Expect earnings growth at 24% CAGR in FY23-25E and RoA at ~1% in FY25E.
• Continued healthy performance to lead to improvement in RoA reaching >1% warrants a re-rating. Currently, stock is trading at ~0.8x FY25E standalone ABV.

Bank of Baroda (CMP – Rs 170, Mcap – Rs 88,020 crore, Target – Rs 200)

• Expect credit growth in-line with industry with retail loans growing at relatively faster pace.
• Faster re-pricing of loans to continue in Q4FY23 resulting in margin at 3.2-3.25%.
• Steady CI ratio at ~45-46% and credit cost at ~100 bps of advances to keep RoA healthy at ~1%.
• Currently, the stock is trading at 0.7x FY25E ABV.

Capital Goods - Order inflows on a high, expect EPC companies to catch up

• We expect companies under coverage to report a consolidated revenue and PAT growth of 10% and 6% respectively driven by execution and margin expansion.
• EPC companies (14% revenue growth led by strong execution; 17% PAT growth), Product based companies (revenue growth at 14% YoY) to drive growth while Defence companies (muted growth of 2.3% YoY as their FY23E execution were front loaded).
• Order inflows remains robust across. In the EPC segment Larsen & Toubro (announced EPC orders in the range of ~Rs 20,000-31,500 crore). In the T&D space, KEC & Kalpataru Power announced decent order inflows of Rs 6,824 crore and 5,662 crore, respectively. Order inflows of defence companies remained strong at ~Rs 60,000 crore, Bharat Electronics (Rs 16,678 crore) followed by Bharat Dynamics (Rs 12,288 crore) and HAL (Rs 10,067 crore).
• L&T will exhibit all round performance given we expect order inflow growth will be in excess of 15% and revenue and PAT will grow by 12.1% and 16.9% coupled with margin expansion. Thermax on back of strong backlog will report revenue and PAT growth 21.8% and 47% YoY growth (main lever would be margin expansion given completion of lower margin legacy orders).
• On the product side, export oriented companies like AIA is likely to witness strong 13% YoY volume growth led by mining segment and 39% YoY PAT growth while Elgi Equipment revenues and PAT to grow by 18.5% and 15.2% YoY, respectively.

Pharma - India growth strong, positive surprise expected from the US

• The Pharma Universe is expected to register ~11% YoY growth, to be driven by ~16% US growth and ~ 13% India growth. One of the strongest quarters for India formulations and some complex launches in the US besides currency tailwinds.
• For India, ~13% growth will be backed by continued chronic therapies traction. Incremental MR force penetration and new launches are also expected to support growth.
• For US, besides Currency tailwinds (~9% YoY depreciation in INR), we expect continued complex launches momentum including generic Revlimid by some Indian players to be the key for ~16% expected growth for the universe.
• On the EBITDA margins front, we expect ~300 bps improvement to ~22% for the universe. The improvement would be on the back of better product mix (Higher India and complex US contribution) and wanning input cost inflation besides lower energy and logistic costs.

Top Picks - Sun Pharma (TP - Rs 1,210) Revenues to grow ~17% YoY to be driven by ~21% growth in the US and ~12% growth in India. Cipla (TP - Rs 1,290) Revenues to grow ~12% YoY to be driven by ~20% growth in the US and ~15% growth in India. DRL (TP - Rs 5,210) Revenues to grow ~12% YoY to be driven by ~23% growth in the US and ~8% growth in India.

FMCG - Green shoots of volume uptick visible on price cuts

• We estimate our FMCG coverage universe to see 9.8% revenue growth in Q4FY23 led by mix of volume & pricing.
• We estimate HUL (Hold rating on HUL with the target price of Rs 2,800) to see 15.4% revenue growth led by 6% volume growth, 9% pricing growth. Price cuts taken in beauty & personal care (BPC) category by HUL have started benefiting in terms of pick-up in volumes.
• ITC (Buy Rating with target price of Rs 450) cigarette volumes would continue to grow at faster pace (~13%) led by stable taxation in last five years & curb on illicit cigarettes. Further FMCG business is also expected to see strong growth of 19.1% led by higher growth in foods, discretionary & stationary segment.
• Commodity prices have declined in six months, which is likely to improve gross margins of FMCG companies. Average palm oil, crude & coconut oil prices have been down 35%, 16.1% & 12.7%, respectively.
• We expect 90 bps margin improvement in Q4 which is likely to drive net profit growth of 12.6%.

