Market Outlook of the week: Nifty oversold, Expect technical pullback

• Indian equity benchmarks corrected 2.5% (at 19,050) for the week, in tandem with global peers. Nifty midcap and small caps witnessed profit taking thereby correcting 2% each.
• US indices declined ~3% during the week amid higher interest rates worries.
• Nifty at 200-day ema, oversold: Markets witnessed capitulation last week leading prices into extreme oversold zone. We expect Nifty to witness technical pullback from oversold readings towards 19,400 in the short term wherein strong support is placed around 18,700.
• Midcaps correction approaching maturity: Nifty Midcap and Nifty small cap indices corrected ~10% from life highs (Usual bull market corrections are ~12%) thereby approaching price wise maturity of correction. We believe both indices will undergo a base formation amid ongoing earnings followed by next leg of upmove.
• Sectors in focus: We expect BFSI, Auto, Infra, PSU sectors to lead the recovery.

FIIs turned aggressive sellers amid geo-political issues

• FPI sold nearly 25,000 crores in equities during October month as risk-off sentiments prevailed due to elevated geopolitical risk and rising US bond yields. FPIs have been largely on sidelines since mid-July and they have turned net sellers in last 2 months with October witnessing significant outflows.
• US Bond yields have moved up significantly last week with 10-year yields breaching 5% mark. Decline in bond yields may be considered as early indicator for fresh inflows in risk assets.

FIIs positioning in Derivatives

• FIIs net shorts at the inception of November series are highest seen since March with almost 1.5 lakh contracts as significant long liquidation was observed during the settlement week. After a sharp decline of nearly 4% seen during the week, we expect a round of short covering in the coming sessions.

How much further market will fall – Historical Insights

• Nifty 50 Index - Historical range of fall: 10%-15%. Current Fall: 6.5%.
• Nifty Midcap 150 index - Historical range of fall: 10%-25%. Current Fall: 9.5%.
• Nifty Small cap 100 index - Historical range of fall: 10%-35%. Current Fall: 8.5%.

Overall we are at the lower end of the percentage range of fall across large caps, midcap and small cap.

Earnings growth and upgrades higher for Midcap and Small cap:

• 25% earnings growth for FY25 for Midcap/Small cap as against 18% for Nifty 50 Index.
• Earnings upgrade in last 2 quarters have been higher for midcap and small cap (Nifty: 5%, Midcap: 16%, Small cap: 21%).
• Universe of small cap stocks with higher profitability has increased significantly in last 6 years: Number of companies with PAT of more than Rs 100 crore in FY17 was 232. In FY23, this number increased to 800.

What investors should do?

Conservative investors may start fresh lumpsum allocation to markets at current levels but may go slow as market may fall more. However, if you are aggressive investor, start allocating from current market levels without waiting for further market fall.

Good run continues for BFSI

Kotak Mahindra Bank– Healthy overall performance; ~35 bps decline in margins came as surprise

• Kotak Bank reported healthy performance in Q2FY24, despite higher-than-expected decline in margins. Earnings increased 23.6% YoY to Rs 3,191 crore, led by healthy top-line. Credit cost continued to remain steady at ~11 bps and slippages broadly stable at ~0.4%. Asset quality remained steady with GNPA and NNPA ratio at 1.72% and 0.37%.
• Margins declined ~35 bps QoQ at 5.22%, of which ~15 bps is attributable to ICRR and short-term inflows which remains one-off, while another ~20 bps of impact is owing to increase in cost of liabilities.
• Advance growth remained at healthy pace of 18.5% YoY to ~Rs 3.5 lakh crore, attributable to growth across segments. Momentum in unsecured loans (MFI, credit cards, personal loans) remained strong with proportion increasing from 8.7% in Q2FY23 to 11% in Q2FY24.
• The bank has informed that RBI has approved appointment of Mr. Ashok Vaswani as new MD & CEO for a period of 3 years from the date of taking charge before 1^st Jan 2024.
• Margins is expected to recover with continued focus on high yielding book. Healthy growth in bank ad continued robust performance in subsidiaries remains positive. Expect new MD & CEO to continue with the current strategy, however, awaiting clarity on the same. At current price, bank is trading at 2.3-2.4x FY25E ABV which is lower compared to historical average, however, near term upside seen limited till market gets comfortable with the new MD & CEO.

Axis Bank – Delivered sustained performance; Citi integration benefit awaited

• Axis Bank continued to deliver consistent steady performance in Q2FY24 with delivery on growth, asset quality as well as profitability.
• Advances grew 23% YoY to Rs 8.97 lakh crore with growth seen across segments. Growth in high yielding segment (personal loans up 25% and credit cards up 72%) and decline in RIDF book has kept margins steady at 4.11% (+1 bps QoQ).
• NII and other income reported healthy growth, though elevated opex led to 12% YoY growth in operational profit and 10% YoY uptick in PAT to Rs 5,864 crore.
• Asset quality improved with slippages at ~1.5% and ~23 bps QoQ decline in GNPA ratio at 1.73%.
• Healthy overall performance with focus on asset mix and quality of liabilities bodes well. Guidance maintained across parameters. Benefit from Citi acquisition awaited which could act as catalyst for valuation ahead.
• At current price, the stock is trading at 1.7-1.8x FY25E ABV which is reasonable. Given higher than industry growth and RoA at 1.7-1.9%, the stock offers an attractive opportunity.

CreditAccess Grameen (CMP - Rs 1,550, Mcap - Rs 24,643 crore) – All round performance

• CreditAccess Grameen reported healthy Q2FY24 performance with RoA at 5.6%, driven by steady credit growth (at 36% YoY to Rs 22,488 crore), improvement in margins (+20 bps sequentially to 4.7%) and controlled asset quality (GNPA down 12 bps QoQ at 0.77%).
• Healthy acquisition of new borrowers and increase in ticket size both contributed to continued strong growth in advances at 36% YoY to Rs 22,488 crore.
• Healthy operating profit at Rs 562 crore (up 68.3% YoY) coupled with steady provisions at Rs 95.9 crores, led to robust 98.1% YoY growth in PAT to Rs 347 crore.
• Healthy customer retention coupled with focus on operating efficiency is seen to aid profitability ahead. Management has revised margin guidance from earlier 12.1-12.2% to 12.7-12.8% and RoA from earlier 4.7-4.9% to 5.4-5.6%, while keeping growth guidance unchanged at 24-25% and provision at 1.6-1.8%.
• At current price, the stock is trading at ~3.2-3.3x FY25E ABV, which seems reasonable given the superior performance. Continued healthy business growth coupled with superior RoA should aid valuations, however, recent run up in price could limit near term upside. However, the stock remains to be a good bet on Indian micro-finance story.

Shriram Finance – Healthy growth; guidance revised upwards

• Growth in AUM remained at 19.6% YoY to Rs 2,02,641 crore; growth in auto segment remained steady while non-auto segments (MSME, 2-wheeler and personal loans) continued to witness higher growth.
• Asset quality witnessed improvement with gross stage 3 assets declining 24 bps QoQ to 5.79%.
• Margins witnessed improvement at 8.93%, led by increase in yields while cost of funds remained broadly stable. Despite higher opex and provision, PAT grew 12.3% YoY to Rs 1,751 crore.
• Management has revised growth guidance from ~15% earlier to 18-20% in FY24E (on a conservative basis) while margin & credit cost guidance has kept unchanged at 8.5-9% & ~2%. RoE is targeted at 16-18% in FY24-25E.
• At current price, the stock is trading at ~1.6-1.7x FY25E ABV and ~Rs 100 for subsidiaries which seems reasonable. Sustained business growth and gradual improvement in RoA is seen to aid valuation ahead. 

