Market outlook of the week: Inflation expectations and RBI policy outcome to drive sentiments

• Most global indices went into risk off mode amid concerns over higher yields after US downgrade. Developed market indices declined 1.5-2% while Nifty declined 1% for the week.
• Key highlight was relative outperformance of broader markets as Nifty midcap and small cap indices gained 0.5%.
• Nifty is expected to extend healthy consolidation in the band of 19,200-19,900 amid stock specific action. Buying dips template to be followed.
• Midcap: Broader market indices are overbought and expected to undergo healthy consolidation at index level. Follow buy on dips approach here.
• Sectors in focus: Pharma and Power sectors exhibited resilience last week amid volatility. We expect these sectors to relatively outperform.

FIIs in profit taking mode

• FIIs have been major propellers of the recent market move and have deployed > 1.6 lac cr - the highest among emerging markets since March.
• However, post July expiry we have seen some tapering off the flows, and they have turned net sellers.
• Downgrade of US also has induced profit taking in the global markets. As a result, FIIs have turned marginal net sellers and have sold ~ 4,000 cr last week.
• FIIs longs in Index futures were nearly 1.04 lac contracts on 20^th July (Nifty made life highs) and since then they have been continuously liquidating their positions and have formed marginal shorts as well.
• In the absence of these flows, we can expect some further consolidation in the headline indices.

Fitch Rating downgraded its US debt rating to AA+ from AAA

• The U.S. 10 year bond yield has risen by 20 bps from 3.96% to 4.18% in last one week.
• Bond yields in U.S. were already under pressure since US Fed policy. The rating downgrade event just aggravated the pressure in bond markets in U.S.
• Fitch rating downgrade is unlikely to lead to major impact in debt, currency and commodity markets. S&P had already downgraded the U.S. rating to AA+ from AAA in 2011.
• The rating downgrade in isolation may appear significant but on a relative basis it is insignificant as most of the countries have seen far more deterioration in their debt finances. Market participants always invests on a relative basis and U.S. treasuries and capital markets as a whole, hold the same significance as it held prior to the rating downgrade.

RBI policy meet in focus

• RBI in its MPC meeting next week (10^th August) is likely to maintain status quo on Repo rate.
• In India, the current Repo rate of 6.5% is likely the operating rate, at least in the current fiscal FY24.
• While a marginal rise in the inflation forecast for Q3 and H2FY24 is likely given the upside risk due to the sharp price rise in vegetables and pulse, it is not significant enough to change rate trajectory or liquidity stance.
• 10-year yields in India have seen some pressure ahd have risen above 7.2%, a jump of around 10-15bps in last 1 week.

Auto Volumes July 2023: Passenger Vehicle segment outperforms!

• Auto volumes for the month of July 2023 were a mixed bag. Passenger Vehicle segment led by the Utility vehicle space outperformed.
• Volume prints were steady in the seasonally low month for the tractor and CV space.
• 2-W segment on the other hand is yet to witness consistent and meaningful volume recovery.
• In the 2-W space volume numbers came in muted for commuter segment with industry leader Hero MotoCorp reporting 10.5% MoM decline in volumes at 3.9 lakh units. Eicher motors (Royal Enfield) fared well with volume prints at 73,117 units. Premiumisation trend stays afloat.
• In PVs, industry leader Maruti Suzuki outperformed with 14.5% MoM growth in volumes at 1.8 lakh units. Interesting UV volumes at Maruti came in at all-time high number of 62k units. Even M&M clocked its best ever monthly UV sales volume at 36k units. With easing supply chain situation this space is expected to report steady volume prints (albeit on a high base).
• In the CV segment, YoY comparison makes more sense given the rainfall led seasonality impact. Ashok Leyland posted 10.6% YoY growth in volumes at 15k units. Industry leader Tata Motors reported 3.5% YoY decline in total volumes at 33k units.
• In Tractor space, industry leader M&M outperformed with 8.0% YoY growth in volumes at 25k units while Escorts reported 4% YoY growth in volumes. 