Auto - Gross margin to plateau in Q4FY23, ancillary set to outperform

• We expect our coverage universe (ex-Tata Motors) to report 7% QoQ sales growth & flat QoQ margins at 12.7% with PAT expected to grow 9% QoQ. This is amidst ~5% QoQ volume growth for the industry.
• With majority of raw material decline benefits already accrued, expect gross margins to largely peak out.
• On the volumes front, total volumes at Maruti Suzuki came in healthy at 5.1 lakh units, up 10.5% QoQ with broadly unchanged product mix as UV share in total volumes stood at ~24%. While volumes at Ashok Leyland were robust at ~60,000 units, up 25.5% QoQ with favourable product mix with M&HCV to LCV ratio at 68:32. Tata Motors too reported robust volumes especially on the JLR front with wholesales volumes at 1.07 lakh units, up 16% QoQ and highest reading in last 8 quarters.
• We expect the auto ancillary space to outperform, we expect sales to grow 4% QoQ with ~120 bps expansion in EBITDA margins to 16.4% and consequent PAT growing 31% QoQ.
• Key outliers for Q4FY23 are seen as Tata Motors, Ashok Leyland in OEM space & Apollo Tyres in the ancillary pack.

Tata Motors (CMP: Rs 460; Target price: Rs 530; Rating: Buy; Upside: 15%)

• Tata Motors is expected to report healthy performance. Total sales volume at Indian operations were at 2.52 lakh units, up 10.4% QoQ with JLR sales volume (incl. China JV) anticipated at 1.08 lakh units, up 16.6% QoQ. On a consolidated basis for Q4FY23, we expect TML to report net sales of Rs 1.06 lakh crore, up 20% QoQ.
• EBITDA margins at 12.9%. JLR’s EBITDA margins are expected at 13.5% in Q4FY23. At PAT level, we expect the company to report profit of Rs 2,269 crore in Q4FY23 vs. loss reported in Q4FY22.

Ashok Leyland (CMP: Rs 138; Target price: Rs 185; Rating: Buy; Upside: 34%)

• Ashok Leyland to witness 26% sequential rise in volumes at ~60,000 units with better product mix (M&HCV: LCV ratio for the quarter was at 68:32 vs. 65:35 in Q3FY23).
• With 3% QoQ rise in ASPs at Rs 19.5 lakh/unit, net sales at ALL are seen at Rs 11,671 crore (up 29.3% QoQ). With largely stable gross margins, EBITDA margins for the quarter are seen at 10% (up 116 bps QoQ) respectively. Ensuing PAT for Q4FY23 is seen at Rs 678.5 crore (almost 2x on QoQ basis; Rs 361.3 crore in Q3FY23).

Apollo Tyres (CMP: Rs 325, Target price: Rs 390; Rating: BUY; Upside: 20%)

• Apollo Tyres is expected to report robust performance amid 20%+ volume growth in domestic CV space and QoQ decline in RM prices.
• Standalone sales in Q4FY23 are seen at Rs 4,336 crore, up 2.1% QoQ with EBITDA margins at 14.5% (up 160 bps QoQ). On a consolidated basis, net sales is expected at Rs 6,246 crore, down 2.8% QoQ (Europe is seasonally strong in Q3).
• EBITDA in Q4FY23 is expected at Rs 952 crore with EBITDA margins at 15.2%, up 100 bps QoQ. Ensuing PAT for Q4FY23 is expected at Rs 343 crore, up 17% QoQ.

Consumer Durables - slow recovery on the cards in Q4FY23 

• We expect small appliances segment (fans, kitchen appliances, etc.) to remain impacted by weak rural demand. Revenue of companies such as Crompton & Bajaj Electricals is likely to show muted growth of 5-6% YoY amid slow channel inventory build-up of fans.
• On the contrary, strong seasonal demand for ACs in Q4 is likely to drive unitary cooling segment revenue growth in the range of 17-22% YoY for companies such as Havells & Voltas.
• On a favorable base, paint companies are also likely to see better volume growth of 11-13% led by strong demand of decorative paints and inventory build-up at dealers level.
• On the piping front, Supreme & Astral are expected to report volume growth of 11-12% YoY led by strong plumbing demand. However, steep fall in PVC prices (down 32% YoY) is likely to keep realizations under check.
• We like Havells for its focus on gaining market share through product launches and improving profitability of Lloyd business (TP: Rs 1,420), Supreme Industries for its strong growth outlook in its core business & focus on increasing proportion of value-added products. (TP: Rs 2,880) 
• Softening raw material prices is likely to aid EBITDA margin recovery by ~100 bps sequentially, however, higher ad spends will keep the margin flat on a YoY basis 

Hotels - Healthy Occupancy and ARR to aid strong operational performance

• Higher domestic tourism and sharp rebound in corporate travel to aid in healthy revenue growth.
• Average Room Rates (ARR) for hotel industry increased by 10% compared to Q3FY23. The average occupancy also improved closer to 68% vs 66% in Q3FY23. Industry RevPar stood at Rs 5,900 (up 12% from pre-covid levels).
• We expect revenues to increase 88% YoY on a favourable base (marginal decline of 3% QoQ) due to lower international revenues from Indian Hotels owing to weak seasonality.
• EBITDA margin of 35.7% vs. 16% last year (favourable base due to Omicron Covid variant).
• Going forward, we expect FY24 to stay strong for the sector supported by full resumption of the economy, India’s G20 presidency in 2023, ICC Men’s world cup and easing of E-visa rules.

