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Market outlook of the week: Earnings to drive stock specific performance amid Fed meeting outcomes

ICICIdirect 16 Mins 21 Jul 2023
  • India’s outperformance continued against DM and EM. Nifty almost touched 20k (up 1%) while Nifty small cap gained 1.8% for the week.
  • Globally, key development was a breakout in DJIA and Russell2000 (Small cap index) from seven-month consolidation amid onset of earnings. Expected to catchup. Indian midcaps have positive correlation with DM midcap indices in long run.
  • We expect Nifty to consolidate in 19,500-20,200 as prices have approached overbought territory in short term. Buy the dips as market to stay stock specific amid earnings.
  • Structurally, weak dollar (recent breakdown), strong FII inflow, steady global cues would support markets.
  • BFSI, PSU, Pharma, midcap IT, Consumption, Metal are expected to do well.
  • Consumer discretionary at extremely favourable risk-reward:
    1. Relative ratio chart of BSE Consumer discretionary against BSE Sensex has approached lower band of past five years upward slopping channel. Expect sector to bottom out.

Banking stock continue to deliver in June Q1FY24 result

  • In Q1FY24, majority of banks reported healthy growth in advances, primarily attributable to continued traction in retail segment.
  • Large banks including HDFC Bank reported 13% YoY growth in consolidated advance to Rs 22.45 lakh crore, while IndusInd Bank witnessed robust increase at 21.5% in advances. Among mid-sized lender, CSB Bank reported 31% YoY uptick in loans and South Indian Bank delivered steady 14% YoY growth in advance portfolio.
  • Deposit accretion picked pace in Q1FY24 with term deposit being the driving factor, led by higher interest rates offered on term deposits. CASA momentum remained muted led by shift to term deposits owing to increase in differential in interest rates compared to saving account.
  • While large private banks – HDFC Bank (-10 bps QoQ) and IndusInd Bank (+1 bps QoQ) reported steady margins, mid-sized banks reported divergence in margin trend. While CSB Bank (+2 bps QoQ) reported steady NIM owing to increase in CD ratio; increase in CoF led to 33 bps decline in margins for South Indian Bank.  
  • Among lenders, PSU banks, with higher proportion of MCLR book (at 57.4% of advances for PSB vs 24.7% of advances for private banks) and healthy liabilities franchise, remains relatively better placed.
  • SBI remains our preferred pick in PSU banks with ~42% of book linked to MCLR, CASA ratio at 42.5% and gradually improvement in RoA at ~1% as of March 2023.

Jio Financial Services discovered price higher than estimate

Against an implied value of Rs 133 per share of Reliance Strategic Investments Ltd. (to be renamed as Jio Financial Services), post its demerger from Reliance Industries, the market has valued the entity at Rs 250-260 per share. This is due to its strong networth of ~Rs 1 – 1.2 lakh crore (on consolidated basis) which is seen enabling faster growth in an already competitive financial marketplace.

Infosys disappoints again, Tier II did better

  • Infosys disappoints, midcap companies deliver better revenues growth: Muted revenue was seen for Infosys amid challenges such as cut on discretionary spends. It reported constant currency revenue growth of 1% QoQ in Q1, while Coforge revenue grew 2.8% QoQ in CC terms at US$ 271.8 mn. Persistent reported a growth of 2.9% QoQ CC at US$ 282.9 mn.
  • In terms of margins, margins were impacted for all players, owing to variable payouts; Coforge also saw hikes impact: Infosys reported EBIT margin decline of 20bps QoQ at 20.8% as cost optimization (+70bps) was offset by higher variable pay and promotions (-90bps). Coforge adjusted EBITDA margins were down 360 bps QoQ to 16%, owing to wage hike and variable payout impact. Persistent EBIT margin was down 50 bps QoQ at 14.9%.
  • Order booking trend robust: For Infosys, positive takeaway was healthy orderbook as large deal TCV came in at US$ while it 2.3bn, up 10% QoQ. For Coforge, Fresh order intake was up 69% YoY, and 76% QoQ to US$531mn. Persistent Systems won TCV of US$380.3 mn.
  • Divergent trends on Demand segment/ region growth: Infosys indicated that Weakness continues in parts of BFSI (mortgage, AMC, wealth, payments), Telecom, Hitech and parts of retail. Manufacturing has been resilient segment for all the players. In terms of Geography, North America has been relatively weaker than Europe/UK for Infosys. However, for Coforge and Persistent, Geography wise, the growth was led by US region which grew by 5.8% QoQ and 5.6% respectively. Similarly, BFSI was a strong segment for both Coforge and Persistent, 3.1% and 6.2% QoQ, respectively.
  • Outlook – Infosys, like other large cap peers, has flagged demand challenges amid delayed ramp-ups, cut in discretionary spends. However, its revenue guidance (1-3.5% in CC growth in FY24 vs. 4-7% earlier) is lower than market expectations and peers. On the other hand, Coforge management maintained its guidance of 13-16% CC revenue growth in FY24.

