Market Outlook of the week: Buy the dips amid global volatility, with eyes on earnings

• Indian equities extended relative outperformance against global peers. Nifty gained 1.5% while small cap index outperformed (+2.5%).
• US indices were 1% down while European benchmarks declined 3.5%.
• We expect Nifty to gradually head towards 19,700 in July. With 1,000 points rally in eight sessions leading to short term overbought conditions and spike in global volatility, use dips to buy with key support at 19,100 for coming week.  
• Stocks specific outperformance is expected to continue amid onset of earnings. IT, Auto, PSU, Pharma, sectors are looking attractive.
• Sector in focus: Nifty PSU banking index was up 6% during last week and approached multi-year highs. (2011,2015,2017,2022) Expect PSU bank index to give multi-year breakout and rally 15%-20% over next few months and relatively outperform.

Auto volume prints remained steady in June 2023

• Premium segment in the 2-W space and CV segment did well.
• Rural recovery takes a breather with motorcycle sales declining at all OEM’s. Numbers came in muted for the commuter segment with industry leader Hero MotoCorp reporting 16% MoM decline in volumes at 4.4 lakh units. Eicher motors (Royal Enfield) outperformed its peers with nearly flat volume prints at 77,109 units.
• PV segment holds steady amid supply side issues (chip). In the PV space, Tata Motors reported healthy prints at 47K units while industry leader Maruti Suzuki disappointed with ~11% MoM decline in volumes at 1.6 lakh units. Management commentary at Maruti however suggests better volumes ahead as chip supply issues ease.
• In the CV segment, MoM recovery across OEM’s was encouraging with M&HCV trucks (linked to core economic activity) and Buses (including electric buses) leading the growth charge.

Our top bets in the OEM space are Maruti Suzuki (Rating: Buy; Target price: Rs 11,000), Tata Motors (Rating: Buy; Target price: Rs 700) and Ashok Leyland (Rating: Buy; Target price: Rs 200).

New launches trigger a selloff in Eicher and rally in Maruti

• Hero MotoCorp along with Harley Davidson launched a 440cc product with an introductory pricing of Rs 2.3 lakh/unit. Similarly, Bajaj Auto in partnership with Triumph launched two premium motorcycles with a price of Rs 2.23 lakh.
• Both these launches are being perceived at threat to market supremacy enjoyed by Royal Enfield in the >250 cc segment.
• In >250 cc, Eicher has enjoyed 90%+ market share over the past decade. Sales in >250 cc segment were 1.22 lakh (RE 1.21 lakh) in FY13 and now in FY23 stands at 7.94 lakh (RE 7.34 lakh) with a market share at 92.5%. So, it’s too early to conclude that these launches distort the growth outlook for RE as we believe these offerings hold potential to expand the segment itself.
• We still hold a positive view on Eicher Motors (BUY rating - TP: Rs 4,165)
• Maruti launched its most premium offering in the SUV category i.e. Invicto at Rs 24.8 lakh. The said model is a rebadged version of Toyota Innova HyCross and will be the most premium offering by the company for Indian Markets. The company has already received ~6,000 units booking of the same and on a broader level is looking to double its revenues by FY31 (on a base of FY22). With aggressive capex outlay in terms of two greenfield plants of capacity ~10 lakh units each, ambition to gain market share in SUV space by new product offerings, we have a positive view on the company. MSIL is also slated to launch its captive EV product in 2025.

Healthy banking credit off-take continues

• Majority of banks reported healthy growth in advances (Q1FY24 business update), primarily attributable to continued traction in retail segment. HDFC Bank (15.8%), IndusInd Bank (21.4%), Federal Bank (20.9%), CSB (30.4%), IDFC First Bank (24.5%) – all posted good double-digit growth.
• Deposit accretion picked pace with term deposit being the driving factor, led by higher interest rates offered on term deposits. HDFC (19.2%), IndusInd (14.6%), Federal bank (21.4%), CSB (20.8%), IDFC (44.4%)
• CASA momentum remained muted led by shift to term deposits.
• Faster accretion in term deposits to increase cost of funds, however, repricing of MCLR book is expected to partially offset the pressure on margins. Therefore, margin trajectory to remains key watchful variable across lenders.
• Among peers, PSU banks, with higher proportion of MCLR book and healthy liabilities franchise, remains relatively better placed. Prefer SBI, BOB, Indian Bank.