Lemon Tree Hotels: (CMP: Rs 77, TP: Rs 95, Upside: 23%)

• For Q4FY23 we expect the company to report a QoQ Revenue/EBITDA/ PAT growth of 8/7%/9% respectively on the back of healthy occupancy and strength in ARR’s.
• The company is also adding ~2,051 rooms under management contract with share of managed rooms to increase from current 40% to ~50% by 2025.
• LTH has been able to reduce the total operating cost which is down significantly from 59% of sales in Q3FY20 (pre-Covid) to 46% of sales in Q3FY23. This led to a sharp margin expansion of ~1,348 bps to 54.2% in Q3FY23. 

Metals - EBITDA/tonne of Steel companies likely to improve

• For Q4FY23E, on a QoQ basis, steel companies within our coverage universe is likely to report a sequential increase in EBITDA/tonne of ~Rs 1,850 to Rs 2,250/tonne, primarily aided by uptick in steel prices (blended steel realisations are expected to increase by ~Rs 2,000 - 3,000/tonne).
• Volume is likely to be flattish YOY, while JSW Steel is likely to post double-digit volume growth for the quarter under review. On a Q-o-Q basis, volume growth in the range of ~ 8-13% QoQ.
• For Q4FY23E, EBITDA/tonne of Tata Steel (standalone operations) is expected to come in at Rs 13,250/tonne (Rs 11,350/tonne in Q3FY23). For Q4FY23E, standalone operations of JSW Steel are likely to post an EBITDA/tonne of Rs 10,000/tonne (Rs 8,141/tonne in Q3FY23). SAIL’s EBITDA/tonne for Q4FY23E is likely to come in at Rs 7,250/tonne (Rs 5,003/tonne in Q3FY23).
• Expect Tata Steel European operations to report a negative EBITDA/tonne of US$ 110/tonne for Q4FY23.

Top Picks

Hindalco (CMP – Rs 418, Target - Rs 465, Upside – 11%, Market Cap - Rs 93,933 crore)

• Novelis aims to achieve EBITDA/tonne of US$525/tonne by Q4FY24.
• Coal costs is softening which augurs well for Hindalco’ Indian Aluminium Business.
• Hindalco is calibrating growth capex for both Novelis and Indian operations. Of ~US$8 billion capex announced a year ago, the company is prioritising ~US$4.4 billion capex projects.

Coal India (CMP – Rs 227, Target - Rs 260, Upside – 11%, Market Cap - Rs 1,40,017 crore)

• Coal India has bettered its FY23 production volume at 703.2 MT, up 12.9% YoY while offtake volume was at 694.7 MT, up 5% YoY.
• For FY24, CIL has target of 780 MT. Of this, 610 MT is power. This augurs well for CIL’s e-auction volumes for FY24E. Going forward, we have assumed Coal India offtake volume of 750 MT of which 100 MT would be for e-auction.

Upbeat Oil & Gas earnings on the back of higher GRMS and marketing margins

• Operating profitability of upstream companies such as ONGC and RIL's (oil & gas segment) will likely remain flat on account of capped net crude realisations (US$75/bbl) and unchanged gas prices.
• For OMCs, with marketing margins turning positive in Q4, EBITDA is expected to grow 2.5x, 0.8x, 1.7x QoQ respectively for IOCL, BPCL and HPCL.
• On the CGD front, although domestic gas prices remained unchanged QoQ, the sharp decline in LNG prices from ~ US$35/mmbtu in Q3 to US$18/mmbtu in Q4 is likely to benefit MGL and IGL. Expect EBIDTA to grow 15-16% growth for both. However, unfavorable price cuts by Gujarat Gas in order to compete with alternative fuels would to ~29% QoQ decline in EBIDTA.
• For midstream companies such as GAIL, we expect operating profits to grow 9x QoQ on account of anticipated normalization across its business segments.

Preferred Stocks

Reliance Industries (Target Price: Rs 3,050, Upside: 30%)

• On the O2C front, we expect operating profit to grow ~11% QoQ led by strong refining margins although petchem performance will likely remain soft. 
• Reliance Jio (Jio), will lead sub addition with ~6.5 mn net sub additions during Q4 with ARPU up ~0.6% QoQ at Rs 179.
• On the back of robust store addition trajectory, we expect Reliance Retail to register revenue growth of 20% YoY. Expect EBITDA margins to improve 70 bps YoY to 6.9%.

