Market Outlook of the week: Nifty@20,700 by Diwali: Buy the dips, ride with conviction

• Nifty is undergoing a healthy consolidation after sharp rally of 19% from March lows.
• Nifty is following CY14, CY17 playbook, wherein post large consolidation breakouts, intermediate corrections to the tune of 5-7%. Key Nifty support at 18,600.
• Expect Nifty to reach 20,700 by Diwali 2023 and achieve 21,400 by March 2024.
• Expect broad-based rally to be led by BFSI, IT and Telecom while Metal, Infra, Power and PSU Banks are expected to generate alpha.
• Market breadth: Ratio of new 52 week highs/52 week lows (monthly) has given a breakout above 30 indicating 10% rally in Nifty 500 over coming 6 months, going by historical evidence.
• Short Term - Expect Nifty to consolidate in the 19,200-19,800 range in coming truncated week.

RBI policy – GDP growth estimates unchanged; inflation estimates revised upwards

• Policy rates unchanged with repo rate at 6.5%.
• Inflation projection revised upwards from 5.1% to 5.4% for FY24 with Q2 estimated at 6.2%, Q3 at 5.7%, Q4 at 5.2% and Q1FY24 at 5.2%.
• GDP growth kept unchanged at 6.5% for FY24.
• Existing CRR ratio unchanged at 4.5%. However, in order to absorb additional liquidity generated (owing to return of Rs 2,000 notes among others), banks shall maintain incremental CRR (I-CRR) at 10% on the increase in their net demand and time liabilities (NDTL) between May 19, 2023 and July 28, 2023. The same would be reviewed on 8^th September 2023. Absorption via excess CRR is estimated at ~Rs 1 lakh crore. Given ample liquidity and excess SLR, we do not expect any substantial impact on earnings of banks.

SIP inflows continue to dominate domestic flows

• SIP flows crossed Rs 15,000 crore in July 2023 and touched all-time high level at Rs 15,243 crore.
• Inflows in July 2023 came in marginally lower at Rs 7,600 crore Vs Rs 8,600 crore June 2023. (Inflows, ex-NFOs, came in at Rs 4,600 crore in July as compared to Rs 5,600 crore June 2023).
• At higher levels, profit booking is incrementally higher. (Gross redemption stood at Rs 30,000 crore in July vs less than Rs 20,000 crore during Jan-April 2023.
• Importantly, inflows in smallcap funds remain strong. At Rs 4,200 crore in July, it remains a significant number (Last 3 month Avg inflows at Rs 4,300 crore). In last 1 year, the AUM of smallcap funds has grown by 61% to Rs 1.8 lakh crore in July 2023 from Rs 1.1 lakh crore in July 2022.

Retail Sector overall muted: Trent & Titan Continue to remain outliers

• Q1FY24 was a challenging quarter for fashion/lifestyle retailers as discretionary demand continued to remain muted. Companies across footwear and apparel registered single digit topline growth. Overall revenue growth (ex-Titan & Trent) for top retail companies was mere 3% in Q1FY24.
• The fashion industry during the quarter resorted to higher discounting to expedite inventory liquidation (preponed end of season sale by 15-20 days). The subsequent impact was reflected in profitability as gross margins during the quarter contracted sharply by 300 bps YoY to 33.0% (average of top 10 retail companies).
• Amongst the retail coverage, Trent continued to be the outperformer. A staggering 53% YoY revenue growth on a very strong base and in a relatively subdued market conditions is a testimony to Trent’s robust business model and ability to gain market share. Revenue stood at Rs 2,536.4 crore with an impressive four-year CAGR of 35% (highest in the industry). Company continued to aggressively add Zudio stores with addition of 40 new outlets (388 stores) in Q1FY24. Zudio now contributes 40% to standalone revenues (from merely 16% in FY20) and we expect Trent will continue its accelerated store additions for Zudio with opening of 200+ stores in FY24.

Tyre space leads to better prints in the ancillary pack

• In the ancillary space, gross and EBITDA margins improved to 40.9% and 14.4% respectively in Q1FY24 (a gain of ~200-250 bps over past four quarters).
• Tyre companies posted good set of numbers with gross margin (by 200 bps QoQ) and consequent EBITDA margin (by 150 bps QoQ).
• Topline sales grew in single digit for Apollo Tyres and JK tryre while it declined in Balkrishna Industries due to lower exports.
• EBIDTA margins expanded for all - Apollo Tyres 17.8%, up 190 bps QoQ, JK tryre at 11.2% (up 200 bps QoQ )and Balakrishna Ind EBITDA margins went up by 240 bps QoQ to 22.7%, up.
• posted steady set of numbers for Q1FY24.
• Given steady growth in auto sales, we continue to prefer these tyre companies

Mixed bag from Defence Companies

• Bharat Electronics and Data Patterns reported ~14% and ~31% YoY growth in revenues respectively led by timely execution of their order backlog. Midhani also reported strong revenue growth of 63% led by pick-up in execution and some spill-over from last year’s unexecuted orderbook. But, companies like Bharat Dynamics and Mazagon Dock have reported decline in revenues by 57% and 3% YoY respectively as execution has been impacted.
• Bharat Electronics EBITDA margins jumped by about 250 bps while Margins for Mazagon Dock and Data Patterns have remained flattish. Bharat Dynamics and Midhani have shown significant contraction in margins.
• Order book remains healthy for all the company. Bharat Electronics order backlog stands at 3.7x of FY23 sales while Bharat Dynamics and Mazagon Dock have backlog at 8x and 5x of FY23 sales respectively. Data Patterns and Midhani have decent book-to-bill of about 2x.
• We continue to like Bharat Electronics considering its timely execution and healthy order book. We have a target price of Rs 160 on the stock.  

