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Market Outlook: Nifty to consolidate as earnings season peters out, all eyes on inflation print

ICICIdirect 18 Mins 12 May 2023
  • Indian equity markets maintained outperformance against global peers. Nifty, Midcap and small cap indices each gained 1%.
  • All major developed markets lost 0.7% for the week except Nasdaq which gained 1% post lower US CPI numbers and earnings.
  • Industrial metals like copper and Aluminum were down 5% each for the week amid weak Chinese data.
  • Nifty approaches overbought readings after seven-week rally. Expect healthy consolidation in 18,000-18,500 range amid stock specific action as most large cap earnings are behind us.
  • Midcaps to stay in focus: Nifty Midcap index is within 2% of its all-time highs. We expect the index to eventually challenge life highs over next few weeks.
  • Strong fund flow: continued FII inflows in May (18k Cr so far) is a key supporting factor. 

Declining Gas prices making gas stocks attractive

  • Domestic natural gas prices have been revised downwards by US$2 per mmbtu to US$6.5 (as recommended by KP committee) which led to the entire $2 cost savings being largely passed on customers (Rs 6-8 per kg).
  • In previous quarters, LNG had reached to multi-year highs (above US$45 levels – led by limited demand supplies and higher spot LNG demand from the Europe) amid falling crude oil prices and thus presented a unique challenge to gas importing nations like India. Spot LNG prices have come down now to US$10-11 per mmbtu. The fall in prices have been due to lower LNG demand post winters, higher inventory levels in Europe and ramp up in US LNG supplies.
  • The situation led by loss of market share for Industrial gas suppliers such as Gujarat Gas (LPG became more lucrative), lower CNG consumption and conversions for players like MGL, IGL and GGL, which threatened the entire gas infrastructure story (to raise Gas share in India energy pie from 6.3% to 15% by 2030).
  • On the industrial side, due to sharp fall in spot LNG prices, Gujarat Gas has been able to proactively cut Industrial PNG prices and has thus been able to improve its volumes from current 8.8 mmscmd to reach 9.8 mmscmd in FY24 and 10.7 in FY25.
  • We prefer IGL (Target: Rs 550, upside: 12%) as it has large CNG and domestic PNG exposure (80% of volumes), MGL (Target: Rs 1,300, upside: 23%) MGL has a large CNG and domestic PNG exposure (86% of volumes) and Gujarat Gas (Target: Rs 570, upside: 18%) as it has has 65-70% exposure to industrial PNG.

Paints -Strong demand recovery; benign input cost drives margin

  • Asian Paints and Kansai Nerolac reported strong volume growth in the range of 12%-16% which was much ahead of the street estimates. The volume growth was largely driven by new product launches, demand recovery in rural/semi urban regions and strong industrial paints demand led by Auto OEMs.
  • The managements have guided for volume led growth (CAGR of ~12-13%) over the next two years supported by pick up in construction activities, continued focus on dealer expansions and launch of new products. 
  • Companies have reported EBITDA margin expansion in the range of 300-425 bps YoY in Q4 led by benefit of lower raw material prices. Prices of key raw material (TiO2) have declined sharply by ~22% YoY to Rs 300/kg.
  • We expect supply to grow at CAGR 16% much ahead than overall demand CAGR of ~13%. Hence, we see EBITDA margin of Asian Paints and Kansai Nerolac at ~19%, 12% to remain lower than its peak margin level of ~22% and ~15%. 
  • We maintain hold on Asian Paints (Target price: Rs 3,425) given its market leadership position but upside is capped at current valuations. Kansai Nerolac is focusing to regain its market share through higher A&P spends and new launches. We have hold rating with a target price of Rs 440/share.

