Market outlook of the week: Earnings to weigh on sentiments

• Nifty extended its consolidation and closed marginally green during last week and remained stock specific at the start of earning season.
• Short covering among key heavyweights have compensated the loss of weakness in Technology space.
• Also, markets were able to absorb the continued selling pressure from FPIs and ongoing geo political tensions.
• Going ahead we expect Nifty to respect 19,500 levels and witness gradual recovery once again towards 19,800/20,000 levels.
• Meanwhile stock specific action to remain in focus amid progression of Q2FY24 earnings.

Seasonal correction approaching maturity, time to raise exposure!

• Nifty’s seasonality pattern over past two decades has a unique take away.
• Buying in seasonally weak September has been rewarding for investors with at least 3 months time horizon.
• Out of past 18 years on 14 occasions (78% probability), despite average 4% correction around September, Nifty gained average 9% by December end.
• Thus, projecting target of 21,000 by December 2023 as it is price parity of Jun-Dec 2022 rally (15,183-18,887) projected from Mar-23 low of 16,828.
• The seasonality pattern gels well with our price structure model and classical chart pattern projection of 20,700-21,000 in CY23. Meanwhile, strong support is placed at 18,700.

Inflation

• CPI inflation for the month of September came lower at 5.02% as compared to 6.83% in August and as against market expectation of around 6.2%-6.5%.
• The volatile vegetable (tomatoes) prices which was driving inflation higher in last two months has seen a sharp decline on expected lines leading to lower food and consequently lower headline inflation.
• Importantly, core inflation came in further lower at 4.5% vs 4.8% with secular decline in almost all items led by clothing and footwear and Health.
• Overall, RBI inflation projection of 5.4% for FY24 is likely to be achieved and therefore we are in a stable rate environment with Repo rate at 6.5% at least for FY24.

MF Flows: scaling new peaks

• SIP inflows continue to rise. At Rs 16,420 Vs Rs 15,814 crore in August 2023.
• Inflows (Ex-NFOs) came marginally lower at Rs 11,600 as compared to Rs 15,200 crore in August. Total inflow including NFOs in September was Rs 14,100 Vs Rs Rs 20,200 crore in August.
• While flows moderated, midcap and smallcap category continue to witness higher flows. Smallcap: Rs 2,700 crore vs Rs 4,300 crore, Midcap: Rs 2,000 crore vs Rs 2,500 crore. Although reduced, Outflow from Largecap funds continue.
• Healthy larger trend: Higher SIP inflows at higher market level and higher lumpsum inflows at market correction.

IT result – slow and gradual recovery ahead

• The revenue remained muted in otherwise historically strong Q2 amid challenges such as cut on discretionary spends in key verticals. TCS had flattish constant currency revenues in Q2. Infosys reported 2.3% QoQ growth on CC basis with 50 bps of one-off revenue benefits while HCL Tech reported muted revenues up 1% QoQ on CC basis.
• In terms of margins, all companies saw margins expansion led by improved utilisations, productivity benefits and cost cuts. TCS EBIT margins at 24.3%, was up ~110 bps QoQ. HCL Tech EBIT margins at 18.5%, was up 150 bps QoQ. Infosys margins at 21.2% was up 40 bps QoQ.
• Order booking trend was strong. For TCS positive takeaway was TCV of deal wins of US$11.2 bn grew 38% YoY and 10% QoQ, powered by two mega deals of JLR and BSNL. HCL Tech order booking at 3.969 bn, was up 1.5x QoQ driven by mega deal of Verizon for US$ 2.1 bn. Infosys deal TCV was at USD 7.7bn (highest ever, 3x times average quarterly TCV run-rate) aided by four mega deals.
• Outlook: The managements across these three companies, overall, maintained that 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, Deal wins and healthy levels of pipeline provide comfort on improved revenue growth in FY2025E. Moreover, most of the players remain confident on long term tailwinds of generative AI both in terms of opportunity and efficiency in long term, going ahead.

