Market outlook of the week: Expectation of reversal in dollar could lift markets

• Nifty small cap index hit new life time highs (up 2%) last week and surpassed its CY22 high, outperforming Nifty which remained unchanged at 19,300.
• On Global front, most developed markets inched up by ~0.5% ahead of US Fed meet.
• In coming week, we expect Nifty to pose a technical bounce from current oversold readings towards 19,600 with key support placed at 18,900 while stock specific action to continue.
• Volatility is expected to subside as anxiety around US Fed event to settle.
• Sectors like BFSI, PSU, discretionary to relatively outperform while IT provides favourable risk-reward.
• Dollar Index in focus as it has gained for sixth week and approached higher band (105) of declining channel which is in place since January 2023. We expect upsides to be capped at 105 and reversal in coming weeks.
• Nifty Small cap Index: Index hit new life highs, by retracing 15-month corrective phase in just five months indicating structural improvement and breakout from large consolidation. While in the short-term index may undergo breather after sharp rally, small cap space is expected to relatively outperform over next couple of quarters.

Chandrayaan-3 brings spotlight again on defence stocks

• There are many companies that have contributed to this mission which includes defence PSUs like Hindustan Aeronautics, Bharat Electronics and Midhani. Some private players like L&T, MTAR, Jindal Stainless supplied a special, high strength alloy steel grade that has been used in the motor casing.
• HAL has played a crucial role in Chandrayaan-3 mission as its consortium with L&T has worked on integration of cryogenic engines CE-20, which are used in third stage of GSLV Mk-III or LVM3 (Launch Vehicle Mark-3) used in this mission. They have also contributed towards development of lander and mechanical support equipment’s to ISRO.
• Apart from further opportunities from space industry in future, HAL is already strongly positioned in defence considering the execution of existing healthy order backlog and future pipeline in military aircrafts. Recent news regarding IAF’s plan of procuring 90-100 additional Tejas MK1A aircrafts is also big as it translates into order of over Rs 60,000 crore.     
• We may also expect some developments from upcoming visit of Brazil’s defence officials in India as both the countries would look for further opportunities in joint development and manufacturing of aircrafts like medium transport aircrafts and small commercial jets in India. We believe that HAL will be the key beneficiary.  

Jio Financial Services – would the stock stablise?

• Jio Financial Services got listed on 21 August 2023, post demerger, at a price of Rs 262 (market cap of ~Rs 1.68 lakh crore). Since listing the price has fallen ~18.5% in last 4 trading sessions.
• Exit of ETF & index based funds and obscurity on business model could be reasons attributable to decline in market cap from Rs 1.68 lakh crore to Rs 1.37 lakh crore.
• 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 1.4 lakh crore constituting ~ Rs 1 lakh crore worth of shares of RIL and ~ Rs 31,600 crore as core networth.
• Broadly valuing investment in parent at 30% discount and core networth at 2x, Jio Financial Services could fetch valuation of ~Rs 1.3 lakh crore, implying per share value of Rs 210.

Expectation of normal profit puts price cut worries on the backburner for refiners

• Oil marketing companies or OMCs reported supernormal profits in Q1 at Rs 62,800 crore due to blended retail margins of Rs 8.5 per litre and GRMs (premium to Singapore) at US$7-12 per barrel. However, at current Singapore GRMs and crude oil prices, profits are expected to normalise for the OMCs.
• Gross refining margins (GRM) witnessed sharp upswing to US$13 per barrel last week as compared to Q2 average of US$8.4 and Q1 average of US$4. The sharp rise coincided with rise in crude oil prices to US$82-84 levels.
• As marketing margins are near EBITDA breakeven levels and GRMs in the US$15-18 range. Further, at these prices, risks of retail price cuts of Petrol and Diesel have declined.
• Overall, OMCs are aggressively investing (Rs 50,000 crore annually), which is expected to pick up till FY27, where OMCs would start seeing utilisation from newer assets such as pipelines, CGDs, Petchem, upstream (Brazil) etc.