Capital support to OMCs to drive earnings and valuations

• Govt. had earlier allocated Rs 30,000 crore in FY24 budget as capital support to OMCs. The allocated amount would be provided for green energy transition. OMCs currently trade at a decent 6-7x of FY25 PAT and hence raising equity at these levels would be positive for minority shareholders
• IOC/BPCL/HPCL has a target capex of Rs 30,393/10,000/10,210 crore in FY24. Continued capex on the non-fossil fuel side will continually diversify the OMCs to a more greener side. 

IOC Capex

• IOC is currently overseeing 120 projects with a total capital outlay of Rs 2.4 lakh crore.
• IOC also plans to expand its refining capacity to 107 MMTPA by CY25.
• IOC has 5 MT of petrochemical capacity and it is trying to take that to nearly 15 MT by 2030.
• IOC's current renewables footprint is only about 250 MW, but it planned to raise this to 5 GW by 2030, and to 12 GW by 2046. For that, IOC signed strategic partnerships with state-run National Thermal Power Corp and SJVN.
• The company is planning to set up green hydrogen plants at all its refineries by 2047. This is part of a Rs 2 lakh crore green transition plan to achieve net-zero emissions.

BPCL Capex

• BPCL will invest Rs 1.4 lakh crore in petrochemicals, city gas and clean energy in the next five years as it looks to non-fuel businesses for growth.
• BPCL has set up a business unit 'renewable energy' that will seek to set up 1 gigawatt of renewable electricity generation capacity by 2025 and 10 GW by 2040.

HPCL Capex

• HPCL’s refining capacity is expected to increase from 8.3 MT to 15 MT and a refinery cum petrochemical complex (9 MT with a 74% stake) in Rajasthan.

Preferred Stock: Indian oil (Target: Rs 105, Upside: 5%)

Real Estate – All rounded performer

• Nifty Realty has been top performing in the last 3 months with ~32% return vs Nifty return of ~10%.
• As per Anarock, Housing sales, across seven major cities, are estimated to rise 36% in Q1FY24 to ~1.15 lakh units while prices appreciated by 6-10% across the markets. Among the Major cities, Pune, MMR, Chennai and Bengaluru saw growth of ~65%, ~48%, ~45% and ~30%, respectively.
• Top players like Macrotech (saw 17% YoY sales value growth at Rs 3,350 crore in Q1), Sobha (~28% pre sales value growth at Rs 1,465 crore in Q1).
• Amid robust sales, unsold inventory across the top 7 cities reduced by 2% YoY to 6.14 lakh units during the June quarter. We highlight that the overall demand-supply scenario construct remains decent with all-time low inventory (19 months in Q1).
• Brigade Enterprises (CMP: Rs 554, TP: Rs 650, ~17% upside) remains an attractive pick in the space.

Hidden Gem

NRB Bearings (CMP: Rs 212, TP: Rs 270, MCap: Rs 2,000 crore; Potential upside: 27%)

• NRB is India’s largest needle (65-70% Market share) and cylindrical roller bearings producer.  
• NRB is undervalued (14x FY25E EPS) across the bearings space (other players quoting at 40x-50x on 2 year forward EPS).
• Domestic markets contribute ~75% of total revenues - 2W(33%), PV(23%), CV(27%), while exports contribute the balance ~25%.
• In FY23, its export business declined by 5% YoY to Rs 255 crore given volatility in global markets whereas domestic markets grew by 18% YoY.
• We expect exports (15% YoY growth in FY24) to recover whereas the domestic market is expected to grow by 10% YoY. We expect total revenues to grow at a CAGR of 11% over FY23-FY25E to Rs 1308 crore.
• On the margin front, FY23 was a tale of two half wherein H1FY23 fell sharply to 10% given sharp rise in prices of key input i.e., steel and the lag at which the same was passed on to OEM’s. However, in Q4FY23, the price hikes got fully implemented leading to significant improvement in margins to 20.5%.
• Going ahead, with no major volatility expected in steel prices, double digit growth in export markets, we expect margins to improve to 16.7% and 17.6% in FY24E and FY25E respectively. 
• Double digit topline growth coupled with margin expansion will lead to PAT CAGR of 24% over FY23-FY25E. The company has chalked a capex of > Rs 200 cr for catering to the Hybrid and the EV segment.
• We value NRB at Rs 270 per share (based on 18x FY25 P/E).