Market outlook of the week: Buy dips for Nifty target of 22,300 in January 2024

Indian benchmarks maintained their record setting spree with 1.8% gain for the week, outperforming global peers. Nifty gained 20% for CY23, while Midcap and small cap indices rallied 46% and 55% respectively.
Most global benchmarks gained around 1% each last week.
Going forward, we maintain positive stance with Nifty target of 22,300 in January 2024 as we enter Q3FY24 earnings season. However, taking cognizance of the overbought nature of prices, we recommend adopting buying dips strategy as key support is placed at last week’s low of 21,300.
BFSI, IT, Metal, Capital goods, Consumption and Pharma sectors are expected to do well.

Market 2024 Outlook ; Nifty target 25,000

We expect Nifty earnings to grow at a CAGR of 16.3% over FY23-26E.
Our Dec 2024 target for Nifty is set at 25,000 wherein we have valued Nifty at 20x PE on FY26E EPS of Rs 1,250/share with corresponding Sensex target set as 83,250; offering a potential upside of ~15% from current index levels.

Some of the themes for CY24 are

Capex Cycle – combination of Core Sectors, green growth and PLI
Cement – Healthy utilisations likely amid expanding capacity
Steel – capacity utlisation to double amid green focus
Auto Sales - premiumization trend getting stronger
Banks – back on strong footing
Real Estate experiencing decadal revival

Why we remain Bullish?

Most important question: Whether the current cycle is similar to 2003-2007 or we will see the downcycles like 2008-09, 2010-2011, 2018-2020. We believe its latter.

Strong Inflows

Domestic equity flows: Growing and counterweight during foreign outflows.
Resumption of FPI flows to propel markets further - India’s share in Emerging market index has almost doubled from 7% to 14% in last 8 years and is likely to increase further with higher economic size.
Government Bond Index inclusion: A structural boost - Apart from JP Morgans GBI-EM-GD index, Bloomberg Global Aggregate Index (Global Agg) is also likely to include Indian bonds in its index. It has an estimated AUM of USD 2.5 trillion $ and with 0.6%-0.8% weight, additional potential inflows could USD be 15-20bn.

Capital Expenditure to GDP at an all time high

Capital Expenditure (Capex) spending remains the key priority with government capex allocation CAGR of 30% over FY20-FY24E.
The capex to GDP is pegged at all-time high of 3.3%. This is in stark contrast to FY14-FY18 average of 1.8%.
The two sectors that stand out in terms of allocation is Railways and Roads . Both the segments have seen allocation rising by 6x and 3.3x over FY18-FY24.
50% of the total allocated capex earmarked for Railways and Roads holds the key for making India a manufacturing hub.

Green Capex

Eyeing global leadership in green hydrogen; Making India Atmanirbhar through clean energy.
Driving green growth through decarbonization of the economy, reduced dependence on fossil fuel imports, and enable India to assume market leadership in Green Hydrogen.
Major priority sectors, including fertilizer, refinery, transportation, power, steel, shipping, methanol, ammonia to drive green hydrogen adoption.
Global demand of over 100 MMT (metric million tonnes) of Green Hydrogen and its derivatives is expected to emerge by 2030.
Green Hydrogen presents total opportunity of ~ Rs 14 lakh crore for next 6-7 years.
With cost of production expected to come down, India eying 10 MMT green hydrogen by 2030, ~10% global share.

Defence Sector - Structural shift towards Indigenization continues

Acceptance of Necessity (AoNs) worth Rs 5.4 lakh crore accorded by Defence Acquisition Council (DAC) since April 2022.
Order pipeline remains healthy (Rs 5-6 lakh crore worth of contracts expected in the next 5 years (FY24-28E), driven by increasing govt’s capital outlay in defence, focus on procurement of modernized indigenous platforms and arising export opportunities.

Cement sector to accelerate capacity addition ~1.8x during FY23-27

Cement companies slated to add ~35 MT capacity annually during FY23-27E (vs. 20 MT added during FY17-22).
Capacity expansion will entail fresh capex investment worth Rs 1.1 lakh crore during FY23-27E.
Government spending on infra projects and revival of housing sector to keep utilization rates healthy.

Steel capacity to double by 2030

National Steel Policy has set a target of 300 MT of Crude Steel Capacity in India by 2030 vs. 158 MT as of 2022.
Capacity expansion envisages a capex spend of ~Rs 10-11 lakh crore over the next 8 years.
Annual capex by top five steel manufacturers seen doubling, going forward over next few years.
Encouragingly, industry is traversing towards low carbon emissions with incremental focus on green steel production (utilising renewables & green hydrogen).

Auto Sales at life time high; premiumization trend getting stronger

Passenger Vehicle (PV) and Tractor sales have already surpassed their pre-covid peaks.
Commercial Vehicle (CV) set to pass life time high in FY24.
Two wheelers, a price sensitive segment, is lagging due to the impact of fuel efficiency and insurance norms driven price hikes.

Banks back on firm footing

Credit growth continues to remain healthy in mid teens.
Asset quality concerns behind us with gross NPA coming down from double digit to low single digits.
ROA to inch up towards 1%.
Anticipated decline in G-sec yields in next fiscal remains a catalyst for driving earnings.

