Share Market outlook of the week: Earnings to drive sentiments, supported by stable global setup

Indian equity benchmarks reclaimed new highs amid stable inflation outlook and better than expected earnings from IT heavyweights set the tone for earnings season.
Nifty gained 0.5% to record new high of 21,848. Nifty Small cap index outperformed with 1% gain.
Globally, Nikkei recorded fresh 34 year high as it gained 5% last week followed by 3% gain in Nasdaq. Overall global equity market setup remains positive with most indices hitting new 52-week highs.
We maintain our bullish stance with target of 22,300 for January 2024 as index formed higher base around 21,500 and breakout of eight-day consolidation phase.
Our stance is further backed by:

Strong multi sector leadership from heavyweight across BFSI, IT, PSU, Oil&gas, Infra & Power
Stable crude prices, declining US dollar trend to act as cushion in case minor volatility

SIP Inflow in December on a high

Total inflows came in higher in December at Rs 17,000 Vs Rs 15,500 crore in November aided by NFOs (NFO in December: Rs 6,300 crore).
Sequentially while inflows into Smallcap and Midcap were marginally lower due to sharp rally in the market, the overall trend of higher inflows in Smallcap and Midcap category continues. Ex-NFO, Smallcap: Rs 2,700 crore vs Rs 3,700 crore (Motilal Smallcap NFO raised 1,200 crore. Total Smallcap inflows including NFO was Rs 3,900 crore), Midcap: Rs 1,400 crore in December vs Rs 2,700 crore in November.
Largecap witnessed marginal outflows at Rs 280 crore. The trend continues: Lower/marginal outflows from Largecap and strong inflows in Smallcap and Midcap (Smallcap being higher).
SIP inflows continue to rise. At Rs 17,610 crore vs Rs 17,073 crore in November.
Total inflows into equity schemes in the year 2023 was Rs 1.6 lakh crore. In 2022 also we saw same amount of inflows at Rs 1.6 lakh crore.
Debt funds saw marginal inflows into retail oriented categories like corporate bonds and short term. Since return are likely to be higher going forward, inflows will also improve once historical returns start improving.

Bajaj Auto: Approves buyback at Rs 10,000/share

Bajaj Auto’s board of directors have approved share buyback of up to 40 lakh shares (representing 1.4% of total shares outstanding) amounting to Rs 4,000 crore at a buy-back price of Rs 10,000/share through tender offer route.
The present buyback which is ~40% premium to current market price.
The company had ~Rs 17,000 crore worth of surplus cash on its B/S as of Sep 2023 end and is comfortably placed on that front.
Buyback is indeed a capital efficient as well as tax efficient way of utilising surplus cash on company’s balance sheet.
It is also a measure of confidence that the company’s sees in its future prospect and talks about the mindset of rewarding its shareholders.

Maruti Suzuki India Ltd: Announces Gujarat as the location for new greenfield plant

Maruti Suzuki announced that it will set up its new greenfield PV plant at a total investment outlay of Rs 35,000 crore with 10 lakh units of rated capacity in Gujarat. It is scheduled to be operational by FY29.
Location of the new greenfield plant was not known before although the company planned to construct two new greenfield manufacturing facilities with rated capacity of 10 lakh units each. One is currently under execution in Haryana near Sonipat and will be operational in CY2025 (first phase).
The current announcement is part of its overall big plan to augment domestic manufacturing capacity from ~23 lakhs currently to ~40 lakh units by FY31.

Life Insurance business performance – Q3FY24

Life insurance industry premium witnessed 43.8% YoY growth in premium at Rs 38,583 crore, for the month of Dec 2023, attributable to surge in group premium for LIC.
Private insurers reported 4.2% YoY growth in business premium (Rs 15,601 crore) with individual non-single business growth at 11.8% YoY, offset by subdued single premium business in both individual and group segment (gradual impact of change in tax regime).
Among insurers, SBI Life Insurance (premium growth at 20.7% YoY) and Max Life Insurance (17.6% YoY at Rs 1,213 crore) reported healthy performance with focus on individual non-single and group business. HDFC Life (3.3% YoY growth) and IPru Life (2.9% YoY) witnessed subdued performance led by decline in individual business.
Performance of Q4FY24 remains crucial in determining business performance. Expect business to remain muted in individual single product (non-par product) while unit linked product and term insurance seen to remain in focus.

HDFC AMC Q3FY24 performance (CMP - Rs 3,439, Mcap - Rs 73,433 crore)

HDFC AMC reported healthy performance in Q3FY24. AUM growth came at 28.3% YoY to Rs 5.75 lakh crore, with equity AUM increasing 15.5% YoY to Rs 3.46 lakh crore. Strong growth in AUM led to ~10 bps gain in market share to 11.3%.
Operationally, revenue from operations grew 20% YoY to Rs 671 crore, driven by AUM growth. Decline in TER (Total Expense Ratio) was offset by rise in proportion of equity AUM, thus resulting in ~3 bps YoY decline in yield at 47 bps on closing AUM.
Higher other income (38% YoY) and flattish opex led to benefit of operating leverage resulting in PAT growth of 32% YoY to Rs 488 crore; i.e 34 bps on closing AUM.
Increase in equities and robust inflow led to market share gain which is positive. Anticipated continued growth in AUM and operational efficiency makes HDFC AMC best play on financial savings. Given recent run up in the stock price, we advise to add on dips.

