Market outlook of the week: Focus shifts back to inflation trajectory and Fed meet ahead

• Indian equity benchmarks scaled new peak post state election mandate outperforming global peers.
• Nifty gained 3.3% for the week led by strong rally in banking stocks. Midcap and small cap indices gained ~2% each.
• Globally, developed markets were flattish while commodities were largely under pressure led by 4% decline in crude prices.
• Nifty is expected to maintain its structural uptrend, and gradually head towards 21,400. After sharp rally of 1,300 points in seven sessions some breather near psychological mark of 21,000 cannot be ruled out due to overbought trend. Strong support placed at 20,600 levels.
• Sectors in focus: BFSI, Pharma, Power to relatively outperform. IT, Metal space continues to provide favourable risk-reward proposition
• Declining yields, supressed Brent crude oil prices and stable currency (INR/USD) along with strong institutional flows would act as tailwinds

Monetary policy – stance maintained to focus on gradual withdrawal of accommodation

• RBI maintained policy rates unchanged with repo rate at 6.5%.
• Stance on withdrawal of accommodation remain in focus to align inflation within targeted range (4% with a band of +/- 2%).
• GDP forecast have been revised upwards from 6.5% to 7% for FY24. While headwinds from global turmoil remain watchful, continued strengthening of manufacturing activity, buoyancy in construction, and gradual recovery in the rural sector are seen to boost household consumption.
• Inflation forecast is maintained steady at 5.4% for FY24. Correction in food prices and deflation has led to reduction in domestic inflation at 4.9% in October 2023. However, central bank remains watchful of uncertainty in food prices and volatile crude prices.
• Growth-inflation dynamics is improving with growth projections being higher and medium-term inflation projection at same levels.
• From a bond and equity market perspective, the year 2024 will mark the start of the rate cut cycle globally with rising rate cut expectations by U.S. Federal Reserve in March 2024 itself.
• Global bond yields have already started to moderate and Indian bond yields will also follow suits over the next few months particularly if bond index inclusion driven money flows starts materializing. 

Indian Bank Association inks agreement with 17% wage hike

• Indian Bank Association reached consensus with union for a 17% hike in wages (vs 15% last time); effective from 1 Nov 2022 for a period of 5 years.
• Estimated outgo for PSBs, led by wage hike, stands at Rs 12,449 crore.
• Most of the PSBs have been providing for the wage revision at 13-15%, however, higher agreed hike at 17% is seen to result in additional provision most likely in 2HFY24.
• Going ahead, marginal increase expected in opex of PSBs (on a normalized basis) owing to higher wage hike. Thus, no substantial impact seen on return ratios post implementation.

Brent Crude Oil prices have fallen to ~US$75 per barrel levels

• The continuous fall is attributable to multiple factors such as higher US oil production, higher US inventory levels, weakness in Chinese demand and doubts regarding sustainability of cuts in OPEC oil output.
• Lower crude oil prices is positive for OMCs, neutral to negative for Upstream companies, negative for Gas companies (competitor to them).
• On the GRMs front, Indian refiners have continued to command premium over Singapore GRMs, led by independent crude oil sourcing, better sourcing mix (higher inclusion of discounted crude) and better customer mix (growing supplies to premium EU markets).
• On the marketing margins front, we estimate that if crude averages US$75 per bbl this quarter like it did in Q1FY24, OMC are likely to make Rs 8-9 per litre on petrol and diesel. In Q2FY24, OMC made profit of around Rs 5 per litre on petrol and losses of around Rs 1.5 per litre on Diesel.
• Our preference on falling crude Oil prices remain (HPCL>BPCL>IOC) based on higher marketing capacity vs refining capacity.

Building material demand to ride on Real Estate momentum

• The robust real estate sales volumes have been a key driver of real estate stocks outperformance. Top 7 cities saw sales of 3.35 lakh unit in M9CY23 up 24% YoY, even on a high base of 54%-sales unit growth in CY22. Most importantly, the inventory levels remain at life low of 17 months vs. 21 months in CY22 end and 32 months in CY21 end, clearly reflecting demand is outstripping supply.
• Interestingly, the bulk of the sold flats in last 2-3 years will start hitting completion in CY24 onwards. This cycle of completion will largely drive building materials segment like Wood panel (Ply, Laminates and MDF) as well as Tiles. With further tailwind of margins improvement in Tiles (benign gas prices) and Wood panel (softening of wood prices post a relatively increase in CY23), both these segments will witness a strong earnings growth.
• For Kajaria, we expect ~11% CAGR in tiles volume with tiles revenues CAGR of ~13.2% over FY23-26 to Rs 5,739 crore. Overall Revenues CAGR of 13.8% is expected over FY23-26 at Rs 6,431 crore. With respite in Gas prices, we expect EBITDA margins to reach ~16.3%/17% in FY25/FY26, respectively from 13.5% in FY22. We expect ~27% earnings CAGR over FY23-26.
• For Century, we expect ~15% CAGR in revenues over FY23-25 driven by ~31%/15%/11% revenues CAGR in the MDF/Laminate/Plywood. The 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.
• We have a buy on both with target price of Rs 750 on Century Ply TP 750 and Rs 1,680 on Kajaria.