Real Estate experiencing decadal revival

Industry getting formalised – big developers with better balance sheet gained market share post RERA implementation (type of regulation which is absent in even giant economy like China).
Strong end user housing demand.

Major Risks

Investors should be prepared for the “dip”

Largecaps: 10-15% fall occurs every year
Midcaps: 15-25% fall occurs every year
Smallcaps: 20-35% fall occurs every year

Global growth slowdown could be a dampener

The year 2024 is likely to witness sharp slowdown in major economies like U.S. and China while growth in Euro region is also likely to be a sub-optimal. The same poses risk to the otherwise resilient domestic economy especially on exports front.

Stock Picks

SBI Cards: Target Price- Rs 950

SBI Cards is the second largest credit card issuer in India. Market share in terms of cards issued is ~19.2% and spends is ~18.0%.
High margin business with strong return ratios, ~5% RoA and +20% RoE.
Spends (Rs 79,000 crore in Q2FY24) and proportion of revolvers (at 24% of receivables) remain two primary constituents for a credit card business. Expect growth in spends at ~32% CAGR in FY23-25E.
Moderation in revolvers and increase in cost of funds to impart pressure on margins to be partially offset by higher EMI transactions. Thus margins to decline in FY24E at 11.3-11.4% in FY24E. However, being a beneficiary of anticipated reversal in interest rate cycle, expect margins to recover to 11.5-11.6% in FY25E.
BUY with TP of Rs 950.

UGRO Capital: Target Price- Rs 350

Huge credit gap in MSME financing market and adoption of data backed selective approach enables opportunity for scalable business model.
Expect AUM growth to remain robust at ~50% CAGR in FY24-25E to reach ~Rs 13,682 crore in FY25E.
Robust growth in AUM, operational leverage and focus on co-lending is expected to aid improvement in RoA to 2.7% in FY24E and further at 3.3% in FY25E.
Focus on cashflow based lending coupled with strong in-house collection infrastructure provides comfort on asset quality.

Birla Corp: Target Price - Rs 1,755

With further ramp-up, company’s capacity utilization and cement volumes to pick-up further in coming period. We estimate volume CAGR of 7.3% (FY23-26E).
Operational efficiency measures (raw material sourcing, usage of captive coal & power), govt incentives entitled to Muktaban facility, softening fuel prices, increasing share of premium products and further improvement in capacity utilization, we believe that company’s margins to improve significantly over FY24-26E.
We estimate blended EBITDA/ton to improve to Rs 993/ton by FY26E from Rs 491/ton in FY23. Valuation at 7.2x EV/EBITDA on FY26E basis looks attractive considering the multiple tailwinds.

Uno Minda: Target Price - Rs 810

Uno Minda operates in domestic auto ancillary space, providing solutions in areas of automotive switches, interior & exterior lighting, acoustics systems, seating, alloy wheels, airbags, sensors & controllers.
Uno Minda has a history of vast outperformance vs. user industries riding on growth in kit value, new client and product additions as well as inorganic acquisitions.
The company also has a prominent role to play in EV space with robust EV orderbook with peak annual revenues in this domain pegged at ~Rs 3,000 crore.
We build 19% sales CAGR over FY23-26E, with PAT CAGR placed at ~25% riding on operating leverage gains in the aforesaid timeframe.
We assign BUY rating to Uno Minda with a target price of Rs 810 wherein we have valued the company at 36x PE on FY26E EPS of Rs 22.5.

NMDC: Target Price - Rs 250

NMDC is our top pick in the metal space as crude steel capacity set to double to 300 MT by 2030.
NMDC’s production volume remained flat over the seven-year period over FY14-21 at ~30-35 MT but is on the path to achieve the production of ~46 MT in FY24 and likely to cross ~50 MT production volume by FY25. We have baked in volume CAGR of ~13% to 55 MT by FY26E. This is amidst its ambitious target to expand its capacity to 67 MT by FY26 and further to 100 MT by FY30.
NMDC is also exploring opportunities in other minerals such as bauxite, gold, diamond, lithium, etc., both in India and overseas.

Grindwell Norton: Target Price - Rs 2,700

Grindwell Norton has strong exposure towards all core sectors of the economy.
The segments include abrasives (contributing ~50.2%), ceramics & plastics (41.6%)are expected to bounce back and grow in double digit.
The company has invested heavily in the last 2.5 years and did a capex of Rs 424 crore in growth markets. GNL’s average 10-year capex is at Rs 54 crore.
Overall revenue and PAT are expected at 14% and 16% over FY23-FY26E.

Greenply Industries: Target Price - Rs 295

The bulk of the residential real estate in last 2-3 years will start hitting completion in CY24 onwards driving the building materials segment like Woodpanel (Ply, Laminates and MDF).
Greenply will be one of the key beneficiaries of the same as it has also forayed into the MDF boards business the plant for which was operationalized in H1FY24.
The capacity utilisation from the MDF plant likely to be ~45-50% in FY24E, would increase thereafter in FY25/FY26. The margin currently at 15.5% is likely to expand ~20-22% in a normalized operational state. We bake in revenues to reach Rs 470 crore in FY26 with margins of 20%.
Expect Revenue/PAT to grow at a CAGR of 15.8%/23.2% to Rs 2,863.3 crore / Rs 171.1 crore respectively.

Source: ICICIdirect Research