Market outlook of the week: Earnings to drive sentiments, 19,700 Nifty levels expected in the coming week

• Nifty consolidated recent gains near life highs despite uptick in inflation numbers, while US indices outperformed as Nasdaq gained 3.5% post lower inflation numbers.
• Expect Nifty to touch a target of 19,700 in coming week. Strong support exists at 19,100.
• Sectors in focus: IT, Metals which have been laggard have been relative outperformer last week and price action indicate money flowing to these sectors amid lower US inflation, weak US dollar index and declining Chinese steel exports. We expect these sectors to catch up from hereon. 

Election years are rewarding despite volatility, Nifty expected to touch 21,000 levels year end

• We reiterate structural bullish stance with Nifty target of 21,000 in election year, with strong support at 18,200, as Nifty breaks out of 20 month consolidation.
• Going by past four General elections since 2004, Nifty has gained minimum 11% (median: 22%) in election year. Staying invested through event related volatility has been rewarding.
• Cyclicals: BFSI, a key heavyweight sector has delivered double digit returns in three out of four election years, while Auto, Power, Construction & Infra have been in limelight on atleast three occasions.
• Defensives: Consumption, pharma and IT have relatively been steady performers in each of past four election years.

Inflation – Lower US inflation to drive riskier rally

• US Inflation edged further lower in June for the third consecutive month.
• CPI on YoY basis increased by 3.0% in June 2023 compared to 4.0% in May 2023 and below market expectation of around 3.3%.
• Structurally, US CPI inflation has eased off significantly from 9% in June 2022 to 3% in June 2023. 
• This lower inflation has reduces expectation from 2 rate hike by US Fed to 1 last rate hike later this month. Even the “higher for longer” rate narrative may fade away with sharper than expected fall in inflation.
• Domestical CPI inflation came in higher at 4.8% for June Vs 4.25% in May. MoM rise in headline CPI was at 1% due to seasonal supply and weather related disruption.
• Food inflation which was driving inflation lower in last 3 months reversed. Vegetables, Pulses and Spices - all 3 contributed and were the major driver of higher print.
• Actual average Q1FY24 prints at 4.61% is absolutely in line with RBI and therefore no change of stance by RBI is warranted.

US dollar index breakdown below 100 is indicating further downward acceleration towards 96 in coming months. This will act as tailwind for more foreign funds flowing in EM and India is key beneficiary given strong macros.

Overall Takeaways from TIER I IT Companies

• Revenue weakness was seen across amid challenges such as cut on discretionary spends and weakness in key verticals like BFSI/Communication and Hi-tech. TCS led with flattish constant currency revenues in Q1, while HCL Tech revenues were down 1.3% QoQ on CC basis. Wipro had weakest revenue performance of the lot with 2.8% decline QoQ on CC basis.
• Margins were impacted for all players, while TCS had incremental impact of 200 bps on wage hikes. Other the other hand, players like HCL Tech/Wipro have pushed wage hike to Q3 from earlier envisaged Q2. TCS EBIT margins at 23.2%, was down ~130 bps QoQ, owing to 200 bps impact of wage hike partly offset by lower subcontracting costs. HCL Tech EBIT margins declined to 16.9%, down 120 bps QoQ, on lower utlisations, given the demand challenges in Telecom and Tech segments.  Wipro EBIT margins at 16% was down 20 bps QoQ, given the negative operating leverage but partially offset by higher utilisations.
• Order booking trend was mixed bag. For TCS positive takeaway was healthy orderbook at 10.2 billion, up 24% YoY and ~2% QoQ. Wipro received total bookings of $3.7 billion, down 10.7% QoQ. The large deal bookings growth, however, stood at 10.7% QoQ at US$ 1.2 bn. HCL Tech order booking at ~US$1.6 bn, was down 24.5% QoQ. However, the company expects deal TCV to recover in next 1-2 quarters given the strong deal pipeline (up 17.7% QoQ, 26.2% YoY).
• Common commentary thread has been there has been no incremental demand destruction in BFSI, albeit weakness persist in segment such as mortgage, capital markets. In terms of Geography, North America has been relatively weaker than Europe/UK.
• Outlook: Overall near-term demand challenges remain (deferments of discretionary spends, clients focusing on RoI led spends only, vendor consolidation) and refrained from giving recovery timelines, implying a slow and gradual recovery ahead. Nonetheless, most of the players remain confident on long term tailwinds of generative AI both in terms of opportunity and efficiency , going ahead.

