Market Outlook of the week: Focus back to earnings as global volatility subsides

• Global equities rallied from oversold zone post Fed event as yields cool off. Nifty gained 1% while Midcap and small cap indices >2.3% each.
• US benchmarks gained >4% each while Brent retreated over 5% during the week.
• We expect Nifty to gradually head towards short term milestone of 19,600 with elevated support at 19,000.
• Broad perspective: Nifty has corrected 6.5% over past seven weeks while factoring in multiple headwinds in the form of higher interest rates, geopolitical events while holding its up trending 200-day ema in the process (18,700) We maintain structural bullish stance with end of CY23 target of 20,700 and support of 18,700.
• Expect banking to lead recovery as index rebounded from its 52-week EMA. In each of three occasions post COVID lows, Bank Nifty rallied back to highs after testing 52-week EMA.
• Key catalysts: Further cool off in global and domestic yields and reversal in dollar index (<105.50) and Brent (< 84) would be key catalyst for acceleration of up move.
• Sectors in focus: BFSI, Auto, Infra, PSU to outperform.
• Breadth: Advance/Decline ratio has reverted above 1.1 during current week after recording bearish extreme of 0.27 last week indicating broad based recovery.

US Federal Reserve skipped rate hike for 2nd consecutive occasion

• US Federal Reserve hit a pause button once again in November meeting leaving benchmark rates between 5.25% and 5.5%.
• The Fed’s decided to put a break on rate hike campaign as policymakers struggled to determine whether financial conditions are tight enough to control inflation.
• US Fed Chair stated that financial conditions have tightened significantly in recent months, driven by higher longer-term bond yields, among other factors.
• We expect Dollar Index to face the hurdle near 107.50 levels and slip back which should be positive for risk assets like equities. With decline in Dollar index, we can assume resumption of inflows in equities once again where they have been largely net sellers since mid-July.

Festivity galore, OEM’s reports healthy wholesale volume prints in October 2023

• All the categories expect Tractors witnessed a double-digit growth on YoY basis.
• Growth in the 2-W space was led by market leader i.e., Hero MotoCorp with company reporting its highest monthly volume print over the past 2 years at 5.75 lakh units (up 27% YoY). Domestic volumes were healthy at the 2-W OEM’s with exports yet to post meaningful recovery. On the Royal Enfield front, on a high base, volume grew 3% YoY at 84,435 units (highest ever in its history).
• In the PV space, the growth was led by M&M with its monthly volume prints at 43,708 units (up 35% YoY). Growth at Maruti Suzuki was also healthy at 19% YoY at 1.95 lakh units with UV prints largely flat on MoM basis. Maruti has guided for healthy 18% volume growth for the industry as well as itself for the current ongoing festive season.
• In the CV space, the performance was mixed with Ashok Leyland reporting 14% volume growth on YoY basis at ~17,000 units while the same stood muted at industry leader i.e., Tata Motors at 4% YoY at ~34,000 units. Key out-performer in this space was VECV arm at Eicher Motors with volumes up 24% YoY at ~7,500 units.
• In the tractor space on account of shift of Diwali from October last year to November this year, volumes declined for both the OEM’s. Tractor volumes at industry leader M&M were down 3% YoY at ~50,500 units.
• On the qualitative aspect, most of the OEM’s guided for growth in Rural India coming in ahead of Urban India. 

We continue to see reasonable opportunities across the market spectrum with key filter being quality. We continue to advise investors to utilise equities as a key asset class for long term wealth generation by investing in quality companies with strong earnings growth and visibility, stable cash flows, RoE and RoCE.

L&T : CMP - Rs 2,920; Target - Rs 3,560

• Larsen & Toubro (L&T) is India’s largest engineering & construction (E&C) company, with interest in EPC projects, hi-tech manufacturing, and services. The company primarily operates in infrastructure, heavy engineering, defence engineering, power, hydrocarbon, services business segments. As of H1FY24, Infrastructure segment contributes ~47% to consolidated revenue followed by services at 32%.
• The company with diversified presence across business verticals and geographies commands a mammoth order-backlog of Rs 4,50,000 crore, up 22% YoY as of Q2FY24. This provides strong revenue visibility over next 2-3 years. Coupled with this a strong project pipeline of Rs 8.8 trillion will ensure 15% order inflow growth in FY24. Strong scale up in services business like IT and Finance also provides cushion to cash flows and cyclical risk of engineering business.
• We remain upbeat on the prospects of the company and believe L&T is the best proxy play on India capex story and preferred large cap capital goods pick. L&T is expected to deliver 18.6% and 26.5% revenue and PAT CAGR over FY23-FY25E, respectively.
• We believe selective profitable growth, monetisation of non-core assets, strict balance sheet discipline will help L&T to achieve 18% ROE by 2026.
• We value the company on SoTP basis and arrive at a fair value of Rs 3,560.