Moderation in margins and anticipated impact of ECL provisioning drag PSU banks prices

  • PSU banks have witnessed correction of 5-10% after reporting Q4FY23 performance. While operational performance remained healthy and asset quality continued to improve, moderation in margins and anticipated impact of ECL norms seems to be reason for the negative reaction in stock price.
  • Increase in cost of deposits, amid repricing of liabilities, has impacted margin trajectory to the extent of 13-23 bps QoQ across PSU banks (Canara Bank being an exception).
  • RBI has proposed Expected Credit Loss (ECL) framework for provisioning by banks, wherein banks are required to estimate impairment loss under the ECL approach for all loans. Few PSU banks have indicated potential impact of ECL norms at ~1 – 2.5% of advances or 5-20% impact on net worth.
  • Private banks, with a higher proportion of overlay provision, seems to be better placed when compared to PSU peers.

Margin Expansion Galore for Auto Space

  • Auto Space continued to beat our quarterly estimates with major players reporting better than anticipated margin expansion.
  • In the OEM space, the margin outperformance is pegged at ~125 bps while in the ancillary space margin outperformance is pegged at ~100 bps.
  • For Eicher Motors key highlight was 7.7% sequential rise in ASP’s at Rs 1.72 lakh/unit and 10% EBITDA margins at its CV arm i.e. VECV. Management commentary was upbeat on demand prospects for Royal Enfield both domestically as well as in international markets. The company also announced an accelerated capex spend of ~Rs 1,000 crore for FY24 on product development in EV & ICE space and manufacturing setup in EV domain.
  • For Escorts, key highlight was RM price decline led expansion in gross margins by 300 bps as against management commentary of limited benefits in the past with company guiding for more margin expansion with aim to attain tractor segment EBIT margins by ~13-14% by Q4FY24 vs. ~10% clocked in Q4FY23. It guided for mid single digit growth for domestic tractor industry for FY24E.
  • For Apollo tyres, Indian operations reported gross margin expansion of 470 bps QoQ, in tandem with its peers, however its absolute margin profile still being highest in the industry at 16%.

Going forward we expect auto volume growth to taper in FY24E, albeit on a high base. We however continue to remain positive on the PV (underpenetrated category domestically) and CV domain (beneficiary of robust government spending on infrastructure). Our top bets in the OEM space are Maruti Suzuki (Rating: Buy; Target price: Rs 11,200), Eicher Motors (Rating: Buy; Target price: Rs 4,165) and Ashok Leyland (Rating: Buy; Target price: Rs 185). Our top bets in Auto Ancillary space are Mahindra CIE (Rating: Buy; Target price: Rs 520), Mayur Uniquoters (Rating: Buy; Target price: Rs 580) and Ramkrishna Forgings (Rating: Buy; Target price: Rs 400).

Firm Sugar prices, stable sugar recovery & higher ethanol volumes to propel earnings in FY24

  • Sugar companies like Dhampur Sugar & Balrampur Chini posted strong earnings growth in Q4FY23.
  • Sugar companies in UP witnessed mixed trend in sugar recovery in 2022-23 season. Gross recovery for Dalmia Bharat Sugar, Balrampur Chini & Dhampur Sugar is similar or better compared to last year.
  • Moreover, Domestic sugar prices have moved up by Rs 2-3 / kg in last one month. We believe sugar prices would remain firm at least until the start of crushing season in November-2023.
  • Most of the sugar companies have completed large capacity addition last year, which would reflect in higher ethanol volumes in FY24. We believe sugar companies would earn better margins in sugar business in FY24. Moreover, higher ethanol volumes would also drive profitability.
  • We like Dhampur Sugar (Target price: Rs 340)  & Dalmia Bharat sugar (Target price: Rs 490) mainly due to dual benefit of higher sugar prices & lower cost of production. Balrampur Chini would also see strong earnings growth in FY24 due to improving margin & low base year numbers.

