Market outlook of the week: Nifty headed towards 20,400 by Diwali

On expected lines, index clocked a fresh all time high after Dec-22 and outperformed the global peers, up 2.3%. As a result, Nifty is marching towards our earmarked target of 19,300.
Structurally, breakout from 18 months consolidation backed by strong market breadth makes us confident that Nifty would head towards 20,400 by Diwali.
Sectors which can drive Nifty towards 20,400 are:

Banking: Six months consolidation (44,500-38,600) implying for target of 49,000
IT: 25% away from its All Time High, Favourable risk -reward
Pharma: 18 months falling channel breakout
Resilient sectors like Auto and Capital Goods and PSU

Our positive stance is further validated by:

Significant improvement in market breadth: 74% stocks of Nifty 500 universe are above 200 DMA
Current rally is backed by rising cash volume: One month’s average turnover jumped to 62,000 cr. Compared to May reading of 56,000 cr
Persistent FII’s inflows

Monsoon: Dark Clouds fade away showering abundant rainfall

Post a dull and delayed start to the current monsoon 2023, the recent pick up in rainfall activity is encouraging with deficiency down from ~30% of LPA in the past week to ~13% as on date.
As per IMD, monsoon is expected to cover entire country over next 2 days. IMD has sticked to its earlier guidance of normal monsoon 2023 with rainfall pegged at lower end of the normal range (96-104) at 96% of LPA.
In terms of regions, it is currently running deficient in Southern Peninsula at -45% of LPA, Eastern India at -20% of LPA and Central India at -12% of LPA while is running surplus in agrarian bowl i.e. North West India at +40% of LPA.
With kharif sowing tracking rainfall activity, we expect the same to pick up going forward. Total sowing in the current Kharif season as on 23^rd June 2023 stood at 13 million hectares, down 4.5% YoY.

Auto Numbers: PV space to outperform

Auto Volumes for the month of June 2023 are expected to be stable with Passenger Vehicle and 2-W space expected to out-perform the rest of the pack.
PV space is likely report double digit volume growth on YoY basis aided by low base of last year and easing chip supply issues amidst healthy order book at key OEM’s like Maruti Suzuki and M&M.
2-W space too is expected to report healthy performance amidst green shoots of rural recovery. In this domain, volume numbers from Royal Enfield franchise at Eicher Motors are keenly awaited given that the company had reported healthy volume prints last month at 77,461 units.
In the CV and tractor space, high base of last year to limit volume growth in June 2023.
At the OEM level, outperformance is expected from Eicher Motors in the 2-W space, M&M in the PV segment, Ashok Leyland in the CV domain and Escorts in the tractor segment.

For FY24E, we expect industry volume growth to taper amidst high base of FY23. We however continue to remain positive on PV (underpenetrated category domestically) and CV domain (beneficiary of robust government spending on infrastructure). Our top bets in the OEM space are Maruti Suzuki (Rating: Buy; Target price: Rs 11,000), Tata Motors (Rating: Buy; Target price: Rs 700) and Ashok Leyland (Rating: Buy; Target price: Rs 200).

Indian banks in a better position in terms of growth, asset quality and capital adequacy - FSR

RBI, in its Financial Stability Report, has reported that Indian banks have witnessed improvement in asset quality with GNPA at 10 year low of 3.9% and NNPA at 1%. Further, under the baseline scenario, GNPA is expected to ease to 3.6% in FY24.
Indian banks remains well capitalised with CRAR ratio at 17.1% and CET1 at 13.9%; comfortable to support growth and any near term stress.
Increasing proportion of unsecured loans (credit cards and personal loans) is under scanner. However, no signs of concerns are being seen.
Banks, in our view, seem to be better placed with continued healthy credit growth, moderation in credit cost and steady margins ahead. Thus, we remain positive on overall banks, however, given relatively lower valuation and subdued price movement, prefer PSU banks over large private players.

Preferred Picks:

Bank of Baroda (CMP – Rs 190, Target – Rs 220, BUY, 0.9x FY25E ABV)

Bank of Baroda’s management is confident of in-line industry growth. Further, it aims to grow retail growth at 1.5x pace of the overall book.
Levers to maintain margin steady at ~3.3% levels seen aiding earnings. Guidance on return ratios steady at ~1% RoA and 16-18% RoE in FY24.
Credit cost of ~1% in the normal cycle. ECL provisioning should be restricted to 1–1.5% of advances.

Indian Bank (CMP – Rs 284, Target – Rs 335, BUY, 0.9x FY25E ABV)

Credit growth guidance of 10-12%, driven by RAM segment is seen aiding business and margins.
Given anticipation of steady margins and normalised taxation, RoA is expected to witness a gradual improvement at 0.8-0.9%.

Green Hydrogen: Encouraging guidelines for green hydrogen

MNRE has come out with guidelines for promoting green hydrogen ecosystem in two components. The guidelines are a step in right direction to augment the necessary value chain and ecosystems for green hydrogen and also for capacity creation of electrolysers.
Component 1: Incentive scheme for electrolyser manufacturing from FY26-FY30 with outlay of Rs 4,440 crores and the capacity that will be incentivised is pegged at 1,500 MW.

Under the scheme, base incentive will start at Rs 4,440 /KW in 1st year and will taper down to Rs 1,480/Kw in 5th year.
The scheme also focuses on the level of localisation for each year of production of electrolysers wherein the local value should be at minimum 40% in year 1 and should reach at-least 80% by year 5 under the alkaline technology.
For other technology, the year 1 and 5 should have local value of 30% and 70% respectively. Any bidder can bid up to maximum of 300 Mw of electrolyser capacity.

