Market outlook of the week: Stock specific moves to continue in truncated expiry week

• Indian benchmarks were subject to mild profit booking at life highs and muted global cues.
• Nifty, Nifty midcap and small cap indices closed 0.6% down for the week.
• Index has rallied 12% over past thirteen weeks and healthy consolidation with short term.
• We maintain Nifty target of 19,300 for July, with buying the dips approach and key support at 18,400 levels.
• Small caps to continue relative outperformance: Nifty Smallcap250 index has given a breakout from 20-month consolidation. Pattern implication suggest another 20-25% rally over next 12–15-month period.  Constituents like Credit access Grameen, Birla Soft, Jamna Auto, Elgi Equipments, MM Forgings, Lemontree, KEC, Rossari Bio are looking attractive.

India US defence Cooperation

• Indian defence sector continues to look strong with govt’s resilient focus on indigenisation.
• GE aerospace has signed an MoU with Hindustan Aeronauticsfor co-production of GE-414 aero engines in India, which will be used in next-gen fighters like Tejas MK2 and Advanced Medium Combat Aircraft (AMCA) Mk1.
  • Considering IAF’s plans to procure 6 squadrons of Tejas MK2 and 2 squadrons of AMCA Mk1, at-least 180-200 GE-414 engines are expected to be produced in India which would create a sizable opportunity for HAL and other domestic players.
  • Apart from this, few key agreements like Micron’s setting up semiconductor facility in India would be beneficial for companies like Bharat Electronics which is largely into defence electronics. Moreover, discussions on “Reciprocal Defence Procurement Agreement” are in process which also shows significant potential for other defence ancillary companies.
  • We remain positive on Bharat Electronics (Target price - Rs 135) as the company looks well placed in terms of reaping benefits from increasing requirement of electronic enabled indigenised defence platforms. Order backlog at ~Rs 60,700 crore (3.4x FY23 revenues) gives strong revenue visibility. Order inflows are expected to be steady at about Rs 20,000 crore per annum as the pipeline looks strong considering the requirement of electronic warfare systems, radars, avionics etc in different defence platforms.

Banking stocks set to witness pick up after remaining muted in recent times

• Post a ~11% correction in Dec-Mar’23, banking stocks witnessed recovery in Apr-May’23. However, overall Bank Nifty has remained muted in last 6 months (Bank Nifty at 43,707 on 22 June 2023 vs 44,044 on 14 Dec 2022). After such muted performance, banking stocks seems to be poised for beginning gradual pick up ahead of earnings season.
• Healthy credit growth, increase in deposits owing to note ban (Rs 2.4 lakh crore worth of notes received) and anticipation of steadier margins in FY24E (compared to earlier expectation of fall in margins).
• With RoA expected to remain strong in FY24E, banking stocks are expected to start factoring in business growth in valuation. Large private and PSU banks, both are expected to witness traction ahead.
• Preferred Pick – HDFC Bank (Target Price: Rs 2,050).

Auto Sector – Cooling the CV Space

• Union Minister for Road & Transport indicated at making AC cabins mandatory for M&HCV truck starting 2025 (Official notification awaited).
• On of the key beneficiaries of the same i.e. Subros Ltd has pegged the total opportunity at 3.2-3.5 lakh units with total opportunity size in value terms pegged at ~Rs 500-550 crore.
• This is largely aimed at improving working conditions for truck drivers.
• For auto OEMs, it does not move the needle as the consequent price hike is to the tune of
• We are positive CV space amidst robust infrastructure spending by the current government and expect it to surpass the previous peak and attain a total sales volume of ~10.5 lakh units domestically in FY24E. Our top bets in this space are Tata Motors (Rating: BUY; Target Price: Rs 700) and Ashok Leyland (Rating: BUY; Target Price: Rs 200).

Textile Sector- Most of the negatives behind; poised for steady recovery in FY24E