Adani group back in limelight

Barrage of Triggers such as Lowered uncertainty in National politics, Clean chit by various domestic institutions (SC, SEBI) has put Adani group back in focus.

Adani Ports

• Adani Ports is the largest commercial port operator in India with 25% share of port cargo movement.
• The management has guided for 370-390 MMT in FY24 and while it clocked 203 MMT in H1FY24, it has since then changed gears and has been clocking 36-37 MMT each month (up 25-42% YoY), while global EXIM environment remains subdued. The growth is evident in all cargo types (dry bulk, containers, liquid and Gas).
• Barrage of Triggers such as Lowered uncertainty in National politics, Clean chit by various domestic institutions (SC, SEBI) and countries such as US (as per media sources, for US$533 loan to Adani ports for developing Sri Lankan port), expected normalization of EXIM cargo in FY25, commercialization of ports such as Vizhinjam port, Phase 1 Colombo port in FY25, lowered Net debt to EBITDA at 2.5 times and inorganic opportunities (Concor, Gopalpur port acquisition) would aid Adani ports on both earnings and multiples front.
• The stock is available at PE multiple of ~17 (based on FY26 earnings of Rs 58.9 per share) and EV/EBITDA of ~13 (FY26). 

ACC & Ambuja

• Both the companies ACC & Ambuja are poised to do well operationally in the coming period, mainly led by healthy volume growth & cost saving measures.
• Ramping up of capacity additions, synergies with other group companies of Adani and strong focus on gaining market shares in their key markets would benefit both the companies in terms of healthy volume growth (12-13% CAGR as compared to industry growth expectation of ~8% CAGR).
• EBITDA/ton or margins are expected to improve further in 2HFY24E and FY25E with the cost-saving measures like increasing share of green power and logistical synergies and positive operating leverage.
• However, delta of margins improvement from Q4FY24 onwards is not expected to be as significant as it was in H1FY23, as the main impact of lower energy prices will continue till Q3FY24 only.
• During H1FY24, ACC witnessed an EBITDA/ton improvement of Rs 450/ton YoY to Rs 754/ton while Ambuja saw Rs 340/ton YoY improvement to Rs 1,031/ton as both the companies witnessed significant positive impact of lower energy cost and operating leverage on healthy volumes. During the period, ACC’s volume growth stands at 20.2% YoY while Ambuja’s volume growth is at 15.3% YoY.
• In the longer term, Adani targets to double its cement capacity to 140 million tonnes in five years through organic and inorganic route. We believe that Indian cement industry will continue to see consolidation in the coming period. Larger players like Adani, UltraTech and JSW will continue to look for capacity expansion through inorganic opportunities in stressed assets at a reasonable cost.
• Valuations at about 16x EV/EBITDA or $240/ton for Ambuja Cements looks expensive considering the current replacement cost of $130/ton. However, ACC’s valuation looks attractive at 10x EV/EBITDA or $100/ton looks attractive as we believe the valuation gap should narrow down given the efficiency enhancements in ACC led by synergy benefits

Hidden Gem

IndusInd Bank (CMP - Rs 1,508, Mcap - Rs 1,17,285 crore, Target - Rs 1,800, BUY) – Firing on all cylinders

• IndusInd Bank is a Hinduja group promoted newer age private sector bank with full product suite and focus on vehicle & micro finance business.
• Structural enhancement has been undertaken by the bank with continued investment in distribution capacity, digital stacking and customer accretion. Scaling branch network (target to reach 3,250 – 3,750 branches by FY26E), digital initiatives and focus on affluent customers is expected to aid liabilities franchise.
• Impact of recent hike in risk weight is seen to remain minimal. Cost of funds are expected to increase in near term, however, levers including repricing of assets, change in asset mix, gradual utilization of excess liquidity and increase in CD ratio is expected to keep margin steady at 4.2-4.3%.
• With continued focus on key segments – micro-finance & auto finance, the bank is scaling retail segments including housing and “Bharat Shop Super” adding growth with improved granularity. Expect advance growth at ~18.5% CAGR in FY23-26E.
• Asset quality has remained steady (~0.5-0.7%) with adequate provision buffer in the past. Expect slippages at 1.5-1.6%, annualised credit cost at 110-130 bps for FY24E amid healthy coverage and contingent provision.
• Continued traction in growth with focus on new age segments, granular liabilities franchise and lower credit cost is expected to keep RoA at 1.8- 1.9% in FY24-26E. Thus, we remain positive on the fundamental strength and thus assign BUY rating on the stock.