Pharma companies some respite in US markets

  • Combined US sales growth of ~12% YoY driven by complex and limited competition products (gRevlimid by DRL), new launches along with ~9% currency depreciation. DRL posted ~27% YoY growth boosted by complex product launch of gRevlimid besides a slew of injectable launches.
  • On the flip side, oral solids portfolio continues to face prising pressure due to stiff competition. Alembic Pharma US portfolio witnessed ~36% YoY degrowth and ~18% QoQ degrowth.
  • Outlook excluding oral solids -OSDs looks promising, the price erosion in OSDs still persists between mid-single digit to low double digit.
  • US focused companies are in the process of recalibrating the US portfolio with more investments and bolt-on acquisitions in the injectables and other complex generics.
  • We have observed strong correlation of US business strategy and the company’s EBITA margins and ROCE. While companies with higher % of complex generics, injectables, respiratory products in the US sales have maintained EBITDA margins profile of ~20%  and ROCE of 18-20%, companies with heavy tilt towards oral solids continue to report EBITDA margins in the range of 15-18% and ROCE of 10-12%.
  • Our top picks is Dr Reddy (Target Price: Rs 5520) - Focus on complex launches in the US and similar focus in other geographies to target management’s aspirational goal of ~25% EBITDA and ~25% ROCE by 2027.

L&T misses earning estimates, outlook intact (Mcap: Rs 3.13 lakh crores, Target 2,650)

  • L&T’s standalone core engineering business reported weak set of numbers in Q4FY23. Adjusted standalone revenues de-grew marginally by 1.9% YoY. EBITDA margins declined by 74 bps on a YoY basis to 9.6%. Consequently net profit grew by 3.5% on YoY basis.
  • Order inflows at the group level were up 3% YoY to Rs 76,099 crore. For FY23 total order inflow came at Rs 2,30,528 crore, 19.5% growth.
  • From latest result one noteworthy thing was NWC/ Sales came at 16.1% in FY23 vs 19.7% in FY22.
  • For FY24 L&T has given a revenue guidance of 12-15% and EBITDA margin guidance 9%. On the working capital to sales ratio, the company has guided for a range of 16-18% even though it will strive to achieve the lower end of the guidance. RoE was at 12.2% in FY23 vs. 11% in FY22. Improved performance of Hyderabad metro and Nabha along with divestment of noncore assets is expected to drive RoE by 1-2%. The company is aiming to reach 18% RoE by FY26. We value L&T at Rs 2,650 on an SoTP basis.

Hidden Gem

Gujarat Gas: Lower gas prices to drive volume recovery (CMP: Rs 485, Target: Rs 570, Upside: 18%)

  • Spot LNG prices have rapidly cooled to US$10-11 per mmbtu, leading to proactive price cut to Rs 40 per scm, while generating an EBITDA of Rs 7 per SCM.
  • The company had been clocking above 11 mmscmd volumes in Q2 and Q3FY22 (Industrial PNG 8.4-8.7). In FY23E, the volumes declined to a low of 7.3 (mainly led by industrial volumes at 4). At peak volumes, Morbi industrial cluster (tile manufacturers) were contributing 7).
  • The management expects to improve its volumes to 10 mmscmd in FY24. It clocked 8.9 in Q4FY23 (CNG & PNG - 3.5, Industrial - 5.4 mmscmd).
  • Gujarat gas has been heavily investing Rs 1,100 crore+ in areas such as Ahmedabad and newer areas such as Thane, several areas in Gujarat and Rajasthan to boost volumes beyond FY25.
  • In FY24, the company expects to add 3 lakh new connection on the domestic PNG front (18 lakhs connections currently) and 100 CNG stations (from current 808 stations).
  • We build a 9% CAGR growth in EBITDA to Rs 2,836 crore and 11% growth in PAT to Rs 1,865 crore (EPS of Rs 27.1). The stock is available at a multiple of 18 currently.


India inflation data, indications on Monsoon arrival and earnings of mid/small cap segment would be key drivers for coming week. Nifty to consolidate.

Source: ICICIdirect Research

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