Market Outlook of the week: Healthy consolidation on the cards amid stock specific action

Short term view

Nifty took a breather last week near psychological mark of 20,000 amid earnings progression. Midcaps relatively outperformed (+1%).
In coming week, we expect Nifty to extend consolidation in 19,400-20,000 band amid stock specific action. Short term consolidation would be healthy and provide incremental buying opportunity.
Sector in focus: Nifty pharma index hit new life high

On relative terms, ratio of Nifty pharma/Nifty has given a breakout from three year declining channel, indicating relative outperformance.
Stocks likely to outperform: Sun Pharma, Divis Lab/ Dr Reddy, Syngene International, Ajantha Pharma, Alkem, Natco Pharma, Shilpa Medicare, Granules.

Medium term view

Structurally we maintain positive stance on Indian equities with Nifty target of 21k by end of CY23 with strong positional support around 18700. Intermediate corrections would provide incremental buying opportunity.
Midcap and Small cap indices are expected to outperform with potential upside of 13-15% over next six months.
Sectors which should relatively outperform towards 21,000: BFSI, IT, Infra, PSU, Consumption & Auto.

Pharma – strong numbers from major companies and strong commentary as well

Cipla, Dr.Reddys, Ajanta Pharma, Syngene among others posted strong numbers along with robust commentary

Cipla

Price compression in the US is lower than before (high single digit now). Rebalancing of supply chain is also leading to growth in the base business.
Good growth of 12% across branded prescription, trade generics and consumer health.
Robust growth of 43% in differentiated portfolio.
There would also be some increase in the R&D.
EBITDA margin guidance has been improved by 100 bps to 23% in FY24, as US and India will do better than earlier estimates.

Dr.Reddys

US price erosion is on the softer side and the management expects the same to continue for next few quarters.
India Business registers high single digit growth, EM (50% from Russia) grew 28%.
Gross Margins to range in 56-59% in next few quarters and EBITDA margins atleast 25%.
Cash position is at Rs 5,000 crore and would be deployed in series of smaller M&A in US and Europe, like recent Mayne acquisition.
The company has entered into trade generics division in India and also entered child nutrition space.

Cement Sector -volume growth remains strong

During Q1FY24, cement demand continued to remain robust with growth for most of the players increasing double digit YoY. Cumulative volume growth for the companies who have declared results so far (8 companies) have increased 18% YoY to 60.6 MT.
Industry leader UltraTech has led from the front with healthy volume growth of 20% YoY (as it continues to gain market share), followed by 19% YoY volume growth recorded by Shree Cement. A positive surprise was delivered by ACC with volume growth of 24% YoY as it operated at 100%+ utilisation levels.
Pricing scenario remained weak during the quarter as companies focused on higher volumes to gain market share (realizations on an average have declined 1-2% on a QoQ basis). Lower realizations have restricted profitability growth during the quarter as average EBITDA/T declined by Rs 30/t QoQ to Rs 765/t. UltraTech & Shree Cement held the Rs 1,000 EBITDA/t mark, whereas ACC recorded the highest jump of Rs 257/t QoQ to Rs 818 EBITDA/t in Q1FY24.
Fuel costs have declined significantly in the recent times with prices of pet coke now trending at US $ 115/t (down 42% YoY). The benefit of the same is expected to flow by H2FY23. We expect overall cost reduction of Rs 200-250/ton in FY24E.
The industry volume growth is expected to remain healthy in FY24 (FY23: 12%), with growth of 10-11% owing to boost in government spending on infra projects and upcoming general elections in 2024. We expect EBITDA/T to surpass Rs 1,000 levels in FY24E (FY23: Rs 830/t). Among large cap, we prefer UltraTech, Ambuja Cement while among midcaps we like JK Cement and Ramco Cement.

Mahindra Lifespace: Eying 5x growth

Residential sales volume, value stood at 0.42 msf and Rs 345 crore, respectively, down 4% QoQ, given the modest new launches of ~0.4 million sq feet during the quarter.
But more than the results, the key highlight was ambitious business growth by the new CEO. The new CEO Amit Sinha (erstwhile Mahindra Group strategy President) has outlined ambitious business growth of 5x over the next 5 years from 2,300 crore of residential and Industrial Cluster business sales to Rs 8,000-1,000 crore by FY28. Of the same, growth will be largely from residential segment wherein sales in FY23 stood at 1,812 crore. The Industrial cluster business is likely to be stable at ~ Rs 500 crore (Rs 456 crore in FY23).
We note that it has announced land bank addition with revenue potential of Rs 3,200 in FY23. Even it Q1FY24, it has added projects with sales potential of Rs 850 crore including two added society redevelopment projects. It currently has business development pipeline of ~Rs 6,000 crore. To achieve the abovementioned targeted run rate of sales, the company would need total new project addition of ~Rs 40,000 crore. The key focus area is likely to be MMR, Pune and Bengaluru.
Among current land bank, it has one historical land bank in Thane, where it is targeting mixed development with total potential of Rs 8,000 crore, likely to be launched from FY25 onwards in phases.