IGL (Target Price: Rs 550, CMP: Rs 484, Upside: 14%, PE multiple:17x)

• IGL's revenue is expected to remain flat QoQ to Rs 3,742 crore as volume growth is likely to ~2% QoQ with no hikes or cuts in CNG, PNG. 
• On the operating front however, with decline in gas sourcing cost we expect EBIDTA to improve ~15% QoQ and PAT at 12% QoQ to Rs 312 crore.

Infra - Order inflows and execution picking up

• Order inflows was healthy with Road ordering picking up.
• On the execution front, we expect our road & construction universe to witness 13.6% YoY growth in topline (to Rs 11,258 crore) backed by companies elevated order book position and pick in execution.
• PSP Project (~45% topline growth and ~17% bottomline growth), NCC (~18% topline growth and ~56% adjusted PAT growth), HG Infra (41% YoY topline growth ~54% bottomline growth), will lead the growth in Q4FY23.
• PSP Projects (CMP: Rs 685, TP: Rs 820), NCC (CMP: Rs 107, TP: Rs 120), HG Infra (CMP: Rs 840, TP: Rs 915) are preferred picks

Telecom - Muted quarter; eyes on 5G expansion ahead

• Reliance Jio (Jio) to lead subscriber addition with ~6.5 million (mn) net sub additions during Q4. Bharti Airtel (Airtel) is likely to add modest ~1 mn subscribers owing to SIM consolidation amid 2G base tariff hike while Vodafone Idea will lose 4 million subscriber.
• ARPU growth is expected to be muted across telcos as upgrades benefits will be offset by lower number of days in the quarter. We expect Jio, Airtel, VIL’s reported ARPU to be up 0.6%, 0.5%, 1% QoQ at ~Rs 179, Rs 194, Rs 136, respectively.
• The network opex for top two telcos will go up with 5G rollout. Airtel India EBITDA margins are expected at 52.7%, flat QoQ, given the higher network opex on 5G rollout. For Jio, we expect EBITDA margins at 51.6%, down 60 bps QoQ due to higher network expenses on account of 5G expansion.

Cement - Healthy utilisation levels to enhance profitability

• We expect our coverage universe to register volume growth of 9.3% YoY (12% QoQ) to 66.6 MT in Q4FY23. We expect the capacity utilisation rate for our coverage universe to increase to 88% (Q3FY23: 80%).
• Expect EBITDA/t to improve by ~Rs 170/t to Rs 948/t in Q4FY23E (mainly led by positive operating leverage). We expect UltraTech and Shree Cement to lead the pack with EBITDA/t surpassing Rs 1,000/t during this quarter itself supported by healthy volume growth of 14% and 11% YoY, respectively.
• We expect pan-India cement prices to remain flattish QoQ in Q4FY23E (up 2% YoY). Southern players such as Ramco and Sagar are likely to witness a decline in realisations of 3% QoQ in Q4FY23. As per channel checks and feedback, cement companies are likely to announce Rs 10-30/bag price hike in April 2023.
• While cost tailwinds (imported south African coal price down 30% QoQ) would entail positive profitability momentum (~Rs 200-250/t delta in EBITDA/T), acceptance of the latest price hike attempt would further provide thrust to the profitability (~Rs 150-200/t) in FY24E.

Hidden Gems

Kajaria Ceramics (Target Price: Rs 1,310, 18% Upside) – Declining gas prices to drive margin recovery

• Kajaria Ceramics is the largest manufacturer of ceramic/vitrified tiles in India with current annual capacity of 84.5 mn sq metre (MSM). Apart from completed capex of Rs 250 crore on tiles, it is adding 1.8 MSM brownfield capex in Sikandrabad and setting up a plant of 8 MSM in Nepal in a JV with investment of ~Rs 125 crore.
• Given the sharp increase in gas prices, the margins had shrunk sharply to ~12% from normalised levels of 16% (and peak of 18%) since the last 1 year. The company expects ~200 bps improvement in margin (to 14%+) during Q4FY23 with decline in gas prices and use of alternate fuel (its effective gas procurement prices have come down by ~20% QoQ  as of Q4 end and is likely to go down further ahead). Thus, it also expects further improvement in margins in FY24, led by lower gas prices and improved mix in premium tiles.
• The management has guided for ~15% YoY volume growth in the tiles segment and ~18% revenues growth during FY24. We expect tiles revenues CAGR of ~15% over FY22-25 to Rs 5,093 crore coupled with margins back to pre-covid levels of ~16% from FY24, onwards.

Conclusion

After recent sharp up move of almost 1,000 points was seen in just 8 sessions making it one of the sharpest rebound in recent times. Considering results from heavyweights in the coming week, we expect Nifty to consolidate amid stock specific action.

Source: ICICIdirect Research