Reliance Industries set to demerge Jio Financial Services

• Reliance Industries has announced 20^th July 2023 as record date for demerger of Reliance Strategic Investment Limited (to be named as Jio Financial Services). As per the announcement, shareholders of Reliance Industries will receive equivalent number of Jio Financial shares i.e 1 share of Jio Financial Services for every 1 share of Reliance Industries.
• Listing of Jio Financial Services is expected in October 2023.
• Lending to consumers and merchant remains initial plan for Jio Financial Services with entry in insurance, payments, broking and asset management later. 
• Networth of Jio Financial Services is estimated at Rs 1.5 lakh crore constituting Rs 1.1 lakh crore worth of shares of RIL and Rs 40,000 crore as core networth.
• Broadly valuing investment in parent at 30% discount and core networth at 3-5x, Jio Financial Services could fetch valuation of ~Rs 2 lakh crore. Post demerger, parent holding in Jio Financial Services will be at 49.1% which will constitute nearly Rs 142-190 in SOTP of parent company, which seems to be gradually priced in the parent company’s price.

HDFC Bank emerges as a behemoth with advance of Rs 22.5 lakh crore

• HDFC Bank has concluded with the merger of parent HDFC Ltd and has emerged as behemoth with a advance book of Rs 22.5 lakh crore.
• Integration benefit includes cross sales of home loan products to large customer base of HDFC Bank. Further, subsidiaries engaged in insurance and asset management business will have huge distribution leverage with large branch network (~8,500 branches) spread across the country.
• Benefit of lower cost of deposits (CASA deposits) will accrue overtime with initial focus on replacing borrowings from parent entity with retail deposits.
• At current valuation, standalone bank is valued at ~2.1x FY25E which seems to be lower than long term average and thus we expect re-rating in the stock in next 3-4 quarters.

Defence Sector

• Defence sector continues to see strong momentum as PM visits France.
• Deal for the large defence platforms like rafale marine aircrafts and three scorpene class submarines are expected. Creation of MRO hubs (maintenance, repair & operations) for various systems is also expected.
• This throws a sizable manufacturing opportunity as the submarines will be built by Mazagon Dock. Also many critical parts of rafale aircrafts will be manufactured in India.
• One key development to watch-out for is indigenous manufacturing of aircraft engines from Safran which are used in Rafale aircrafts and other helicopters like LCH & LUH.
• The complete tech transfer from Safran for M88 engine and for Shakti engines which are used in helicopters, will be significant as the overall indigenous levels of these aircrafts & helicopters will increase.
• Bharat Electronics looks well placed considering the healthy order book position and strong order inflows in defence electronics space.   

NTPC: Making rapid strides towards Renewables and Green Energy

• In a bid to diversify from traditional thermal, central utilities like NTPC has shifted their focus towards renewables and have set significant assets addition plans over the next decade.
• NTPC, the largest generator, plans to add 60 GW by 2032 and wants to take share of green portfolio to 45% in the overall basket. The company also has set aggressive renewable capacity addition target of 16,000 MW till FY26. Apart from renewables, it is also working on green energy segments like Nuclear (has entered into JV with NPCIL) and Green Hydrogen. The company has also floated a subsidiary in this regard and transferred assets to the same.
• Recently it has finalized tie up for electrolysers with Ohmium (400MW based on PEM technology) and HILD electric ( 600 MW of electrolysers based on alkaline technology).
• This change of DNA will lead to improvement in ROE given renewable projects are relatively shorter time projects and risk of feedstock and clearances is lesser and that will result into faster capitalisation of CWIP into ROE generating Fixed assets.

Hidden Gem

Shalby Limited (Target Price: Rs 220)

• Shalby is a multi-specialty hospitals chain with expertise in joint replacement, started by renowned orthopaedic surgeon Dr Vikram Shah.
• Shalby is a market leader in arthroplasty procedure with ~15% market share of all joint replacement surgeries by organized private corporate hospitals.
• Knee replacement surgeries have grown at ~30% CAGR over past three decade.
• Besides arthroplasty, the company is rapidly expanding in other specialties like cardiology, neurology, oncology, bariatric, liver & renal transplants, etc. As a result, share of arthroplasty has come down from 97% in FY08 to 41% in FY23.
• Besides hospitals, the company has set an inspirational target to clock US$100 million in Implant business in next 5 years (from ~US$11 million in FY23). The management expects strong growth to continue in the implant business and has achieved  EBITDA breakeven in Q4FY23.
• Shalby is one of the rare hospital chains, which has a debt free balance sheet.
• Its revenues/EBITDA/PAT is expected to grow at 14%/18%/19% FY23-25 CAGR to Rs 1049| Rs 198/Rs 101 crore in FY25. Net Debt free balance sheet with FY25 RoIC approaching 15%. We value Shalby at Rs 220 based on SOTP valuation (upside of 22%).
• Trades at an attractive 7x EV/EBIDTA multiple.