M&M: Checks into RBL Bank

M&M in a regulatory filing has informed exchanges about acquiring 3.53 % stake in RBL Bank as an investment for a total outlay of Rs 417 Crores.
It might also consider further investment subject to pricing, regulatory approvals and required procedures. However, in no circumstance will it exceed acquiring 9.9% stake in RBL bank.
This came as a negative surprise to the street and the stock was down 6%, given the company was tightly walking the talk on its capital allocation strategy.
In the past it has aggressively written down investments with no clear path to double digit RoE.
On the business side, they have been performing well both on the tractor as well as automotive space with aggressive growth trajectory envisaged for its key investee group companies.
Management’s strategic intent on the same is keenly awaited.

Tech M: Weak performance; management guides for recovery from H2FY24*

The revenue was down 4.2% QoQ in CC terms to $1,601 million as the key segment (Communication Media & Entertainment) remained weak. Key segment – Communication, Media, Entertainment (forming ~38% of the mix) declined by 9.3% QoQ, while BFSI declined 3.2% QoQ .
The EBIT margins at 6.8% was down 440 bps QoQ, given the negative operating leverage and 200 bps impact on provision for bankruptcy of a client and 50 bps on Comviva seasonality impact. The TCV stood at US$ 359 mn, down 40% QoQ.
Most US Telcos have pushed their capex spends to CY 24. The company sounded off on near term demand challenges due to reduction in discretionary spends including in key segments but reiterated long term tailwinds in its key segment as well as generative AI. The company expects overall recovery from H2FY24.
We believe key will be how new CEO (from December, 2023) pivots the business to more diversified from current Communication heavy construct.

US Debt Ceiling: Standoff should resolve sooner

Topline was up 5.6% YoY at Rs 1,064 crore. Tiles sales volumes were up ~7.2% YoY at 25 MSM. Tiles revenues were up 5.3% YoY at Rs 957 crore, with pricing decline of 1.7% YoY.
EBITDA was at Rs 169 crore, up 10.2% YoY, with resultant margins at 15.9%, up 67 bps YoY and 130 bps QoQ, on account of decline in gas prices and benefits of alternate fuel in the overall mix. PAT was at Rs 108 crore, up 17% YoY, given the superior margins.
The performance was healthy and benefits of lower gas prices is visible and likely to have more flow through effect, going ahead as volumes picks up.
We highlight that the management has guided for ~13-15% YoY volume growth in the tiles segment and ~14-16% revenues growth during FY24. Furthermore, from the earlier guided margin range of 14-16% for FY24, the management indicated that further margin expansion is likely as volume recovery picks up from September, 2023 onwards.

BFSI

Bajaj Finance - Continued healthy performance; competitive intensity watchful

Bajaj Finance’s reported AUM increased 32% YoY to Rs 2.7 lakh crore, led by healthy growth across segments. New customer addition came highest at 38.4 lakh taking total customer base at 7.3 crore, while average ticket size has grown in higher single digit on YoY basis.
Long term guidance intact at 25-27% growth in advances, GNPA at 1.2-1.4% and RoA at 4.6-4.8%. Anticipation of moderation in NII growth led by increase in cost of funds and increasing competitive intensity remains watchful.

Axis Bank - Mixed quarter with sequentially soft performance

Axis Bank has reported 27% YoY growth in NII driven by 22% YoY growth in advances and 50 bps improvement in margins at 4.1%. Sequentially NIM has declined by 12 bps (9 bps excluding impact of one-off income in Q4FY23) despite an increase in CD ratio by ~190 bps to ~91%. Management has indicated moderation in pace of deposit repricing which would be partially by maturing fixed loan portfolio.

Kotak Bank - leadership remains key watchful

Kotak Mahindra Bank reported healthy growth in NII at 32.7% YoY, led by steady growth in advance at 17.3% YoY and 65 bps YoY uptick in margins. Sequentially margins declined 18 bps to 5.57%, led by higher growth in deposits and repricing of liabilities.
Expect loan growth at 17-18% with RoA ahead of 2%. However, relatively lower level of leverage and uncertainty regarding change in leadership remains key watchful.

Hidden Gem

Ajanta Pharma (Target: Rs 1,950, upside: 26%)

Ajanta Pharma is a focused player in branded generics, which constitutes ~72% of overall sales, spread across geographies including India.
As of FY23, overall exports: domestic formulations ratio was at 67:33. Among exports, Asia accounts for ~41% of export formulations, Africa 26% and the US ~34%. The company also participates in anti-malarial tenders in Africa (included in Africa).

Key Investment thesis:

Increased capital allocation towards the branded generics segment (72% of the revenues): More numbers of product launches (including higher First to Market molecules) in various geographies, with differentiated delivery systems or combinations and doubling of international workforce (up 50%).
Reduced capital allocation to US business: Inspite of mere 22% revenue contribution, 2/3rd of working capital tied to the business (overall 141 days in FY23). To counter increased erosion in the market, Ajanta aims to selectively launch products in lower competitive business and limit US revenues to 15% of consol revenues.
Improving productivity of existing employees: In FY23, employee costs jumped 170 bps due to expansion in international workforce. The management intends to improve productivity of entire 4,500+ field team, by enabling them more digital tools and helping them to get most out of the growing product portfolio.
EBITDA margins expected to rebound 400 bps in FY24: Margins are likely to improve amid operational leverage, expected softening of raw material cost and incremental focus on branded business. Calculated focus, healthy margins, return profile and lighter balance sheet are some key differentiators for Ajanta.
Revenues/EBITDA/PAT expected to grow at 11%/23%/25% FY23-25 CAGR. Return ratios are expected to reach 25% levels (ROIC even higher).

Value: