Market Outlook of the week: Stock specific action likely amid Q2 earning season

• Indian equities outperformed its global peers amid elevated volatility owing to spike in US treasury yields. Recovery from lower levels helped index to recover lost ground and settle on a flat note while DJIA was down 1.2%, Europe down 2%.
• Going ahead, we expect index to gradually challenge the upper band of consolidation placed at 19,800 and subsequently accelerate upward momentum.  Meanwhile, 19,200 would continue to act as key support.
• Market breadth: Percentage of stocks >50 EMA (Nifty500) are bottoming out above reading of 60 in current market volatility indicating shallow nature of correction across broader market space.
• Small cap index has been showing immense strength by undergoing healthy retracement above its 20 days EMA, highlighting inherent strength.
• Crude Oil: Breakdown from 3 months rising channel signifies resumption of corrective bias and expect it to head towards 80.
• We are positive on BFSI, Consumption, Power and PSU baskets while IT offers favourable risk reward.

RBI policy on expected lines

• No change in Repo Rates: RBI maintained status quo on benchmark rates as was widely expected.
• No change in inflation projections: There is no change in inflation projection for the whole year (5.4%) and for H1CY24 (5.2%) despite marginally increasing by 20 bps for the current quarter (Q2FY24) to 6.4% vs 6.2%.
• No change in GDP Growth projection: Real GDP growth projection for 2023-24 maintained at 6.5%. Q1FY25 growth projection maintained at 6.6%.
• Debt market negativly surpriced by OMO-sales announcement: RBI announced that OMO-sales to keep liquidity in check. This OMO-sales announcement has led to some sell-off in yields by around 7-8bps in long dated bonds (5-year and beyond): RBI Governor stated that the release of the remaining impounded incremental-CRR funds tomorrow along with pickup in government spending are expected to ease liquidity conditions.
• RBI may also be preparing market for not getting overly bullish on inflows due to inclusion in global bond indices as RBI may want to suck out a major part that liquidity to ensure overall system liquidity does not turn into significant surplus.

Banking Q2FY24 business performance – robust traction continues

• Indian banking industry witnessed continued robust traction in credit growth at ~15.3% YoY, led by strong retail credit demand & working capital across lenders.
• Repricing of rates led to strong accretion in liabilities. Majority of incremental inflow came as term deposit while CASA inflow remained subdued.
• Change in asset mix and increase in CD ratio seen to keep margins steady. Opex to remain elevated while lower credit cost to benefit earnings.

• Federal Bank - Advance growth in-line with management guidance. Retail segment grew 22%; wholesale book growth at 17%.
• CSB Bank - Healthy growth aided by continued traction in gold loans (contributing ~47%) of book.
• IndusInd Bank - Healthy credit growth in-line with management guidance; retail segment being major driver with pick up expected in MFI segment. Focus on improving granularity of liabilities continue.
• HDFC Bank - Pace of liabilities accretion witnessed recovery. Retail and commercial book witnessed healthy growth while corporate segment remains slower at 8%. Home loan disbursement remained strong at Rs 48,000 crore.
• Bajaj Finance - Sustained business growth amid steady customer acquisition run rate and marginal improvement in ticket size

September Auto volumes - Steady numbers amidst expectations of robust festive season

• CV space outshined rest of the segments with Tata Motors and M&M outperforming its peers in the CV and PV space respectively.
• In 2-W space, market leader Hero MotoCorp reported volume growth of 3.2% YoY at 5.4 lakh units. Sustained volume recovery is still elusive the 2-W space with strengthening premiumisation trend the only solace for the industry. Exports too were broadly flat on MoM basis and are witnessing gradual recovery.
• In the PV space, Maruti Suzuki (MSIL) sales volume were up 3% YoY at 1.8 lakh units, while volumes at M&M were up healthy 19.6% YoY at 41,267 units (a new all-time high). Industry retails have been healthy in the start of festive season with aim to clock 1-million-unit sales volume over the 100-day festive period.
• In the CV segment, Market leader Tata Motors (TML) reported CV volumes of 39,064 units up 12% YoY for September 2023 while Ashok Leyland reported a volume growth of 9% on YoY basis. Notably, in this segment M&HCV space witnessed much higher growth an indicative of robust economic activity (healthy core sector growth such as coal, cement and Steel).
• In Tractor space, on a high base & Diwali being shifted to Nov this year vs. Oct last year, both players reported double digit decline in volumes (11% YoY decline). 

With longer investment horizon, we continue to remain positive on Passenger Vehicle Space (playing upon the underpenetrated category domestically) and CV domain (being beneficiary of robust government spending on infrastructure).