Reliance Retail: Further stake dilution on the cards

• Reliance Retail is in limelight as Qatar Investment Authority's (QIA) invested fresh capital of Rs 8,278 crore in Reliance Retail Ventures (RRVL) for ~1% stake. This transaction values RRVL currently at Rs 8.2 lakh crore.
• RRVL in the past (FY21) had completed largest fund-raising exercise by raising ~Rs 47,265 crore from various global marquee private equity funds (Silver Lake, KKR, Mubadala etc.) at valuation of Rs 4.2 lakh crore. Since then, valuations have risen ~2x. If the company now intends to further divest ~8-10% stake, RRVL could raise anywhere between Rs 65,000- Rs 80,000 crore.
• Company’s capex trajectory (including acquisitions) has increased multifold from ~ Rs 8,000 crore in FY20 to Rs 27,000 crore in FY22 and ~ Rs 40,000+ crore in FY23. The fresh capital would be utilised to further accelerate capex plan and position it as a frontrunner for capturing a larger pie of the Indian retail sector opportunity.
• Indication regarding timeline for Reliance Retail IPO could be the key announcements to be watched out for in the AGM which is scheduled on 28th August. We peg Reliance Retail’s valuation at~ Rs 9.5 lakh crore (36x FY25 EV/EBITDA) which post IPO listing would be the largest retailer in terms of market cap.  

Titan: A greater share of glitter through increased stake in CaratLane

• Titan Company has acquired another 27.18% stake in its subsidiary CaratLane following which its stake will increase to 98.28% from current 71.09%. The cash consideration for the stake is Rs 4,621 crore which values the subsidiary now at Rs 17,000 crore (~5.6x FY25E Mcap/sales).
• CaratLane has been the new growth engine for Titan wherein its sales have grown more than 12x in FY17-23 to Rs 2,100+ crore (robust CAGR of: 52%). On the profitability front too CaratLane has witnessed significant turnaround with the segment reporting 8% EBIT margin in FY23 vs. -8% in FY19.
• Titan in 2016 had acquired 62% stake in CaratLane for a consideration of Rs 357 crore (valuing the company at Rs 575 crore). With staggering growth in CaratLane’s operational performance, valuations too have increased multifold (nearly 30x in last six years). CaratLane is currently in an exponential growth phase (35%+) and is expected to grow faster than Tanishq’s jewellery portfolio (company expects CaratLane share in overall jewellery revenue to increase from 6% to 10% by FY27E).
• Titan continues to have healthy b/s with cash & investments worth Rs 3,000+ crore (some part of the deal will be funded through debt). 

Hidden Gem

CanFin Homes(CMP - Rs 740, Mcap - Rs 9,860 crore, Target price - Rs 935)

• Canfin Homes, a subsidiary of Canara Bank, is one of the prominent housing financier (HFC) with ~90% of loans to individual borrowers. Further, Canfin Homes has been best in class HFC with a robust business model & underwriting practice, which resulted in healthy earnings growth with GNPA <1% across cycles.
• The stock declined ~ 15 per cent post announcement fraud detected in a branch to the tune of Rs 38.5 crores thereby marking the stock attractive.
• Geographic expansion and increase in ticket size to drive healthy credit growth estimated at 17-18% CAGR in FY23-25E. Strategy to revamp process & implement technology, while preserving existing advantages, to result in faster turnaround with improvement in efficiency.
• Diversified source of funds, strong credit rating and repricing of liabilities largely undertaken, cost of funds expected to remain steady. Expect margins at ~3.3-3.4% and spreads at 2.4-2.5% in FY24-25E. Strong under writing enable to manage GNPA below <1% during various cycles. Restructured book at 2.2% of advances with adequate provision buffer.
• Healthy credit growth at 17-18% CAGR coupled with RoA at 2% bodes well. At the CMP, CFHL trades at ~1.9x FY25E ABV, which seems a good opportunity given its fundamental strength and historical valuation. Hence, we assign a BUY rating with a target price of Rs 935/share.