Market outlook: Nifty at one month high,18,000 in sight

• Indian benchmarks gained 1.6% to settle at one month high in catchup with global peers, as risk on sentiment was further boosted amid RBI pausing rate hikes and globally expectations of further rate hikes tapered down.
• It was also a fastest rally in terms of momentum.
• Nifty sustaining above 17,600 would make current pull back (>800 points) strongest in magnitude since December 2022 life highs indicating conclusion of corrective phase.
• We expect the index to break past this short term hurdle of 17,800 over next few sessions, leading to further acceleration towards 18,100 in April 2023.
• Current up move was backed by robust market breadth as 80% components of Nifty 500 universe has given positive returns during this period.
• US dollar index trending down, a positive for EM equities. Further breakdown below 100 would lead to acceleration of inflows.

RBI pleasant policy pause - Interest rates hike cycle seems to have peaked

The RBI MPC maintained status quo on repo rate at 6.5%. The MPC continued to remain focused on "Withdrawal of accommodation”

CPI inflation is projected lower at 5.2% vs 5.3% earlier for 2023-24.

Real GDP growth projection for 2023-24 is raised to 6.5% from 6.4%.

The status quo on benchmark rates by RBI came as pleasant surprise as majority of the market participants were expecting one last rate hike of 25 bps. Both debt and equity markets reacted positively on the policy outcome.

RBI Governor indicated that it may not be the end of the rate hike cycle and the next policy move depend on incoming data. However, with inflation now projected at 5.2% for FY24 and U.S. Fed unlikely to hike rates further given weak economic data, the rate hike cycle in India has peaked in all likelihood.

Benchmark 10-year G-Sec yield dropped by more than 7-8 bps to below 7.2% and equity market also showing uptick post policy announcement. We believe that the yield across the G-Sec curve is likely peaked at current levels.

March E-Way bill generation reached an all-time high, robust GST collection ahead

March E-Way bill generation reached an all-time high of 9.1 crore, up 8.3%, compared with previous highs of 8.4 crore.

GST collection for March-23 (for the activities done in Feb-23, E-way bill at 8.2 cr) remained healthy at Rs 1.6 lakh crore, representing a growth of 12.7% YoY.

The average monthly GST collection is at Rs 1.51 lakh crore in FY23 so far.

For FY24E, the average budgeted monthly collection is at ~Rs 1.59 lakh crore and thus, there is a strong possibility of overshooting that too.

B2B companies such as TCI, TCI Express are already seeing these trends percolate into their Q4 performance, however, B2C vertical (E-Commerce) is still expected to remain soft (compared to their previous highs).

Real Estate: Rate hike cycle pause and eventual cut thereafter to be a key trigger ahead

• The sales volumes numbers of residential real estate have been resilient. As per Anarock, the housing sales rose ~54% in CY22 to 3.65 lakh units as against 2.37 lakh units in 2021 across the top seven cities.
• Real estate stocks have underperformed (Nifty Realty down by ~15% in last 1 year vs ~1% decline for Nifty) owing to various concerns such as home loan rates (up 250 bps over the past 12 months as there was repo rate hike by ~250 bps in the same period).
• Rate cycle pause, therefore, could be a much need breather with eventual rate cut cycle being a major catalyst, when it happens.
• The overall demand-supply scenario construct remains decent with decadal high absorption and decadal low inventory (21 months).
• We expect the top developers to 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. RERA has also led to superior trust factor on historically efficient players. The players in high end user markets such as Bengaluru, Pune, Hyderabad etc are better placed in our view amid likely high supply in Mumbai market. Brigade Enterprises (CMP: Rs 475, TP: Rs 620, ~30% upside) is our top bet.

Auto – Pause in interest rate to provide fillip to the price conscious 2W and entry level 4W segment

• Automobile Sector has been one of the top performing space in FY23 with Nifty Auto Index up 16% last fiscal vs. nearly flat performance at the Nifty level.
• It was primarily led by healthy 21% overall domestic retail sales volume growth in FY23 at 2.2 crore units.
• Recent management commentary however suggests drop in bookings and enquiries especially in the entry level segment which is more price conscious amid commodity & regulation led hike in vehicle prices as well as rise in interest rates (~250 bps in current cycle) leading to higher EMI’s.
• Retail finance penetration is as high as 75%+ in the PV and CV category while the same stands at 50%+ in the 2-W space.  
• Pause in interest rate comes as a sign of relief for the domestic automobile space and could potential result in demand recovery particular in mini & compact space in the PV segment and <125 cc space in the 2-W domain.
• Our top bets in the OEM space are Maruti Suzuki (Rating: Buy; Target Price: Rs 11,200), Tata Motors (Rating: Buy; Target Price: Rs 530) and Ashok Leyland (Rating: Buy; Target Price: Rs 185)

Rate hike pause to benefit consumer durable industry

The consumer durable players have reported muted volume offtake in H2FY23 owing to lower demand from the rural regions amid inflationary pressure and high financing costs.