Company wise

TCS: Muted revenue growth with margins improvement; Strong Order Booking led by Mega deals; Near term outlook challenging

• TCS, on expected lines, reported muted performance with revenues at US$ 7US$ 7.21 bn, up 4.8% YoY & down 0.2% QoQ on reported basis and flattish QoQ (up 2.8% YoY) on CC basis. Muted sequential revenue performance was broad-based across all major geography. Manufacturing and energy were the only verticals that grew above 1.5% QoQ. Geography wise, North America and Continental Europe continued to lag at 0.1% and 1.3% yoy growth, respectively.
• EBIT margin improvement of 110 bps QoQ to 24.3% was aided by— (1) 100 bps benefit from productivity, utilization improvements and sub-contractor cost rationalization and (2) 35 bps tailwind from efficiency in discretionary expenditure, offset by (3) increased infrastructure expenses.
• The key positive takeaway was TCV of deal wins of US$11.2 bn grew 38% YoY and 10% QoQ, powered by two mega deals like (1) ~US$1 bn TCV, 12-18 months deal with BSNL and (2) GBP800 mn (US$ 1bn) deal with JLR over five years.
• The management, overall, maintained that near term demand challenges remain (deferments of discretionary spends, clients focusing on RoI led spends only) and refrained from giving recovery timelines, implying a slow and gradual recovery ahead. Double Digit growth recovery is likely only in FY25 with execution on mega deals.

HCL tech: Muted Execution Quarter but Strong order booking; Revenues Guidance cut

• HCL Tech reported muted set of numbers with revenues at US$ US$ 3.225 billion, up 1% QoQ (up 3.4% YoY) on CC basis. The organic growth stood at 0.5% QoQ. The ER&D business was up 5% QoQ, while IT and Business services were up 0.9% QoQ. HCLSoftware’s revenue declined 4.0% QoQ. In terms of Geography, Americas saw growth of 1.4% QoQ, while Europe was up 0.8% QoQ. Retail and Telecom led the segmental growth at 7.5% and 6.2% respectively, and manufacturing and tech declined 1.5% and 0.4%, respectively.
• The order booking at 3.969 bn, was up 1.5x QoQ driven by mega deal of Verizon for US$ 2.1 bn.  The company’s deal pipeline remains at healthy levels (marginally lower from the peak), even after strong conversion during the quarter.
• HCLT reduced services organic revenue guidance from 6.5-8.5% to 4.5-5.5% YoY CC because of lower-than-expected growth in Q2FY24 and softness in discretionary spends. Its organic growth is likely to be 4-5% YoY CC vs earlier 6- 8% YoY CC. Including ASAP acquisition, the company expects 5-6% YoY CC growth. Revenue guide math implies 1.9-3.2% CQGR over 2HFY24 for the services segment and 2.7-4.0% CQGR overall. Deal wins and healthy levels of pipeline provide comfort on improved revenue growth in FY2025E. However, an uptick in discretionary spends is key ahead.
• EBIT margins expansion of 150 bps QoQ to 18.5% was primarily due to 210 bps expansion in services margin to 18.3%, aided by aggressive cost cuts. Margin expansion was driven by (1) productivity and utilization improvements (100 bps), (2) rationalization of outsourcing costs (70 bps), (3) lower discretionary expenses (50 bps), (4) overhead reduction (70 bps)

Infosys: Performance on expected lines; Guidance cut on challenging outlook

• Infosys reported 2.3% QoQ (2.5% YoY) growth on CC basis at US 4.718 bn. 50 bps benefit on revenue growth was on account of one-off increase. In terms of verticals in CC term, BFSI (27.5% mix) was flat QoQ, while segment such as Retail (15.2% mix) and manufacturing (14.2% mix) outperformed with 6.9% and 3.4% growth. In terms of geographies, North America (61% of mix) grew 2.7% in CC on QoQ basis while Europe grew 1% QoQ.
• EBIT margins expansion of 40 bps QoQ to 21.2% aided by 50 bps tailwind from cost-optimization benefit, 30 bps tailwind from revenue one-timers, 10 bps from rupee depreciation, partially offset by 50 bps third-party costs, salary increases and other items.
• The deal TCV was at USD 7.7bn (highest ever, 3x times average quarterly TCV run-rate) aided by four mega deals. Net new component was healthy at 48%. TCV comprised 21 large deals spread across verticals – 6 in retail, 5 in manufacturing, 3 in BFSI, 2 in life sciences and 1 in energy & utility and geos – 12 in North America, 8 in Europe and 1 in RoW.
• The new revenue guidance band stands at 1-2.5%, down from 1-3.5%. The guidance implies revenue decline of 1.9% to flat revenues over the next two quarters. The guidance cut is led by (1) lower pass-through revenues in the next two quarters and (2) only partial ramp-up of large deals in 4QFY24. Margin guidance remains unchanged at 20-22%.

