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Market Outlook of the week: Stick to quality near life highs, buy the dips

ICICIdirect 11 Mins 09 Jun 2023
  • Nifty is expected to gradually head towards its life highs in June 2023, while over next few sessions we expect some breather/consolidation as indices have rallied for ten consecutive weeks leading to overbought conditions.
  • Focus should remain on mid/small caps with earnings visibility, buy on dips approach.
  • Nifty Small cap index is still 14% away from life highs and expected to catchup gradually.
  • Stocks from Auto ancillary, capital goods, BFSI, consumption, pharma forming part of small cap index are expected to relatively outperform.

RBI policy on expected lines, Inflation in focus

  • RBI maintained status quo on benchmark rates as was widely expected.
  • RBI lowered their inflation target marginally to 5.1% from 5.2% for FY24. The downgrade is front loaded with Q1 revised down to 4.6% (5.1%) Q2 5.2% (5.4%). Q3 and Q4 remain unchanged at 5.4% and 5.2% respectively.
  • Latest WPI print saw a de-growth of (-)0.92% for the month of April. WPI declined for 11th month consecutively. Good Rabi harvest (Output est. 160MT), same as last year is likely to have positive impact on near term CPI.
  • Inflation is not a concern at least till September 2023.

RBI approves FLDG; implementation of ECL framework deferred

  1. Banks will be given more time to implement ECL framework. Earlier expectation for implementation was 30th June 2023. Thus, increased timelines for implementation of ECL framework will act as a breather for banks.
  2. About half of Rs 2,000 notes worth Rs 1.8 lakh crore has come back in system, of which ~Rs 1.5 lakh crore has been deposited in bank accounts. With these additional deposit and scope for raising MCLR rates (owing to lag), expect pressure on bank margins to be lower than anticipated.
  3. RBI has approved First Loss Default Guarantee (FLDG), a mechanism wherein fintechs provide a default cover to lender. As per the guidelines, maximum default cover could be provided upto 5% of loan value. Such clarity in regulation is beneficial for fintechs including PayTm in listed space.

Banks continue to remain at a strong footing

  • Managements of private and PSU banks, in their recent commentary, has indicated healthy flow of deposits, continued momentum of credit demand and scope for increase in MCLR rates. With higher proportion of MCLR loans, PSU banks seems relatively better.
  • With continued healthy credit off-take and steadier margins coupled with further moderation in credit cost seems to support elevated RoA reported in FY24.
  • Stock Preferred – Axis Bank (Target Price Rs 1,100, Buy)
    • Anticipated RoA at 1.8% to drive valuation. Advance growth at 16-18%, higher than anticipated industry growth of 12-13%.
    • Scope for increasing MCLR rates and continued robust credit off-take is expected to enable steady margin on full year basis at ~4% for FY24.
    • With steady margins at ~4%, bank is expected to deliver RoA of 1.8% in FY24-25E. Stock is attractive at current multiple of 1.65x FY25E ABV

Fuel price cut expectation rises as health of OMCs are close to normalcy

  • In FY23, OMCs (IOC, BPCL, HPCL) recorded blended marketing margins of (13.8)/(8.5)/(3.1)/2.4 per litre in Q1/Q2/Q3/Q4 respectively.
  • This resulted into EBITDA loss of Rs 7,522 crore for HPCL in FY23, while IOC/BPCL posted positive EBITDA due to better refining: marketing mix.
  • Marketing margins has since then improved to Rs 8 per litre in Q1TDFY24.
  • GRMs are expected to remain healthy in FY24 though weak in Q1.
  • At current oil prices of 75$ per barrel, marketing margins have improved to Rs 9-11 per litre.
  • A cut of Rs 4-5 per litre would still remain beneficial for the company.
  • Preferred Pick – IOC (Target Price: Rs 105, Buy) - IOC plans to increase its refining capacity from current 80 to 107 MMTPA, Higher dividend payout (7-8% yield).

Graphite Electrode players better placed in steel segment

  • Graphite Electrode are used in Electric Arc furnace (EAF) route of steelmaking.
  • In US, ~25 MT of EAF route of steelmaking capacity is likely to come up . Of this 7 MT has already come on stream and balance 18 MMT would be operational in next 2 years.
  • Also, there has recently seen softening trend seen in prices of needle coke which is a key RM.
  • Stock Preferred - Graphite India (Target – Rs 440, Buy) – Capacity utilization to inch up.

Tata Motors – Upbeat management commentary (Target Price: Rs 700; Potential Upside: 25%)

  • Company reiterated towards wining sustainably in the domestic PV business and EV business.
  • In the PV space, to launch new SUV model i.e. Curvv in ICE domain while EV product launches include Sierra, Harrier and Avinya over next 12-18 months.
  • In the domestic PV business, it is targeting to attain double digit EBITDA margins in medium term with 7.3% levels attained in Q4FY23.
  • PV Industry to grow 5-7% in FY24E amid high base.
  • On CV, focus is on product launches in alternate fuel domain (EV, Hydrogen, CNG, LPG) and attain higher double-digit margins in medium term vs. ~10.1% in Q4FY23.
  • CV Industry to grow high single digit and attain a new high in FY24E (past peak was in FY19).
  • Aiming to be Net Auto debt free by FY25.

IEX : Caution warranted as market coupling weighs on the stock

  • The move by power ministry to call on CERC for timely execution and implementation of Market coupling led to IEX’s stock falling 16-17% in 2 trading sessions.
  • Market coupling would lead to creation of super exchange (owned by govt. entity) where price discovery will happen with power getting dispatched to short-term power trading platforms.
  • Now exchanges would just be a platform for dispatch of power and IEX being a dominant market leader will lose the moat of creating price discovery and liquidity. Hence there exists a significant risk of loss of power volumes for IEX.

Hidden Gem

Gabriel India - EV agnostic growth (CMP: Rs 182; MCap: Rs 2,614 crores; TP: Rs 225; Rating: Buy)

  • Gabriel India (GIL) is a global top-10 shock absorber manufacturer catering to auto and railway segment. FY23 revenue mix was– ~63% 2W & 3W, ~23% PV, ~12% CV & railways.
  • The company increased market share in 2W from 25% in FY22 to 32% in FY23 driven by outperformance by its key clients i.e. TVS, HMSI.  It also supplies to all new EV players like Ola Electric, TVS, Ampere, Ather, etc
  • In the PV space, market share is maintained at 23% with strong intent to increase it to 30%. Market share in fast growing UV is 35%.
  • The company recently entered JV with Inalfa (globally 2nd largest sunroof manufacturer with OEM’s like JLR, BMW, Mercedes, etc as clients) for manufacturing of sunroof system & other related.
  • It has already won orders from Hyundai & Kia for their entire range of products. Company intends to spend ~Rs 150 crores for setting up plant with initial capacity of ~2 lakh units and will be expanded to ~4 lakh units in 3-4 years with peak annual revenue potential of ~Rs 1,000 crores.
  • Expect 10.6% net sales CAGR over FY23-25E. PAT CAGR in a similar timeframe is placed at 19.5%, building in 80 bps improvement in EBITDA margins to 8% by FY25E.

It has a healthy balance sheet with net cash surplus of ~Rs 300 crore & strong capital efficiency (RoCE at ~20%) and trades at inexpensive valuation of ~14x P/E on FY25E EPS.

Source: ICICIdirect Research

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