Market outlook of the week: Another week in consolidation, Nifty approaching price/time wise maturity of correction

• Nifty spent another week in consolidation amid high intraday volatility and witnessed selling pressure at higher levels. Underperformance among index heavyweights like Reliance and HDFC Bank has triggered the weakness in the headline index.
• However, broader market remained firm as both midcap and small cap indices closed almost flat despite almost 1% loss in Nifty. Most developed market indices were down >2% as rising bond yields weighed sentiment.
• Expect Nifty & Bank Nifty to bounce back from key support amid oversold readings. Nifty expected to consolidate in 18,900-19,600 amid stock specific action. Buy the dips.
• Key take away: Going by historical evidence, with 4% correction over four weeks, index has approached price wise/time wise maturity of correction. Expect a bounce back.
• Sectors: PSU, BFSI, Healthcare, Consumption to relatively outperform.

Corporate Earnings: Robust Q1FY24 Results, healthy growth to sustain

• Nifty earnings in Q1FY24 came in robust with PAT growing 26.5% YoY (exc. BFSI space).
• Gross margins expanded to the tune of 500 bps YoY. EBITDA margins in Q1FY24 came in at 19%, up 300 bps YoY basis and 160 bps on QoQ basis. EBITDA margins in Q1FY24 were the highest in last six quarters.
• Topline growth however, was at 2.4% YoY largely led by decline in commodity prices in the metals and Oil & Gas space. 
• At the Nifty level, including the BFSI space the growth was even healthier with PAT growth pegged at 36% on YoY basis.
• For the listed universe of ~4,000 companies; topline and bottom-line growth stood at 6% and 39% respectively. 
• With EBITDA margins of 14.7% in Q2FY23, we expect robust corporate earnings to sustain in Q2FY24 as well (base effect); supporting markets.
• Post Q1FY24 our Nifty EPS gets a positive upgrade up 2% to 1,110.
• Nifty EPS has grown at ~22% CAGR over FY20-23 driven by resilient India Inc. performance. For FY23-25E earnings CAGR is expected at 16.5%.
• We value Nifty at 21,500 i.e. 20x PE on FY25E EPS of Rs 1,080 (Sensex target placed at 71,600).

Core Inflation moderates while bond yields jump on US rate hike worries

• CPI inflation for July 203 came sharply higher at 7.4% vs 4.8% (June 2023).
• Around 60% of the rise in CPI print is driven by four items: Vegetables (2.26%), cereals (1.26%), spices (0.54%) and pulses (0.32%). Within vegetables, 50% (1.2% out of 2.26%) of the rise is driven by Tomatoes.
• Core Inflation moderated to 4.9% in July 2023 vs 5.1% in June 2023 while CPI ex-vegetables rose only marginally in July to 5.4% vs 5.2%.
• Inflation in vegetables is seasonal (tomato prices are already down to Rs 110 from 160-170/kg).
• Overall, August CPI print may be around 6.5%, FY24 inflation projection of 5.4% is unlikely to see any major and therefore no change in RBI policy stance is expected.
• Indian 10-year bond yield is currently ~ 7.25%, up by around 5-7 bps as US 10-year yields have gone up by 15 bps in last one week from 4.1% to 4.25% on further rate hike expectations.
• Indian bond market has outperformed US markets as reflected in the narrowing of the US-India yield spread (spread has reduced to around 300 bps from an average of around 500-600 bps.

Critical minerals mining a game changer

• The recent development of identifying 30 critical minerals and opening up for commercial mining is going to be a game changer for India.
• Imports will come down for some of the minerals like lithium, titanium, zircon, berrylium and eventually push domestic mining of these minerals. This will also increase the manufacturing of superalloys from these minerals, which are widely used in high growth industries like defence, space, electric vehicles, clean energy etc.
• Midhani is already a prime production partner of government in manufacturing of superalloys & titanium alloys for these sectors, we believe that the opportunity size for Midhani is huge considering the strong demand scenario for these superalloys in defence, space and clean energy areas including electric vehicles.
• Company’s current order backlog stands at about Rs 1,600 crore and large part of this orderbook is to be executed in short term only. Moreover, future prospects in terms of order inflows looks very strong. This gives us strong visibility on the company’s growth over the next few years. We have a Buy rating on Midhani with a target price of Rs 465.

Textile Sector- poised for steady recovery in FY24E

• Amongst the textile space, India’s home textile segment is the first segment which is witnessing demand greenshoots as managements commentary suggests that inventory levels at the global retailers is gradually correcting.
• India has regained its lost market share (for Cotton sheets) in the USA from ~ 50% in CY22 to 58% in YTD-23 (Jan-June 2023). In the month of June, India’s overall home textile exports to USA is up 24% from the lows witnessed in April-23.
• While managements commentary suggests that inventory levels at the global retailers is gradually realigning, the overall ordering scenario by global brands continues to be cautiously optimistic with most buyers buying closer to date and in smaller lots than earlier.
• Indo Count Industries indicated that in Q2FY24 it is witnessing incremental business and order book position continues to improve. It has maintained its volume guidance of 85-90 Mn pieces in FY24 (implies 15-20% volume growth).
• We believe there is enough headroom for sustainable long-term growth for textile space (expected free trade agreements with Europe/UK, PLI scheme, China+1) given India’s minuscule share (~4%) in overall global textile trade. We continue to like Indo Count Industries in the home textile space as it has displayed resilient performance during challenging times.