The consumer durable industry (TVs, Refrigerator, Washing Machines) is pegged at ~Rs 90,000 crore in India.

Consumer finance accounts for around 30- 35% of the consumer durable industry in India. In the last five years, the consumer durable financing has grown at a CAGR of 32% mainly due to easy financing schemes available.

We believe, easing inflationary pressure and pausing of interest rate hikes by the RBI will help drive recovery of rural demand from Q1FY24 onwards.

We like Havells, V-guard industries under our FMEG coverage universe. We believe expansion in rural regions, launch of new products and robust Balance sheet condition makes them an attractive stock at current valuation. (Havells, TP: Rs 1,420) (Vguard, TP: Rs 310)

Sharp rally in crude oil prices post cut in production

Crude oil prices increased sharply over the weekend from ~US$79/bbl to ~US$86/bbl as Saudi Arabia and other OPEC+ countries announced a production cut of 1.16 million bpd. Total OPEC+ cut pledges would now stand at 3.66 million bpd which is roughly 3% of the world demand.

Increase in oil prices is generally favourable for upstream companies. Upstream companies (ONGC) would be benefitted as it would likely ensure that their capped net realisation does not fall below US$75/bbl We value ONGC at Rs 180 (upside of 20% from CMP of Rs 150) i.e. Rs 150 for core oil & gas business and Rs 30 for subsidiaries and other investments.

It negatively impacts OMCs margins in the short term. For OMCs such as HPCL (target of Rs 275), BPCL (Target of Rs 380) and IOCL (target of Rs 90), marketing margins which were negative in Q3 (loss of Rs 3/litre on a blended basis), finally started turning positive February onwards. For Q4 we estimate the 3 OMCs to report a marketing margin of Rs 2.4/litre on a blended basis. These margins had gone up to a high of Rs 8/litre while those on diesel at Rs 6/litre when crude had declined to ~75$ per barrel.

The increase in crude prices would benefit CGDs too as this would make gas a preferred choice to alternate fuels with Gujarat Gas (Target price of Rs 520/share) being the key beneficiary of this development. This would help the company gain industrial and commercial customers (which account for 75% of total volume) and improve its volumes.

Gold Jewellery demand to sustain healthy trend amid elevated gold prices

In the last six months gold prices have spiked sharply by ~ 20% from Rs 51,000  to Rs 61,000. Historically, over the last six years, gold prices have been on an upward trend and have risen at a CAGR of 13% from Rs 30,000 to ~ Rs 61,000.

Generally an increase in gold price is initially negative for gold volumes (as per industry estimates, ~ 1% increase in gold price could lead to volume decline of 0.4%). However if the prices sustain at the increased level, the consumer tends to accept the higher price point and the volume growth normalizes.  

Majority of gold demand emanates from tradition driven religious events like Akshay Tritiya, Dusshera, Laxmi Pujan and wedding related purchases. For all these events, the consumer tends to buy gold as per his predefined budget for the event.

Titan’s (CMP: Rs 2,570, TP: Rs 3,030, Upside: 18%) performance justifies the above trend with the company’s gold segment revenues increasing at a CAGR of 18% over the period when gold prices have risen by 13%.

In spite of the steep rise in gold prices over last five years, Titan’s gold segment EBIT has increased at a CAGR of 25% over the period as majority of making charges for Tanishq is based on percentage of gold price which results in higher profit per gram in case of elevated gold price.

Q4FY23 business performance update of banks witnessed continued robust traction

• Indian banking industry witnessed continued robust traction in credit growth at ~15.5% YoY, led by strong retail credit demand & working capital across lenders.
• Recent hikes in rates has propelled deposit accretion, especially in term deposits. HDFC Bank being an exception with focus on garnering higher term deposits.
• Margin expected to remain elevated while credit cost to witness further moderation in Q4FY23.