United Spirits – one of the best premiumization plays

  • United Spirits June standalone revenues grew 17% YoY to Rs 2,172 crore, while its consolidated revenues grew 29% YoY to Rs 2,668 crore led by strong standalone revenues and significant increase in revenues from IPL, new 5 years media rights cycle (2023-27).
  • P&A volumes/revenues grew 10%/21% to 11 million cases/Rs 1,876 crore respectively and now comprise 86% of the standalone revenues. Popular segment revenues remained flattish at Rs 226 crore.
  • Standalone EBITDA margins was up 638 bps to 17.7%, which included 139 bps improvement in the gross margins (rest contributed by lower employee expense).
  • Thereby, EBITDA grew 84% to Rs 385 crore and PAT grew 22% to Rs 238.2 crore.

Tata Son’s capex to keep investor interest alive in Tata Motors (TP: Rs 700; Rating: BUY)

  • In an important development, the parent company of Tata Motors i.e. Tata Sons has announced plans to build a 40GW battery cell gigafactory in the United Kingdom (UK) at an investment outlay of over 4 billion pounds (Rs>40,000 crore).
  • JLR will be the anchor customer for the same, with supplies commencing from 2026. The said plant will deliver electric mobility and renewable energy storage solutions for customers in UK and Europe.
  • This is over and above its capex commitment in the similar domain in India (US$ 1.6 billion, 20 GW battery capacity).
  • This will go a long way providing assured supply of battery’s to JLR which is indeed transiting itself to be a major Electric Luxury Car player. Jaguar brand of JLR is going all electric by 2025.

With guidance of record CFO (~5 billion pounds) and debt reduction (~2 billion pounds) at JLR for FY24E and impending listing of its subsidiary i.e. Tata Technologies we have a positive view on the company.

Ashok Leyland reported a healthy performance -augurs well for Tata Motors & Eicher

  • Ashok Leyland retained double digit EBITDA margin profile at 10%, despite lower share of M&HCV sales sequentially.
  • Standalone operating income for Q1FY24 came in at Rs 8,189.3 crore, up 13.4% YoY amid 4% growth in volumes to 41,329 units and share of M&HCV in total volume mix at 63% vs. 68% in Q4FY23.
  • Key positive surprise also was QoQ rise in net realisations at Rs 19.8 lakh/unit; indicating good pricing discipline at the industry level which is also positive for Tata Motors and Eicher Motors (VE-CV).
  • Company has already guided for domestic CV space surpassing its past peak of FY19 in FY24E.
  • We have a BUY rating on the stock and value it at SOTP based target price of Rs 200 (10x core FY25E EV/EBITDA, 1.5x P/BV for investments).

ABB: Cues of moderate order inflow growth from parents results weighs on stock price

  • ABB global reported its Q2CY23 results wherein it reported order inflow growth of 2%YoY on a high base. From a geographical point of view, India reported 7% YoY in the same quarter.
  • Though ABB India reported higher inflows growth compared to overall growth reported by the parent. However, the same fell short of expectations from Indian market perspective given expensive valuations have been discounting more than the reported growth in inflows. Consequently, stock fell sharply.

L&T: To Consider buyback and special dividend in the upcoming quarterly result

  • L&T will be considering buyback and a special dividend in its upcoming board meeting to be held on 25th July 2023.
  • In 2019, L&T’s plan of a buyback was not approved by SEBI based on the grounds that consolidated debt to equity exceeded 2x at that point of time.
  • The current consolidated equity ratio is at 1.14x by FY23 end which implies that if L&T approves a buyback, the same will sail through. Currently L&T has cash & cash equivalents of Rs 58,100 crore as of FY23 end.

In the metals space - JSW Steel reported steady performance in Q1FY24

  • On Standalone basis, steel sales volumes came in at 4.93MT, up 22% YoY however down 13% QoQ. On the consolidated bases, volumes were 5.71MT, up 27% YoY however down 13% QoQ.
  • Blended ASP’s for the quarter stood at ~Rs 66,500, up Rs 1,100/tonne on QoQ basis.
  • Standalone operating income for Q1FY24 came in at ₹ 32,791 crore, up 5% YoY with consequent EBITDA/tonne at Rs 9,860 vs. Rs 11,000 in last quarter (Q4FY23). The company realised substantial savings in power & fuel costs however higher raw material and other overhead costs led to decline in EBITDA/tonne.
  • With steel prices bottoming out domestically and decent correction in coking coal prices, we expect steel companies to report better margins and EBITDA/tonne going forward.
  • Our last rating was HOLD on the company with target price of Rs 740. It is due for revision.

Hidden Gem

Shriram Finance (Target Price: Rs 2,250)

  • In November 2022, Shriram group entities - Shriram Transport Finance, Shriram City Union Finance & Shriram Capital merged to form Shriram Finance resulting in one of the largest NBFCs with AUM of Rs 1,85,683 crore.
  • Market dominance to benefit credit growth in used CV business. 78% of the entire AUM is CV heavy, so recovery in rural economy & construction activity are expected to drive CV AUM growth.
  • We expect double digit growth in AUM at 14-15% in FY24-25E, with non-auto portfolio growth seen at faster pace.
  • We expect credit cost to remain at ~2% in FY24-25E.
  • SHF is well placed to benefit from healthy CV cycle with 14-15% growth in AUM and RoA improving to ~3%.
  • We value PHF at ~1.7x FY25E standalone ABV and assign a ~2x multiple on FY25E ABV with a 20% holding discount. Thus we arrive at a target of price of Rs 2,250/share.

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