Our current top bet in the Auto OEM space is Tata Motors (BUY rating; Target price: Rs 810, Potential Upside: 32%)

Mahindra & Mahindra: Raises fresh capital at its EV-PV arm

• The company in a regulatory exchange filing has informed about raising Rs 1,200 crore as equity investment from Temasek for its subsidiary operating in the Electric – PV space i.e. MEAL (Mahindra Electric Automobile Limited). Temasek will own 1.5%-3% equity stake in said entity with upper range of valuation (MEAL) now pegged at ~Rs 80,000 crore.
• Temasek investment is in addition to the British International Investments (Rs 1,925 crore for 2.75% to 4.76%) already made in MEAL at an equity valuation of ~Rs 70,000 crore last year i.e. July 2022. Upward revision in valuation for company’s Electric – PV venture is a positive development (from ~Rs 70,000 crore to ~Rs 80,000 crore i.e. ~15% increase) however given the low absolute amount of fund raise the price action on the stock was minuscule.
• M&M’s overall aim is to spend nearly ~Rs 10,000 crore in MEAL over FY24-27 wherein it sees nearly 30% of its SUV sales being Electric in nature.
• M&M reported healthy performance in Q1FY24. On standalone basis, topline for the quarter came in at Rs 24,056 crore (up 23% YoY) with automotive segment volumes growing 21.3% YoY at 1.86 lakh units and tractor sales volume at 1.15 lakh units (down 3% YoY). EBITDA in Q1FY24 came in at Rs 3,235 crore with corresponding EBITDA margins at 13.4% (up 100 bps QoQ). Resultant PAT for the quarter stood at Rs 2,774 crore (up 94% YoY) amidst higher margins and higher other income.

Eicher Motors and Escorts Kubota - Both companies reported good set of numbers

• Eicher Motors, On the consolidated basis, Total operating income for Q1FY24 came in at Rs 3,986 crore (up 17% YoY) amid 22% rise in Royal Enfield sales volume at 2.3 lakh units. EBITDA in Q1FY24 came in at Rs 1,021 crore with corresponding EBITDA margins at 25.6% (up 110 bps QoQ). Resultant PAT for the quarter stood at Rs 918 crore (up 50% YoY). Share of profits from the VECV arm stood at Rs 100.4 crore (EBITDA margins at 7.4%).
• Going forward management guided for healthy demand prospects and dealer excitement amidst upcoming festive season domestically. It is also looking forward to new product launches this fiscal and expects market to expand post new launches in this segment by competition.
• Escorts Kubota Ltd reported robust performance in Q1FY24. Total operating income for the quarter came in at Rs 2,328 crore (up 18% YoY) with growth coming healthy in the railway as well as construction equipment space amidst flattish tractor sales volume. EBITDA in Q1FY24 came in at Rs 327 crore with corresponding EBITDA margins at 14% (up 320 bps QoQ and 400 bps YoY). Resultant PAT for the quarter stood at Rs 283 crore (up 92% YoY).

