Market outlook of the week: Nifty Consolidation to continue, stock specific actions likely

• Nifty declined 1% last week, in line with developed market indices, as higher US bond yields and geopolitical escalations led to risk-off sentiment.
• Globally, US and European indices declined 1% while Hang Seng declined 3% despite better-than-expected Chinese GDP. Brent gained 2.3%.
• Outlook: In upcoming truncated week, we expect Nifty to extend consolidation in 19,300-19,800 band.
• Geopolitical Events: Historically, volatility related with geopolitical events is short term and transitory in nature.
• Stock specific approach amid earnings: Use ongoing correction as buying opportunity in quality stocks with progression of Q2FY24 earnings.
• Breadth: Percentage of stocks above 50-day ema sustains above bull market threshold of 50% (current reading 64%).
• Nifty Small cap 100 Index Overbought, stay selective: Index hit fresh life high last week thus outperforming Nifty, but extremely overbought at current juncture after 34% rally YTD.
• Brent: Geopolitical worries have led prices higher over past two weeks. However, we expect prices to face stiff hurdle in $96-98 band.

BFSI companies post steady number, IndusInd bank outshines

HDFC Bank - First quarter post-merger remains volatile

• HDFC Bank advances growth remained healthy at 4.9% QoQ at ~Rs 23.5 lakh crore and deposits witnessed 5.3% QoQ increase at ~Rs 21.7 lakh crore.
• Advances was led by all segments, however, traction in high yielding segment – personal loans and payment business remained relatively slower at 1.1% and 0.5% QoQ.
• Core Issue with HDFC seems to be marginal. 4% margin is still sometime away. Margins were at 3.4% with impact of 25 bps due to additional liquidity. Relaxation in ICRR and deployment of additional liquidity to support improvement in margins in near term.
• Further Focus on high yielding segment and shifting of borrowing with relatively low-cost deposit to drive margins to the desired level over medium term.
• At current price, the stock is trading at 2.25x FY25E ABV which remains a good opportunity given sustained growth and expected RoA at 1.9-2% ahead.  However near term price performance still look difficult.

Bajaj Finance– Continued growth cheers; NIM pressure in 2H acted spoiler

• Growth in AUM remained healthy at 33% YoY to Rs 2,90,264 crore, with growth seen across segments.
• Operational performance remained healthy with 26% YoY growth in NII at Rs 8,845 crore which led to 30% YoY growth in PPP to Rs 5,834 crore. Margin compression seen owing to increase in cost of funds.
• Asset quality remain broadly steady with GNPA ratio up ~4 bps to 0.91%, while NNPA ratio remained steady at 0.31%.This is seen to keep business growth momentum on track. Anticipate margin compression of ~25-30 bps in 2HFY24E, on the back of repricing of liabilities, however, RoA target unchanged at ~5% owing to improvement in operational efficiency.
• At current price, the stock is trading at ~6x FY25E ABV. Continued healthy growth momentum (28-30% in FY24E) and elevated RoA (at ~5%) are positives, however other NBFCs look relatively attractive.

IndusInd Bank – All round healthy performance

• Healthy advances growth at 21% YoY to Rs 3,15,454 crores, which came from across segments - corporate loans book grew 18% YoY while retail book grew at 24.5% YoY.
• Margins remain steady at 4.29%, on the back of robust growth in high yielding book and utilization of excess liquidity.
• Asset quality remained steady with GNPA ratio at 1.93% and NNPA ratio at 0.57%.
• Growth guidance maintained at 18-23% and credit cost at ~110 to 130 bps for FY24E. Cost of deposits is expected to increase by ~10-20 bps though healthy credit growth with focus on high yielding book and utilization of excess liquidity is expected to keep margins steady.
• At current price, the stock is trading at ~1.6x FY25E ABV. Given strong business growth, steady margins and RoA expected at ~1.9%, we remain positive on the valuations.

Federal Bank - Business growth robust

• Federal Bank reported mixed performance in Q2FY24. While advances growth remained healthy at 19.5% YoY to Rs 1,92,817 crore, asset quality witnessed improvement (decline of 12 bps in GNPA ratio at 2.26%), operational profit growth remained in single digit at 9% YoY to Rs 1,325 crore.
• Higher opex (26% YoY at Rs 1,462 crore) led by branch expansion kept operational performance slower at 9% YoY. Low credit cost at Rs 44 crore (which is not sustainable) led to 36% YoY growth in earnings at Rs 954 crore.
• Broad based growth was witnessed across segment with yielding segment (credit cards, personal loans, CV and MFI) reporting faster growth. Post a decline in Q1FY24, margins remained broadly steady at 3.16%, despite 20 bps QoQ increase in cost of funds.
• Guidance of healthy credit growth and steady margins at 3.25% in FY24E remains positive. Faster accretion in high yielding book to keep RoA steady. At current price, the stock is trading at ~1.1x FY25E ABV, which seems an entry opportunity.