Tata Group continues with investor friendly moves

• Tata Motors subsidiary operating in the E&RD domain i.e., Tata Technologies which had already filed its DHRP with SEBI for proposed IPO i.e., an OFS of 9.57 crore shares with Tata Motors selling 8.1 crore shares (~20% stake) has filled an Addendum to the DHRP wherein it proposes to reserve 10% of the Issue Size i.e., ~1 crore shares for shareholders of Tata Motors.
• This is positive development for Tata Motors; firstly, it is rewarding for the existing shareholders of the company by way of some preferential treatment and second it will generate demand of its shares in secondary market as some investors might want to buying Tata Motors shares to brighten their prospects of getting allotment in Tata Technologies IPO.
• Shareholders of Tata Motors shall be eligible to bid in the IPO of Tata Technologies under retail category i.e., invested amount should be < Rs 2 lakhs.
• Given the increasing technology content in automobile these days and healthy valuations of listed companies operating in this domain like KPIT Technologies and Tata Elexi, we expect Tata Technologies to fetch a valuation of ~Rs 30,000 crore i.e., 50x PE on FY23 PAT of Rs 625 crore.
• With Tata Motors holding 55% stake post its partial stake sale in IPO, this is indeed value accretive to Tata Motors.
• We have a BUY rating on the stock with a SOTP based target price of Rs 810; offering a healthy 27% upside.     

Healthy wholesales at JLR for Q2FY24

• Tata Motors reported wholesale volumes of JLR (ex-CJLR) at 96,817 units for Q2FY24 amid improving chip supplies which is a growth of 29% on YoY basis and 4% on QoQ basis.
• Retail number for the quarter came in at 1.07 lakh units for Q2FY24, up 21% on YoY basis and 4% QoQ basis. It also expects positive FCF generation of £300 million in Q2FY24 (to be notified at the time of quarterly results).
• Wholesale volume growth of 4% on QoQ basis comes as a marginal positive surprise amidst management guidance of flattish volume performance on QoQ basis.
• With healthy order book of 1.68 lakh units and 77% of it tilted in favour of more profitable models namely Range Rover, Range Rover Sport and Defender, it is well poised for a record profitability and cash flow generation in FY24E.

Cement sector M&A could be win -win proposition

• We believe that Indian cement industry will see some consolidation in the medium term considering that the large players with better balance sheets would look for inorganic opportunities.
• The consolidation would also augur well for mid-cap/small cap players as they have been facing the increased competition pressure because of considerable capacity surplus and further additions across regions.
• Overall, consolidation in the sector may be a win-win for both the acquirer and the target companies as large companies wouldn’t mind giving some premium to smaller companies in order to retain or increase market shares.
• Recently Dalmia acquired few Jaypee assets at $75/tonne. Though the valuation was lower than the current replacement cost, but it was better than the current average valuations of a midcaps as there is already a substantial valuation gap (mid-caps trade at 40-50% discount to large caps on EV/tonne basis).
• Players like Orient Cement, Heidelberg Cement and Sagar Cement offer an opportunity considering the possibility of consolidation and substantial valuation disparity as compared to larger players.

Hidden Gems

Mayur Uniquoters (CMP: Rs 565; MCap: Rs 2,480 crores; TP: Rs 700; Rating: Buy; Upside: 24%)

• Mayur Uniquoters is a leading player in the technical textile domain manufacturing synthetic/artificial leather with application across automotive (seat upholstery and inner lining), footwear (shoes/sandals insole and uppers), furnishing (sofa upholstery, curtains) and apparels among others.
• Automotive segment constituted bulk i.e., ~50-60% of sales while footwear segment constituted ~20-30% of sales with rest being constituted by others.
• In the automotive side it caters to domestic OEM’s (like Maruti, M&M, MG, Volkswagen India, etc.), domestic aftermarket and OEM exports while in Footwear segment its key clients are Bata, Relaxo and Action among others.
• Auto OEM exports (at ~20% of its sales) is the most lucrative business (high margin) and our key point of interest at Mayur. Its key clients in this space are quality conscious and difficult to crack Luxury car makers such as Mercedes Benz, BMW among others wherein the company post years of hard work is seeing healthy demand traction with sales in this segment seen growing to ~Rs 600 crore by FY26 vs. ~Rs 160 crore as of FY23.
• With firm order pipeline both in domestic as well as export business, we expect sales at the company to grow at a CAGR of 17.5% over FY23-25E. With increasing share of high margin auto export business, operating leverage benefits and stable raw material pricing we expect margins to improve conservatively to 20% levels by FY25E.  With improving scale of operations, core RoIC is seen improving to ~25%+ levels.
• With controlled working capital cycle, MUL is offering an attractive CFO yield of ~4%. On the B/S front, it has long been debt free company with present net cash on books at ~ Rs 180 crore.
• We assign BUY rating on Mayur Uniquoters with a target price of Rs 700 i.e., 20x PE on FY25E EPS of Rs 35/share.