• Textile stocks during the last few weeks have been under the limelight with shares such as Indo Count Industries, Gokaldas Exports, Vardhman Textiles & KPR Mills gaining in the range of 9-23%.
• Domestic cotton prices have softened in the recent times with prices declining by~10% in the last one month to Rs 155/kg (down ~40% YoY).
• More importantly, disparity between the domestic and international cotton prices have drastically reduced with domestic cotton prices now trading at a premium of only 5-6% (down from peak of nearly 35%). Subsequently, India’s yarn utilisation levels have improved steadily from 60% in Q3FY23 to ~85-90% currently.
• Furthermore, for home textile players, India has regained its lost market share (for Cotton sheets) in the USA from ~ 50% in CY22 to 56% in YTD-23. Share of apparel exports too have strengthened in USA with share increasing by 130 bps to 7% in YTD-23 (CY22: 5.7%).
• Recent managements commentary suggests that inventory levels at the global retailers is gradually correcting, the overall ordering scenario by global brands continues to be cautiously optimistic with most buyers buying closer to date and in smaller lots than earlier.  
• We believe there is enough headroom for sustainable long-term growth for textile space (expected free trade agreements with Europe/UK, PLI scheme, China+1) given India’s minuscule share (~4%) in overall global textile and apparel trade.
• Amongst the textile coverage, we continue to like Indo Count, KPR Mill & Gokaldas Exports. 

Trent Ltd – expected to perform despite expensive valuations (CMP: Rs 1,700, TP: Rs 2,030, Upside: 19%)

• In the retail space, Trent has been an exceptional performer with stock price appreciating at 40% CAGR in the last 5 years. It continues to trade at premium valuations (~77x P/E FY25E) and the reason for the same is industry leading operational performance.
• Over the last six years (FY17-23), Trent has delivered industry leading sales growth of ~30% CAGR vs. industry average of 12%. During FY23, Trent also witnessed a sharp jump in RoE profile to 17% in FY23 (from ~5% in FY20).
• Latest value fashion format, ZUDIO, has demonstrated strong ability to gain market share in value fashion segment with focus on improving profitability. Zudio now contributes 40% to standalone revenues (from merely 16% in FY20), with revenues surpassing Rs 3,000+ crore in FY23. Trent will continue accelerated store additions for Zudio with opening of 200+ stores in FY24 (added 117 stores in FY23). We expect Zudio revenues to grow at CAGR of 31% in FY23-25E.
• Westside continues to be one of the most profitable retailers driven by unique business model with 100% exclusive retail. Westside recorded highest EBITDA margin of 13% in FY23 (average: 11%), despite pressure on RM expenses.
• Westside generating its highest ever revenue/sq. ft of Rs 11,973 in FY23 (industry average: Rs 10,000). With Westside firing on all cylinders, we expect the format to have registered 25%+ RoIC during FY23.
• Robust performance during challenging times and industry leading performance will continue to fetch premium valuations to Trent.

Sugar stocks back in action on monsoon worries

• Sugar production for 2022-23 season is expected to be 32.7 million tonnes (MT). Considering consumption of 27.7 MT & exports of 6.3 MT, sugar inventory level is expected to decline by at least 1 MT by September 2023. This would keep domestic sugar prices firm above Rs 36 /kg until November'2023.
• Moreover, possibility of El nino & below normal rainfall could keep sugar prices firm for extended period of time.
• Most of the sugar companies have completed large capacity addition last year, which would reflect in higher ethanol volumes in FY24.
• We believe sugar companies would earn better margins in sugar business in FY24. Moreover, higher ethanol volumes would also drive profitability.
• We like Dhampur Sugar (Target price: Rs 340)  & Dalmia Bharat sugar (Target price: Rs 490 share) mainly due to dual benefit of higher sugar prices & lower cost of production.

Hidden Gem

Dalmia Bharat Sugar (Target Price – Rs 490)

• Dalmia Bharat Sugar is one of the most efficient sugar companies in India with high distillery capacity. It has presence in UP as well as Maharashtra.
• The company is aggressive in its distillery capex plans & it is looking to leverage high demand opportunity of ethanol (20% ethanol blending require 1,000 crore litre of ethanol by OMCs by 2025-26) through grain-based ethanol distilleries in next two years.
• DBS is expanding its distillery capacity from current 710 KLD (22 crore litre pa) to 1,100 KLD (32 crore litre pa) by September 2024 by adding grain-based ethanol capacities. Distillery segment to contribute 45% to revenue by FY25.
• It has one of the best balance sheets in sugar industry with mere 0.1x debt to equity. Given it is undertaking huge capex ~to the tune of ~Rs 500 crore in next two years, its overall debt would increase to Rs 804 crore by FY24. However , it would be generating operating cash flow of Rs 842 crore in the next two years, which would be utilised for working capital requirement, capex related to distillery & dividend payout.
• Dalmia Bharat Sugar is one of the best plays in sugar sector with high sugar recovery, low cost of production, high ethanol capacity, strong sugar refining operations & lean balance sheet.
• We remain positive on the company with a target price to Rs 490.