Zee Entertainment: NCLT approved merger; new management growth plans key ahead

• NCLT has approved the merger of Zee with Sony and has quashed all objection against the proposed merger.
• Post merger, the combined entity will own 70 channels, two OOT platforms (Zee5 and Sony Liv) and two film studios with TV market share of ~26% and overall revenues of Rs 14,000+ crore. It will have market cap of ~Rs. 56,000 crore on combined basis, at CMP.
• In terms of TV ad growth recovery, it is expected only from H2FY24. We highlight that EBITDA margins which historically used to be 20%+ has faced challenges (now in single digits) given the slower ad trajectory as well as high content spends. We believe the margins may get back to historical levels only over next two years when full-fledged ad recovery will be seen along with plateauing of content spends.
• Key will be new management (Sony will hold 51%) strategy on business ahead, especially on OTT and sports where it lags currently.

Domestic Pharma companies on a solid footing

Torrent Pharma: Branded segment constitutes 72-73% of portfolio. EBITDA margins are further expected to improve 75-100 bps every year from current 30-31% levels, due to better efficiencies from the acquired Curatio portfolio and from both price and volume levers.

JB Pharma: JB showed a growth of 21% vs Indian pharma growth of 10.6% in Q1, led by traction in CDMO business in international market and growth (up 17%) in the acquired and chronic portfolio in Indian segment. The management has guided for a 25-27% EBITDA margin with an overall topline growth in mid-teens.

Adani Ports aggressive guidance Intact

The management has guided for 370-390 MMT volumes in FY24, with revenues/EBITDA at Rs 24-25,000 crore/Rs 14,500-15,000 crore. Capex guidance remains unchanged at Rs 4,000-4,500 crore. APSEZ has gross debt of Rs 48,000 crore, cash and cash equivalents at Rs 9,900 crore. Logistics vertical has grown its revenues/EBITDA at 41%/48% during the quarter (it has gained MS over other CTOs on the Mundra-NCR route). 

L&T aggressively focusing on Green energy

• L&T to look at up to $4 bn investment in green hydrogen, with partners. The company will capitalize this opportunity via various modes of investments.
• L&T’s is setting up electrolyser factory at Hazira, which will involve an investment of Rs 500 crore, as the land and factory are already in place and production is expected to commence from FY25. For this it has tied up with Norwegian based Hydrogen ProAS based electrolyser manufacturing based on alkaline technology.
• It has tied up Indian Oil Corporation Ltd. and ReNew Power for the formation of a Joint Venture (JV) company to develop the nascent green hydrogen sector in India.
• Additionally, Indian Oil and L&T have signed a binding term sheet to form a JV with equity participation to manufacture and sell Electrolyzers used in the production of Green Hydrogen.

Hidden Gem

Exide Industries (Target Price: Rs 335; Rating: BUY; Upside: 26%) Li-On cell manufacturing – structurally positive; First movers advantage at bay!

• Exide Industries (EIL) has a sizable presence across automotive & industrial applications. Its segment mix stood at ~70%/30% for automotive & industrial application respectively.
• It also has a dual presence in Li-On battery space; first through assembly operations (1.5 GwH, Nexcharge) & second through Li-On Cell manufacturing venture. It is presently outpacing its peers in terms of tangible steps in this new energy space.
• On the Li-On Cell manufacturing front, EIL has entered into a technical collaboration with SVOLT with total capex outlay of ~Rs 6,000 crore for a 12 GWH capacity with 1st phase of 6 GWH slated to be operational in CY25E at a capex outlay of ~Rs 4,000 crore. With margins in cell manufacturing to be at par with base business and capital efficiency to the core (RoIC’s>20%), we believe it to be structurally positive for the company ushering a new stream of profitable growth with longevity. It also help company to de-risk itself from the inherent EV risk
• Even for its Li-On battery pack assembly business it has secured orders worth ~Rs 600-700 crores to be executed over next 12-15 months.
• With increasing application across industrial segment (data centres, 5G adoption, renewables), steady auto replacement demand and export opportunity (China+1 trend), we expect this base business to grow at steady state in near to medium term. EIL continues to be capital efficient in this domain with RoIC’s>20%. Going forward, we have built 9.7% sales CAGR over FY23-25E. With stable raw material prices, we expect margins to stabilize ~11-12% mark over FY23-25E.
• The company continues to remain debt free with healthy B/S with cash & cash eq. of Rs 625 crores. It also has stake in HDFC Life worth ~Rs 5,750 crores.
• We have a positive view on the stock tracking wider opportunity play in Li-Ion domain. We assign BUY rating on the stock thereby valuing it at SOTP-based target price of Rs 335 (Rs 214 for base business at 17x FY25E EPS, Rs 121 for investments, stake in subsidiary and CWIP of Li-On cell plant).