State Bank of India : CMP - Rs 577; Target - Rs 725

• SBI is a public sector bank and also the largest bank in India with a balance sheet size of over ~Rs 55 lakh crore. Strong distribution network, diversified product mix and large customer base remains core strength of the bank which enables to deliver best operating metrics in the PSU banking space.
• Large customer base, diversified product mix and strong pipeline of corporate sanctions is seen to aid credit growth expected to be in-line with industry at 14-15% in FY24E. Advance growth is seen to remain broad based with focus on MSME and retail (home loans & Xpress credit) segment which will enable business growth as well as support yields.
• Yields expected to inch up gradually, however, faster accretion in term deposit and repricing of deposit rates is expected to impart some pressure on margins in FY24E.
• Asset quality remained resilient with GNPA/ NNPA at 2.76%/ 0.71% while restructured book stood at ~70 bps of advances.
• Healthy PCR stands at 76.4% for advances and ~30% coverage on restructured book provides comfort on continued benign credit cost expected at ~30-50 bps ahead. Elevated provision buffer is seen to limit impact of implementation of ECL norms, thus keeping RoA healthy ahead.
• SBI has demonstrated its strength in previous quarters both on core operating performance and asset quality. Management confidence on growth (14-15%), steady margins and return ratios remaining at ~1% in FY24-25E warrants a re-rating and should see strong positive momentum.
• Plough-back of profits leading to improving RoE of ~16-17% to add to valuation. Thus, valuing standalone bank at ~1.2x FY25E ABV and subsidiaries at Rs 165, we assign a target price of Rs 725.

Spandana Spoorthy Financial : CMP - Rs 903; Target Price - Rs 1,100

• Spandana Spoorthy is a micro finance player primarily engaged in lending to women borrowers. Post Covid, business performance has remained weak, however, post appointment of new management, continued recovery is witnessed in growth as well as operational performance in last 6 quarters.
• Redefining of business model with focus on customers, employees and collection has led to improvement in business metrics.
• Continued expansion through branch addition (at 1,502 as of Sep’23), addition of loan officers (at 8,504 as of Sep’23) has led to strong accretion of customer (at ~27 lakhs).
• Management remained confident of 35-40% growth in AUM, with continued focus on customer addition and steady average ticket size.
• Diversifying liabilities mix, improvement in credit rating is seen to offset pressure of rising interest rates, thus keeping margins steady in FY24-25E.
• Recovery has been witnessed in asset quality with GNPA at ~1.4% as of Sep 2023. Focus on quality customer accretion (wherein customer has less than 2 lenders), stage 3 coverage of ~70.3%, provides confidence on credit cost remaining steady at ~2% ahead.
• Sustained recovery witnessed in last 6 consecutive quarters translating in improvement in RoA. Continued strong business growth (35-40%), steady margins and moderate credit cost (~2%) is seen to keep RoA healthy above 4.5% (calculated), thereby driving valuation ahead.
• Thus, with anticipated continued recovery in overall business metrics, we value the stock at ~1.8x FY25E ABV, assigning target at Rs 1,100 per share. 

Bharat Dynamics: CMP - Rs 970; Target Price - Rs 1,260

• Bharat Dynamics is one of the leading Indian defence PSU and is primarily engaged in manufacturing of missiles, underwater weapons or torpedoes & countermeasure systems.
• With the govt’s strong focus on indigenization of defence platforms, BDL has been the govt’s key production partner for manufacturing different types of missiles or torpedoes.
• The company is already having partnerships with DRDO and many global players for development of new-age missiles and enhancing its global market position & competitiveness.
• Order backlog stands healthy at ~Rs 23,500 crore (11.3x TTM revenues) and provides strong growth visibility over the next 2-3 years. Orders pipeline also remains very strong for the company’s products over the next 3-5 years. As per the estimates, there is a pipeline of ~Rs 50,000 crore in the longer term which includes different missile variants like surface to air, air to air, anti-tank, anti-ship, underwater weapons etc.
• Execution is expected to pick-up substantially in 2HFY24 after facing some supply chain delays in the last couple of quarters.
• Over FY23-25E, we estimate revenue to grow at 33% CAGR and PAT at 53% CAGR led by execution pick-up and margins improvement.
• Valuation at 22x P/E on FY25E looks attractive considering the sectoral tailwinds and strong growth in coming years. Our target price is Rs 1,260 on BDL which is about 26% upside from current levels. 