Component 2: Incentive for production of Green Hydrogen with an outlay of Rs 13,050 crore.

Mode 1 - Under this mode, the incentive demanded for three years will be capped at Rs 50, 40 and 30/kg of hydrogen.
Mode 2 - Total capacity available for bidding is at 4,50,000 tonnes and maximum capacity that can be allotted to a single player would be 90,000 tonnes.

Big players like Reliance industries (foray into entire spectrum, Target Price: Rs 2,850), L&T (Target: Rs 2850, Foray into electrolyser manufacturing wherein production is likely to commence in FY25) can be beneficiaries of the same. L&T also rides on the tailwind of capex cycle and improvement in IT services business along with strong focus on monetising non-core assets and increase ROE’s to 18% by 2026 and achieve revenue CAGR of 15%.

Hotel Sector: RevPAR remains healthy in May 2023; occupancies soften marginally

As per HVS Anarock, May 2023 has been a steady month for hotel industry. RevPAR for the industry was at Rs 4,347 which continues to be 25% higher than pre-Covid level (May 2019) and up ~12% on YoY basis. ARR stood at ~ Rs 6,900 (up 14% YoY), however occupancy softened marginally YoY to 63% (May 22- 65%).
The domestic business is expected to remain healthy in CY23, driven by major events such as the G20 meetings and the ICC ODI World Cup cricket. Industry level occupancies which recovered to 60% in CY22 are estimated to reach 66% in CY23, 68% in CY24 and 70% in CY25 (as per Anarock data). RevPAR expected to grow at CAGR of 16% in over CY22-CY25E (at Rs 5,500+ in CY25E).
Furthermore, over CY23-CY27, the hotel demand is expected to increase by 9.7%, while hotel supply is expected to increase by 5.2% which would enable Average room rates and occupancy to remain at healthy levels.
The operational results of hotels in our coverage have resonated the strong scenario depicted by the industry level metrics. Among the hotel sector stocks we prefer Indian Hotels , Lemon Tree Hotels and EIH.

Decision on Total Expense Ratio (TER) provides breather for AMCs and distributors

SEBI has deferred the decision to rationalise TER (Total Expense Ratio) for AMCs based on the data provided by the participants.
SEBI is expected to come out with a second consultation paper on rationalisation of TER.
In our view, gradual rationalisation of expense will continue in long term. However, deferment of decision to provide breather for AMCs in near term.
HDFC AMC (Target Price: Rs 2,050) continues to be preferred players.

MCX – Software issues continue to impact near term visibility

MCX has extended the support service of existing software vendor (63 Moons) for 6 months starting 1st July 2023 for consideration of Rs 125 crore per quarter.
Delay in implementation of new platform and higher cost related to extension of software contract (Rs 250 crore for 2 quarters) is seen to impact profitability and keep stock under pressure in near term.
However, in our view, MCX should be able to implement new platform towards December 2023.
At this time, probability of any recovery from the new developer is unknown but could become a catalyst for the stock post implementation of the new platform.

High RoCE (30%) + consistent revenue trajectory (20%+) = One of the best compounding stories

Titan Company: (CMP: Rs 3,020, TP: Rs 3,240, Upside: 7%, BUY)

In the consumer discretionary space, Titan has been an exceptional performer with stock price appreciating at 30% CAGR in the last 5 years. Company has outperformed peers and continued to gain market share in the industry which is mainly dominated by unorganised players.
Over the last five years (FY18-23), Titan has delivered industry leading sales growth of ~21% CAGR vs. industry average of 11% for other listed players. Robust balance sheet (cash & investment: Rs 3,500+ crore) and asset light distribution model have enabled it to outpace peers in terms of store addition (400+ Tanishq stores which is 2x of the second largest retailer). Despite being the largest organised jewellery retailer (Rs 30,000+ crore sales) its current market share in the overall industry is mere ~8% (overall market: Rs 4 lakh crore). This offers huge headroom for long-term growth going forward. Titan Aspires to grow jewellery revenues by 2.5x by FY27 (implied CAGR: 20%).
Furthermore, gold prices in the past one month have softened by ~4% which has resulted in uptick in demand in month of June for the jewellery industry.
The watches segment (~10% of revenues) is too performing well as the wearable segment (which is ~10% of the watches segment) is increasing multi-fold.
We expect revenues to increase 18% in FY23-25E with jewellery division expected to grow at a CAGR of 20% during the same period. Robust business model (30%+ RoCE) and strong earnings visibility will enable Titan to sustain its premium valuations, going forward. We reiterate BUY with a revised target price of Rs 3,240 (57x P/E FY25E EPS).

Hidden Gem

Indian Bank (CMP – Rs 284, Target – Rs 335, BUY, 0.9x FY25E ABV)

Indian Bank is one of the largest and among the better performing PSU banks in India.
Credit growth guidance of 10-12%, driven by RAM segment is seen aiding business and margins. NIM is expected to be stable at 3.2%.
Improvement in CD ratio and increase in proportion of RAM portfolio to partially offset pressure on margins amid repricing of liabilities.
Moderation in credit cost amid healthy buffer seen to be offset by resumption of normalised taxation. Effective tax rate during the year was ~11%, which, going ahead, should be back to ~25%.
Given anticipation of steady margins and normalised taxation, RoA is expected to witness a gradual improvement at 0.8-0.9%.
NII growth is expected to be 9 per cent over the next 2 year along with Net profit growth of 19% CAGR.

Source: ICICIdirect Research