HDFC Life - Growth momentum and margin maintained despite challenges

• HDFC Life Insurance reported steady performance with 14% YoY growth in premium at Rs 26,613 crore in 1HFY24. New business momentum remained steady at 15% YoY in 1HFY24, led by introduction of new products (HDFC Life Sanchay Legacy and Click 2 Protect Elite).
• VNB margin remained steady at 26.2% in 1HFY24. Embedded value increased 19% YoY at Rs 42,908 crore. Earnings increased 15% YoY at Rs 792 crore in 1HFY24.
• Focus on geographical penetration, new customer addition and gradual uptick in large ticket business is expected to enable healthy business growth in mid-teens in FY24E. VNB margins expected to remain steady at 26-27% in FY24E.

Cement: Sharp improvement in margins seen in Q2FY24 with healthy volume growth

• Q2FY24 results in Cement space so far, have been strong on YoY basis mainly led by healthy volume growth and improvement in EBITDA/ton.
• Ultratech’s volume growth was at 15.5% in Q2 and about 18% in H1 which is better than the overall industry growth. This was mainly led by company’s focus on adding capacities consistently with increasing blending ratio. Sagar Cement’s consolidated volume growth was at 27% mainly because of sharp improvement in capacity utilization of its subsidiary companies.
• In terms of operational performance, EBITDA/ton of both the companies improved sharply on YoY basis, mainly on account of lower energy cost as compared to last year. Ultratech’s EBITDA/t was about Rs 150/t higher on YoY basis to Rs 956/t while Sagar Cement’s EBITDA/t was at Rs 459/t which is about Rs 400/t higher YoY.
• Going ahead in 2H, cement companies should benefit from recent hikes in cement prices along with sustained lower energy cost. Moreover, volume growth expected to remain healthy in 2H.
• We already recommended Sagar Cements in Shubh Nivesh with a target price of 305 which is about 20% upside from current levels. Company’s volume growth for FY24E is expected to be healthy at 25% YoY and 10% YoY in FY25E. Moreover, EBITDA/t is expected to improve sharply from Rs 318/t in FY23 to Rs 600/t in FY24E and cross the Rs 700/t mark in FY25E. Overall net profit to increase by about 20x in FY25E vs FY23. Valuation at 8.5x looks attractive considering the strong growth in profitability.

PVR Inox: All-time best Quarter; sustained content performance could drive re-rating

• PVR Inox performance was better than expected. Revenue came in at Rs 2,000 crore, (up 53% QoQ) with box office revenue of Rs 1,119 crore (up 61% QoQ). The footfalls were up 43% QoQ at 48.4 million and (Average Ticket Prices) ATP at Rs 276 was up 12% QoQ. Strong Performance in Q2 was driven by two blockbuster Gadar 2 and Pathan, each grossing Rs 500+ crore.
• EBITDA was at Rs 428 crore, up 5x QoQ with margins at 21.4%, up 16 percentage points, aided by strong footfalls and some synergy led benefits in foods and beverages.
• Near term monitorable is big ticket content performance recovery, which has been robust in recent months. For the medium to long term, key trigger will be synergy benefits (management has guided for EBITDA synergy benefit of Rs 225 crore over 12-24 months) and already achieved half of it in H1. The company has guided for 200 bps higher margins ahead than pre-covid levels of 19-20%.

IT Companies continue to disappoint, Wipro weakest among all, Newgen an outlier

Wipro: Weakest performance among the peers; guide for another weak quarter in Q3

• Wipro’s IT services revenue was down 2.3% QoQ to $2,713.3 million. The EBIT margins at 16.1% was up 10 bps. All key segments such as BFSI, consumer, energy manufacturing and communications declined sequentially.
• Only solace was healthy order booking. The company received total bookings of $3.8 billion for the quarter vs. $3.7 bn in Q1. The large deal bookings growth stood at 79% YoY at US$ 1.3 bn.
• For Q3FY24, Wipro's has guided for a revenue growth of -3.5% to -1.5% in constant currency terms and lower margins band. The company continues to struggle on growth and has also forgone smaller clientele which is aggravating the situation. The company sounded off on near term demand challenges due to reduction in discretionary spends including in key segments like BFSI, Hi Tech etc.