Century Ply : CMP - Rs 619; Target Price - Rs 750

• Century has led the industry on most metrics and remains a superior player in the segment. With strong housing demand in last 2 years and likely completion of those sold inventory, woodpanel industry is likely to witness a robust demand spurt ahead. 
• Century’s Plywood segment (forming ~56% of FY23 sales), will be driven by healthy traction in mass segment. MDF (~18% of FY23 sales) revenues is likely to be boosted by offtake from new capacities. Similarly, Century’s launch of mass brand “Sainik” in laminate segment (18%) will also drive superior growth in the same.
• We highlight that while muted volume and rise in timber prices have impacted H1FY24, festive demand coupled with underlying new housing led demand will boost growth and profitability.
• We expect ~15% CAGR in revenues over FY23-25 driven by ~31%/15%/11% revenues CAGR in the MDF/Laminate/Plywood.
• Margins, after some softness in FY24, are likely to revert back to normalised levels of 16.2% in FY24. This, will result in ~19.2% earning CAGR for the company over FY23-25.
• The company is also well poised on balance sheet with net debt free status and capex largely to be funded through internal accruals. We have valued the company at 32x FY25 P/E to assign a target price of Rs 750

TV Today Network: CMP - Rs 195; Target Price - Rs 260

• TV Today Network (TV Today) is a leading news company engaged in broadcasting operations. TV Today remain a key proxy for election led ad spending and with further catalysts such as ad recovery kicking in as festivities begin and margins improvement level.
• As we embark on festival season, key election in Hindi speaking states like MP, Rajasthan in Q3FY24 followed by General election led spendings in Q4FY24/Q1FY25, we expect sharp recovery in ad revenue growth from H2FY24, onwards.
• We highlight that last general election quarter in 2019 had seen high growth of ~31% in election quarter. We have baked in ~9% revenue CAGR over FY23-25 to Rs 1,040 crore, with ~15% growth likely for next 3-4 quarters after flattish H1FY24.
• On the margins front, the company is planning to consolidate the separate Digital entities such as Tak channels, Lallantop and others (currently being separately run) which will bring down the overall cost. Considering the same we expect margins to inch up to 18% in FY25 vs. 15.5% in FY23.
• We have valued the company at 12x FY25 P/E to assign a target of Rs 260/share.

Coromandel International: CMP - Rs 195 Target Price - Rs 260

• Coromandel International, part of Murugappa group, is a major provider of agricultural solutions and leading private sector player in Indian phosphatic industry with consumption-based market share of 17.2% in NPK & DAP segment. In single super phosphate (SSP), it holds top position with a consumption-based market share of 13.8%.
• Coromandel plans to invest Rs 1,000 crore over the next two years in the above businesses and leverage the macro tailwinds in the chemicals sector to build a business of scale. CDMO business is likely to start generating revenue in 18-24 months once it wins an order.
• In FY23, Coromandel International has developed a new tech product Nano DAP, for which it is setting up a plant in Andhra Pradesh and is expected to introduce in H2FY24. The product has a potential to replace 50% of the traditional DAP in the next five to seven years.
• Coromandel has been strengthening its upstream integration capabilities. Via its strategic tie up with leading integrated players like Tifert (Tunisia) and Foskor (South Africa) for meeting its Phosphoric acid requirements. Further, the company is setting up a new 1,650 MT per day design capacity sulphuric acid plant at its fertiliser complex in Visakhapatnam at a cost of Rs 400 Crore.
• The company foray into drone business represents significant opportunity as it plays a dominant role in precision agriculture. Moreover, the global agriculture drone market is estimated to be US$ 0.6B in CY22 and projected to reach US$ 2.5B by CY27, growing at a CAGR of 32%. We believe Coromandel is well positioned to capture the agricultural drone market. We value the company at at Rs 1,330 based on ~16x FY25E P/E multiple.