IT result takeaways

TCS: Muted revenue growth with margins improvement

TCS reported revenue of US$ 7,281 mn up 1% QoQ & 2.9% YoY (up 1.7% YoY in CC terms) while in rupee terms the company reported growth of 1.5% QoQ & 4% YoY. The muted revenue growth was owing lower discretionary spends and weakness in key vertical of BFSI.
Geography wise the growth was led by Europe reporting a growth of 8.1% YoY in CC terms while North America (53.7% of mix) declined by 3%. Vertical wise BFSI (33.1% of mix) declined by 3% YoY in CC terms while Energy, Resources & Utilities (ERU) and manufacturing reported growth of 11.8% & 7% respectively.
Adj. EBIT (excl. legal settlement claim) increased by 75 bps QoQ to 25% due to the tailwinds of operational efficiency (+60 bps), reduction in subcontractor costs (+70 bps) & currency benefits (+25 bps) mitigated by the headwinds of furloughs (-80 bps).
The company’s deal wins remain steady with TCV of US$8.1 bn in quarter (up 3.8% YoY) taking the total TCV to US$29.5 bn for YTD FY24.
Outlook: The company indicated that the pipeline remains strong & pipeline to TCV conversion is steady. The company’s margin improvement efforts are yielding results with the margin improving for second successive quarter from 23.2% in Q1FY24 to 25% in Q3FY24. The company maintained 26-28% of EBIT margin guidance in the medium term with the levers of increased productivity, utilization & lower sub-contractor cost. Nonetheless, company indicated that there were no significant changes in the macro environment with clients remaining cautious.

Infosys : Weak Revenues; Adjusted for one-off, margins are resilient

Infosys reported revenue degrowth in a seasonally weak quarter while margin was impacted by one off and wage hike impact. Infosys reported revenue of US$4,663 decline of 1% QoQ & YoY while in dollar terms the terms revenue declined by 1.2% QoQ and was flat on YoY basis.
Vertical wise financial services, Communication & Hitech were laggards reporting YoY degrowth of 5.9%, 8% & 5.1% respectively in CC terms while Manufacturing & Lifescience vertical reported growth of 10.6% & 6.3%. Geography wise North America (59% of mix) declined by 4.9% on YoY basis in CC terms while Europe (28.2% of mix) grew by 5%.
EBIT margin of the company declined by 70 bps QoQ to 20.5% due to the headwinds of salary hikes (70 bps) & one-time impact of loss & revenue (60 bps) due to ransomware attack at subsidiary mitigated by the tailwinds of cost optimization program & currency benefit (60 bps).
Large deal TCV came at US$3.2 bn, with ~71% being net new. The company narrowed its revenue guidance increasing the lower end by 50 bps while also reducing the upper guidance by 50 bps to 1.5-2% while it kept its margin guidance intact at 20-22%.
Outlook: While topline weakness was visible, adjusting for one off impact and wage hike (impact for 2 months), the margins were relatively resilient (flat QoQ) indicating that the company’s margin improvement levers are bearing results despite weak revenues. However, concern remains on revenue conversion front as narrowing the revenue guidance indicates clients are still remains cautious on the spending decisions. Clients budget closure ahead will be key which will indicate the demand for FY25.
Valuations: In terms of valuations,

TCS is trading at 25.8x, 2 year forward earnings tad above its last 5-year average of 24.7x.
Infosys is currently trading at 21.3x, 2 year forward earnings similar to its last 5-year average.
We note that TCS is trading ~21% premium to Infosys vs. last 5-year average of 20%.
Key trigger for rerating will superior conversion of orderbooking to revenue growth ahead along with margins expansion.

Hidden Gem

CIE Automotive India (CMP: Rs 490, Target Price: Rs 625; Potential upside: 28%)

CIE Automotive India is part of the Spain-based CIE Automotive Group. It is a multi-technology, multi-product automotive component supplier.
In terms of technology, forging forms 59% of consolidated sales. Segment-wise contribution is skewed towards PV, 2-W and Tractors in India and PV in Europe. Hence it is more of a PV centric forging player – a key differentiator vs. its competition which are more of a CV centric forging business.
It now derives ~65% of consolidated sales from India and the rest i.e. ~35% from Europe.
Indian operations are currently recording ~17% EBITDA margins while its European operations have started to clock ~18% EBITDA margin profile.
Sensing organic growth opportunities in India as well as export potential that it holds CIE has strategically aligned its goals wherein it intends to incur growth capex in India while at the same time focus upon improving operational efficiencies at its European operations.
On the consolidated basis, Topline/EBITDA at CIE is expected to grow at a CAGR of 11%, 21.3% over CY22-24E. EBITDA margins are seen improving from 13.4% levels in CY22 to 16% in CY24E. RoCE in the similar timeframe is seen improving from 13.4% to 18.4%.
Cash flow generation has been the key USP and differentiating factor at CIE with EBITDA to CFO generation at healthy 75%+ with present CFO yield pegged at attractive ~7% thereby making PE re-rating imminent for CIE automotive.
We assign BUY rating to the stock and value it at Rs 625 i.e. 22x PE on CY24E EPS of Rs 28.4/share.
Improving order win momentum including EV order book, thrust on exports and shift in global automotive supply chain away from China are seen as being some of the tailwinds for CIE in coming years.