Newgen Software: Strongest performance among IT pack; Robust outlook

• Newgen reported 29.7% YoY revenue growth in Q2 with a revenue of Rs 293 crore.
• The company EBITDA margin increased by 290 bps YoY to 19.5% due to strong revenue growth posted by the company.
• The company has reiterated its medium-term guidance of 20-25% topline growth (high probability of beat) and EBITDA margin of 20-21% with strong H2FY24. We expect traction in its order booking to provide a strong growth tailwind for a medium term.

Automobile and auto-ancillary space results season begins on a positive note

• On the large cap side, Bajaj Auto reported numbers which were ahead of street estimates. EBITDA margins for the quarter came in at 19.8% (up 80 bps QoQ), primarily tracking 90 bps expansion in gross margins due to better product mix (higher share of 3-W in total sales volume).
• On the small cap side, CEAT and even PCBL reported better than expected numbers.
• CEAT reported EBITDA margins of 15% in Q2FY24, up 180 bps QoQ (highest in last 11 quarters). It was largely tracking gross margin expansion which was up 226 bps QoQ. This result indicates healthy operational performance in Q2FY24 for peers like Apollo tyre & JK Tyres in our coverage universe.
• Philips Carbon Black PCBL reported robust performance in Q2FY24 with carbon black sales volumes at 130 kt (up 5.7% QoQ, 13.9% YoY). EBITDA for the quarter came in at Rs 238 crore (highest ever) with EBITDA/tonne at Rs 18,310/tonne vs. Rs 16.5k clocked in FY23 and Rs 17,121/tonne clocked in Q1FY24 which was the key positive surprise from the results. Speciality grade carbon black sales for the quarter came in at an all-time high of 15.6K tonne (~12% of total sales volume).

Hidden Gem

Vardhman Special Steel (CMP: Rs 222; MCap: Rs 1,800 crores; TP: Rs 260; Rating: Buy; Upside: 17%)

• Vardhman Special Steel (VSSL) is a leading value-added player domestically supplying special and alloy steel to automobile industry. It has an installed capacity of 2.4 lakh tonnes of billets per annum, 2 lakh tonnes of rolled bars and 0.5 lakh tonnes of bright bars.
• VSSL possesses one of the unique features of producing special steel though EAF route of steel making thereby having controlled carbon emissions; green steel at play.
• Its key customers include Maruti Suzuki, Hyundai, Toyota, Hero MotoCorp, Caterpillar, among others. Alongside automotive it also carters to other industries like Engineering, Bearing and other Allied Industries.
• VSSL in 2019 entered into a strategic alliance with Aichi Steel Corporation (ASC) Japan, part of Toyota group, wherein ASC had purchased 11.4% stake in the company and as same time entered into a Technical Assistance Agreement thereby helping VSSL upgrade its systems and processes in order to be a globally competitive quality supplier of special steel.
• We are quite positive on VSSL’s strategic partnership with Aichi Steel as it will open a broader export play with VSSL planning to up the game in this domain supplying special steel to ASC approved plants/vendors in South East Asian markets with intent to grow export sales to 20-25% of sales volume by FY25E vs. 5% in FY23.
• With capacity constraints at play, in the interim, it is expanding brownfield from 2 lakh tonne to ~2.5 lakh tonne of rolled products capacity in phases and is expected to be completed by FY26E at a total capex spend of ~Rs 300 crore which also includes land acquisition for new plant. Organically we have built in 4.8% sales volume CAGR over FY23-26E, consequent Sales/PAT growth is seen at 6.2%/8.6% CAGR over FY23-26E.
• The company is also PLI beneficiary under special steel category.   
• We assign BUY rating to the stock gaining confidence from VSSL’s aim to make it big in the special steel domain amidst backing of Aichi Steel Corporation. We value VSSL at Rs 260 i.e., 18x PE on FY25E-26E average EPS of Rs 14.3/share. We derive comfort from controlled leveraged B/S at VSSL (Debt: Equity 0.2x as of FY23), Capital efficient business model (RoE at ~12-15%) and positive CFO generation.