Strong Box office performance drives multiplex recovery

• PVR Inox saw a strong outperformance in the last one 1 month (up ~23%) vs. Nifty return of -2%. This was led by strong recent performance of content with Superhit movies like Gadar 2, Jailor, Oppenheimer in the last couple of weeks. The industry saw stupendous collections in last week with Gadar collecting Rs. 280+ crore, O my God 2 collecting Rs. 85+ crore and Jailor Rs. 150+ crore of net box office collections.
• In terms of Q1 performance, PVR Inox performance was suboptimal with occupancy at 22% (vs. 27-28% pre-covid). The footfalls were up 11% QoQ at 33.9 million and (Average Ticket Prices) ATP at Rs. 246 was up 3% QoQ. The box office revenue was at Rs. 695 crore (up 15.4% QoQ). EBITDA (without impact of Ind AS116) was at Rs. 81 crore vs Rs. 5 crore in Q4, with margins at 6.2%, (but below 16-17% which was seen pre covid).
• We highlight that first 1.5 months of Q2FY24 has been strong with Hit movies like Gadar 2, Jailor, Mission Impossible, Oppenheimer, Rocky aur Rani, Satyaprem Ki Katha, O My God 2 etc. The management expects Q2 to be one of the best of all time, if remaining content like Dream Girl 2, Jawan, Salaar, Vaccine War etc. hold up well.
• Furthermore, strong box office will also drive other segment (Advertisement, Foods & Beverage & Convenience fee) which forms 35-40% of the revenues and are margin accretive.
• For the medium to long term, key trigger will be synergy benefits (management has guided for EBITDA synergy benefit of Rs. 225 crore over 12-24 months).

Lowering customs duty on Scotch a structural positive

• As per media sources, India is expected to lower customs duty on Scotch, Bottled in Origin whisky from current 150% to 100% charged above a minimum import price and further lowering of duty over a period of 10 years.
• Popular brands such as Johnnie walker (USL) and Chivas Regal (Pernod Ricard) and many others from the MNC stable are both manufactured in India (called Bottled in India) as well as imported (Bottled in Origin).
• While the imported products constitute mere 3.3% of Indian whisky market by revenues, but the share of scotch (both imported and domestic) improves to 32% in middle and premium segments (priced above Rs 750 per bottle).
• In FY23, Luxury and Premium category in United Spirits constituted 31% of the overall revenues and grew at a brisk pace of 37% YoY to Rs 3,000 crore. Roughly, half of the volumes are BII. While, BII have typically lower margin profile, but Return ratios are much superior.
• As per the USL management, the lowering of duty would roughly lower the price by 5-7% of the BII and if customs is further lowered, it will be in the range of 12-15%.
• Earlier, customs duty slashing by State Government of Maharashtra (from 300% to 150%) had led to a strong growth in the scotch segment for next two years in the state (FY22 and FY23). The decision is largely positive for MNC players, while marginally negative for domestic players. 

Hidden Gem

Sagar Cements: (CMP: Rs 235, TP: Rs 305, Upside: 29%)

• Sagar Cements is a south based player with cement capacity of 10 MT. Region wise, Andhra Pradesh/Telangana accounted for ~54% of sales followed by Tamil Nadu (13%), Madhya Pradesh (9%) and Karnataka (8%).
• Sagar Cements has been one of the fastest growing cement companies wherein its capacity has nearly doubled from 5.8 MT in FY19 to 10 MT currently (~15% CAGR). In FY23, company recorded robust volume growth of 34% YoY to 4.8 MT mainly driven by commissioning of new capacities in Jeerabad, MP (Central: 1.0 MT) and Jajpur, Odhisa (East: 1.5 MT). The Jeerabad facility has witnessed swift ramp-up with utilisation rates already at 80%+ levels. Recently, it acquired Andhra Cements (1.8 MT) to further consolidate its position in southern markets.
• With capacity expansion in high growth regions like Central & East and recent acquisition of Andhra Cement (to further solidify its presence in the southern region), we expect volume growth momentum to sustain. We model in volume growth of 25% YoY to 6.0 MT in FY24E and 10% YoY to 6.7 MT by FY25E.
• Benefit of declining fuel costs expected to flow from Q2FY24 onwards (~ Rs 100/t in Q2 and further reduction expected in H2FY24). We expect company to clock in EBITDA/T of Rs 600/t in FY24E and cross the Rs 700/t mark in FY25E.
• Expect Revenues to grow 18.5% CAGR to Rs 3,133 Cr and PAT to improve to Rs 175 crore in FY25.
• Significantly higher capex over last four years (including acquisition of Andhra Cements) has resulted in gross debt bloating from ~ Rs 400 crore in FY20 to Rs 1,470 crore as on FY23 (D/E: 0.9x). With most of the major capex behind us, we expect the company to generate steady free cash flow (FCF) and model in debt reduction of ~Rs 350 crore by FY25E (D/E: 0.6x). Though not factored in our estimates, Vizag land sale (which was a part of Andhra Cement acquisition) could further help deleverage the b/s (~107 acres which is worth~ Rs 400 crore).
• Sagar Cement is trading at attractive valuations (US$ 50/t vs. replacement cost of US$ 110/t). We believe Sagar Cement is an attractive regional play in the southern cement markets. We value Sagar at Rs 305 i.e. 10x FY25E EV/EBITDA.