Cement M&A - Ambuja- Sanghi Deal Key Takeaways

• Ambuja Cement acquired 56.74% stake (at Rs 114.2/share) in Sanghi Industries at an EV of Rs 5,000 crore (which values the transaction at US$ 100/t). It will also make an open offer for 26% stake at the same price. The entire acquisition will be funded through internal accruals as Ambuja (consolidated) has healthy cash & investments worth Rs 11,886 crore.  
• Sanghi has a cement capacity 6.1 MT grinding unit and 6.6 MT of clinker capacity (also having a captive jetty and power plant). As Sanghi has excess clinker capacity, the company will initially expand the capacity to 10 MT under phase 1 (by March 2024) with minimal capex of Rs 500 crore (~US$ 17/t). Hence the effective acquisition cost boils down to ~ US$ 67/t.
• In the second phase of expansion, company will take the grinding capacity from 10 MT to 15 MT in next two years (including clinker line with capex of Rs 3,000 crore).    
• Sanghi has a huge potential of limestone reserves of 1 billion tonne which could support 2x of the current capacity over the next 100 years. Ambuja has the vision to be the lowest clinker producer and supply clinker and bulk cement through coastal routes to markets such as Saurashtra, south of Gujarat, Mumbai, Karnataka & Kerala.  
• We believe the acquisition is positive for Ambuja as there is possibility of a faster turnaround in operations with group synergies coming into play (targeting to achieve Rs 1,000+ EBITDA/T in the next 24 months). Furthermore, the acquisition would further strengthen the market share of Adani Cement in western region from current 20% to 27-28%.  
• With the said acquisition, Ambuja’s goal of doubling capacity to 140 MT by 2028 will be achieved ahead of the time (targeting to reach 100 MT capacity by 2025). We remain positive on the stock.  
• Ambuja Q1FY24: Similar to its subsidiary ACC, Ambuja reported healthy volume growth of 23% YoY to 9.1 MT in Q1FY24. Realisations remained weak as it declined 1% QoQ (4% YoY) to Rs 5,197/t. However, through better operational efficiency coupled with synergising Adani group expertise, production cost per tonne declined by ~ Rs 320/t YoY. Subsequently company recorded EBITDA/T of Rs 1,042/t during the quarter. 

Tendering Activity moving from strength to strength, up 35% YoY in Q1FY24

• Tendering activity is very robust in Q1FY24 which is otherwise seasonally the weakest quarter in terms of activity. The tendering data is up 35.4% YoY for Q1FY24. Tenders worth Rs 3,50,000 crore have been issued as compared to Rs 2,60,000 crore in Q1FY23.
• The above point is reiterated from L&T’s recent commentary on ordering pipeline. At beginning of FY24, the company had guided for a pipeline of Rs 9,73,000 crore of ordering prospects. Post Q1FY24, L&T has already reported inflow growth of 58% YoY and at the same time prospect pipeline has further improved QoQ by 12% to Rs. 10,70,000 crore.
• Stocks Preferred – L&T, NCC, Thermax

Hidden Gem

Mahindra Holidays & Resorts India (MHRIL): (CMP: Rs 340, TP: Rs 400, Upside: 17%)

• Mahindra Holiday’s (MHRIL) enjoys a strong brand patronage through its brand ‘Club Mahindra’ and is one of the leaders in leisure hospitality space. Over the years it has solidified its presence in a unique and sustainable Vacation Ownership (VO) business model with more than 25 years of track record.
• MHRIL enjoys a healthy balance sheet with strong cash & investments worth Rs 647 crores. Despite being asset heavy, MHRIL continues to be debt free (at standalone level) which depicts inherent strength of the business model.
• MHRIL has a healthy base of more than 2.8 Lakh + members who ensures steady cash flows and multi-year source of value creation across the tenure of membership. It has a robust room inventory of 5,000+ rooms at 102 resorts (including 82 properties in India and 20 in South East Asia & Middle East).
• MHRIL has significantly accelerated room inventory over the last three years with average annual key additions increasing from 221 during FY14-20 to 372 keys in FY21-23. Subsequently, member/room ratio enhanced from 71x in FY14 to 57x in FY23. Going forward, company has envisaged to add more than 1,600+ keys over the next 3-4 years and has embarked capex of Rs 1,600-1,700 crore (~Rs 1 crore capex per key). We model in 800 rooms over the next two years taking the total count to 5,740 rooms by FY25E.
• Healthy room addition trajectory would in-turn lead to increase in membership base over the same period. We factor in ~19,000 annual membership addition during FY24-25E taking the overall count to 3.2L+ members (CAGR: 6.5%). With occupancy rate expected to sustain at healthy levels (86-88%) on a rising member base, we expect resort income to grow at 19% CAGR with share in overall revenue increasing to 30% in FY25E.
• We value MHRIL at Rs 400 per share (based on 20x FY25E EV/EBITDA).