Maruti Suzuki: Envisages mega capex plan of Rs 1.25 lakh crore over FY23-31

• The company has outlined its total capex spends over FY23-31 at ~Rs 1.25 lakh crore which includes an already announced capex of ~Rs 45,000 crore for capacity addition (2 million units), plus additional sum on new model development including EV’s plus routine maintenance capex to be incurred over this 8-year period (@ Rs 7,500 crore per annum).
• Maruti over next 7 years plans to augment its capacity to 4 million units vs. 2.25 currently.
• It is looking at augmenting its product portfolio by adding ~10 modes (to 27 models in total) with 6 being electric and tripling exports from 2.5 lakh units in FY23 to 7.5 lakh units by FY31.   
• It also expects that 15-20% of cars sold by it in 2030-31 would be EVs while another 25% could be hybrids and the rest would use ethanol, CNG and possibly CBG.
• This is structurally positive thereby depicting company’s long-term commitment to Indian markets as well as develop India as its major sourcing hub for exports.

HDFC AMC Q2FY24 performance (CMP - Rs 2,885, Mcap - Rs 61,602 crore)

• HDFC AMC reported healthy performance with ~4.7% QoQ growth in AUM to Rs 5.23 lakh crores. Market share continued to remain steady at 11.2%.
• Healthy scheme performance & continued SIP flow led to strong growth of 12.1% QoQ in equity AUM, better than industry growth of 9.3%, resulting in a ~30 bps gain in market share to 12.5%.
• Operational revenue increased 12% QoQ and 18% YoY to Rs 643 crores; yields recovered ~3 bps QoQ to 49 bps a closing AUM basis.
• Despite, increase of 9% QoQ in opex (led by employee and op. expense) at Rs 176 crores, earnings grew 20% YoY to Rs 437 crores; PAT to AUM ratio remained steady at ~33 bps.
• Management stated continued focus on garnering AUM through product launches, improved scheme performance and strengthening of distribution network.
• Expect equity AUM proportion to remain elevated at current level of ~60%. Healthy accretion in AUM is expected to offset impact of gradual decline in yields.

Hidden Gem

Birla Corporation (CMP: Rs 1,281, TP: Rs 1,540)

• Birla Corp is expected to witness strong recovery in its margins and profitability during FY24-25E primarily led by healthy sales volume growth and operational efficiency measures.
• The company’s cement capacity has been increased to 20 million tonnes after commissioning of 3.9 mt capacity in Maharashtra in beginning of FY23. Ramp-up of this new capacity and expanding reach into untapped markets of west region (Maharashtra & Gujarat) along with the existing markets (North, Central and East), cement volume is expected to see a considerable growth (~8% CAGR is estimated over FY23-25E).
• EBITDA/ton is expected to improve significantly from Rs 491/tonne in FY23 to Rs 832/tonne in FY24E and Rs 959/tonne in FY25E. This will be primarily led by energy cost savings through focus on increasing usage of its captive coal and captive renewable power for its operations. Moreover, positive operating leverage benefits would also kick-in with improvement in sales volumes.
• Revenue expected to grow at ~10% CAGR over FY23-25E (as against ~8% CAGR over FY20-23). However, EBITDA and PAT are estimated to grow at ~51% CAGR and 341% CAGR respectively over FY23-25E (as against respective decline of ~17% CAGR and ~57% CAGR over FY20-23).
• Valuation at 7.4x EV/EBITDA on FY25E basis looks attractive considering the multiple tailwinds. We value Birla Corp at Rs 1,540 i.e. 8.5x FY25E EV/EBITDA