Tier II IT companies continue to shine, Tier I disappointment continues

Sonata Software: Healthy IT services growth; Robust Outlook

• The company reported consolidated revenues of Rs 2,036 crore, down 5.6% QoQ as it is a seasonally weak quarter for domestic product business which de-grew 10.7% QoQ. The international IT services business (35% of the mix) at US$ 80.9 mn was up 4.6% QoQ (constant currency basis).
• The company reported an EBITDA margin of 11.3% on consolidated basis, up 130 bps QoQ driven by IT services business, which reported a margin of 23.6%, up 87 bps QoQ.
• The growth of 4.6% QoQ in IT services is very strong considering other peers reported numbers. The company has outlined 3-4 years revenue target of US$ 1.5 bn (vs. US$ 0.92 bn in FY23), implying a growth CAGR of ~15% over the next 3-4 years with low 20s margin in IT services business.
• For FY24, it is expecting industry leading high teen growth (also aided by Quant (new acquisition integration) We believe strong deal wins (won 10 large deals won YTD), enhancing presence in life sciences and BFSI through Quant, should enable the company to attain its growth targets.

Tech M: Weak performance

• The revenue was down 2.8% QoQ (down 2.4% QoQ in CC terms) to $1,555 million as the key segment (Communication Media & Entertainment) remained weak. Key segment – Communication, Media, Entertainment (forming ~37% of the mix) declined by 4.9% QoQ, while BFSI (forming 16.1% of revenues) declined 3% QoQ.
• The EBIT margins at 4.7% was down 206 bps QoQ, given the negative operating leverage.
• Only solace was Deal total contract value (TCV) which stood at US$ 640 mn, up 78 QoQ, driven by large deals.
• The near-term demand challenges remain due to reduction in discretionary spends including in key segments. We believe key will be how new CEO (from December, 2023) pivots the business to more diversified from current Communication heavy construct ahead.

Maruti Suzuki - blockbuster result

• Q2FY24 was monumental for Maurti with company reporting best ever quarterly sales volume, Sales value, EBITDA and PAT.
• Sales volume for the quarter stood at 5.52 lakh units, up 6.7% YoY and 10.8% QoQ. Net sales for Q2FY24 came in at Rs 35,535 crore with corresponding ASPs at Rs 6.44 lakh/unit, up 4% QoQ. SUV share of sales in total sales volume stood at an all time high of 38% vs. 30% in Q1FY24 and 19% in Q2FY23.
• EBITDA margins for the quarter was the real positive surprise and came in at 12.9%, up 360 bps YoY and 370 bps QoQ.
• Margin outperformance for the quarter was led by lower raw material costs (gross margins expanded 220 bps QoQ) as well as lower other overhead costs.  
• With tremendous confidence shown on Indian markets and tangible growth longevity by announcing a mega capex plan of ~Rs 1 lakh crore over next 7-8 years (capacity being augmented from ~20 lakh units per annum to ~40 lakh units per annum amidst ~10 new model launches) we have a positive view on the company.  
• We continue to like Maruti amidst its strong intent to outpace industry growth, reignited focus on SUVs, market share gain ambition, clear timeframe for EV launch and robust order book.

Hidden Gem

Action Construction Equipment (CMP: Rs 750; Target: Rs 910; Upside : 21%)

• Action Construction Equipment (ACE is India’s leading Material Handling and Construction Equipment manufacturing company and are market leaders in Mobile Cranes & Tower Cranes segment (65% Share). Product portfolio is divided into four main categories viz. cranes (~71% of total revenue as of FY23), construction equipment (~11% of total), agricultural equipment (~11% of total) and material handling (~8% of total).
• The company expect strong growth across its segments in the coming period, led by 45-50% growth in construction equipment segment followed by cranes & agri (18-20% growth) and material handling (15-20% growth).
• The company expect overall growth of 20-25% in FY24E and aims to double its revenue by FY27E from FY24E level. In terms of exports, company intends to increase its exports share to 10-15% of revenues in medium term (from ~7% of revenues in FY23).
• With increase in utilization levels in the construction equipment, we expect strong improvement in margins of the company at 10.2% in FY23 to 13% in FY25E.
• We believe company’s operational and financial performance to improve significantly in the coming period. We estimate revenue, EBITDA and PAT to grow at ~20%, ~35% and ~36% CAGR respectively over FY23-25E.
• Valuations look attractive considering the industry tailwinds, strong growth in profitability over FY24-25E, strong balance sheet with healthy return ratios. We value ACE at Rs 910 i.e. 34x FY25E P/E.