Market outlook of the week: Structural bull market ahead, Nifty headed for 22,400 by April 2024

• Nifty gained 1.7% for the week in tandem with global markets after Fed hinted rate cuts going into CY24. IT led the gains with 7% rally.
• Globally, sharp correction in US dollar index and treasury yields after Fed policy meet led DJIA to life high (up 2.5% for the week).
• Nifty almost hit our CY23 target of 21,400 last week as strong global set up boosted sentiments further.
• We expect Nifty to head towards next important milestone of 22,400 over next few months in run-up on General elections. Buy the dips with strong support at 20,700.
• Sectors to lead: BFSI, IT, Pharma, Metal, PSU are our preferred sectors with large caps to catch up midcaps from hereon.
• Macros improving: Strong domestic macros, lower Brent crude prices, expectations of rate cuts globally would continue to act as tailwinds.

Domestic and foreign flows continue to grow stronger

• Domestic inflows which have been the mainstay of liquidity for Indian equity markets in last few years continue to grow strong. Inflows remain strong despite market rising sharply in November indicating the confidence investors have in the structural capital appreciation potential of equities as an asset class. Total inflows in November was at Rs 15,500 crore vs Rs 20,000 crore (Just marginal decline despite sharp rally).
• SIP flows continue to grow: SIP inflows crossed Rs 17,000 crore milestone Vs Rs 16,928 crore in October.
• Smallcap/Midcap funds receiving higher inflows: While flows moderated, midcap and smallcap category continue to witness higher flows. Smallcap: Rs 3,700 crore Vs Rs 3,400 crore, Midcap: Rs 2,700 crore vs Rs 2,400. All other major categories saw marginal lower inflows.
• The yearly run-rate of inflows into MFs stands at Rs 1.6 lakh crore.
• FPI inflows - In last 3 weeks itself, FPIs have poured nearly 45,000 crores in Indian equities while in December month so far, we have seen more than 26,000 crores of flows. The recent outperformance in heavyweights is reflecting the same.

Rally in PSU banks backed by fundamental recovery; valuation provides room for upside

• Post the phase of significantly higher GNPA, treasury MTM losses, lower capital & sub-par growth, there has been a turnaround in PSU banks with comfort on asset quality; reversal of treasury losses, credit growth pick-up and adequate capital position across peers. Despite the decent rally, valuation still provide room for further upside.
• Asset quality trend continued to improve led by healthy recoveries and steady incremental slippages. GNPA ratio for PSU banks declined from 10.7% in Q1FY21 to a decadal low of 5.2% in FY23. Management commentary, revival in the economy suggest an improvement in asset quality and lower credit cost ahead with PCR currently around 75%.
• PSU banks has been losing market share in past of years, amid lower growth when compared to private players owing to asset quality issues and capital constraints. However, post Covid, PSU banks have witnessed a healthy revival in credit growth in-line with industry with focus on retail segments. Going ahead, investment in distribution of retail products and healthy pipeline of sanctioned corporate credit is aiding confidence of continued healthy growth.
• Anticipated decline in G-sec yields in next fiscal remains a catalyst for driving earnings momentum of PSU banks.
• Healthy liabilities franchise and scope for passing on higher interest rates amid higher MCLR linked loans is seen to keep margins steady. Anticipation of continued benign credit cost, amid improved provision coverage, is seen to aid earnings momentum and return ratios.
• Going ahead, RoA for large PSU banks is seen inching towards 0.8-1% gradually. Recovery in growth and stable asset quality justifies the valuation and provide room for further re-rating. Preferred picks – SBI, Canara Bank and Bank of India.

Emerging affordable lending scape is a space worth looking at

• Economic recovery, focus of regulator & government on financial inclusion and adoption of technology has led to continued surge in affordable lending space including housing, small business loans and micro-finance.
• Healthy accretion in NTC (New to Credit) customer and gradual increase in ticket size coupled with improved data stack aiding better under-writing has led to faster credit growth in this segment.
• Factoring cyclicity imbedded in this segment and vast opportunity aiding sustained healthy growth outlook, investment opportunity in selective pockets remains lucrative.
• Preferred stocks – Spandana Sphoorty, SBFC.

Life Insurance – IRDAI looking to prune surrender charges

• IRDAI has released a consultation paper proposing higher surrender value on non-linked products. Surrender value is the payout in case of termination of policy before maturity.
• Higher surrender payout remains negative for life insurers, however, as currently it is consultation stage, implementation of the same is to be seen to ascertain exact impact.
• Broad estimates suggest impact in single digit on life insurers in case the aforesaid proposal is implemented. The recent decline in stock price seems to factor the impact with focus continued on business growth which remains healthy.
• Among listed insurers, HDFC Life and Max Life has higher proportion of non-linked products.
• Preferred pick – SBI Life Insurance due to valuation and better growth trajectory of 18-20%.

Real Estate - Demand Buoyancy is here to stay

• The total residential property sales value in M9CY23 is 7% higher than CY22, with the top 7 cities seeing inventory worth approx. Rs 3,48,776 crore sold in this 9-month period. The entire 2022 saw approx. Rs 3,26,877 crore worth of inventory sold.
• In terms of volume, between January and September 2023, approx. 3.49 lakh units were sold in the top 7 cities, against approx. 3.65 lakh units in the entire 2022.
• The sales value growth reflects the increased demand for premium luxury homes this year. This, along with the fact that average prices in the top cities rose by anywhere between 8% and 18% this year.
• We highlight that with further trigger in the form of likely rate cut next year, the overall demand buoyancy is here to stay.
• We prefer companies such as Mahindra Life, Brigade Enterprises, etc with strong balance sheet, robust execution track record coupled with scalability plan would be the key beneficiaries.

Power Utilities: Conventional and Green energy will co exists together

• With power ministry reiterating the need for incremental 80 GW of coal power plants till 2030 and strong capacity addition and capex trends, we belove that conventional and green energy will co exists together. The same is also reiterated from the fact that power demand is likely to grow ~8% YoY till 2030 thereby requiring strong capacity additions till 2030.
• In a bid to diversify from traditional thermal/Hydro based assets, central utilities like NTPC, NLC India, SJVN and NHPC have shifted their focus in scaling non fossil fuel-based assets in an aggressive manner and have set significant assets addition plans over the next decade.
• NTPC, the largest generator, plans to add 60 GW by 2032 and wants to take share of green portfolio to 45% in the overall basket. The company also has set an aggressive renewable capacity addition target of 16,000 MW till FY26. Apart from renewables, it is also working on green energy segments like Nuclear (has entered into JV with NPCIL) and Green Hydrogen. The company has also floated a subsidiary in this regard and transferred assets to the same.
• SJVN has also floated a separate renewable subsidiary wherein the company aims to reach a capacity pf 5,000 MW by FY25E and 25,000 MW by FY30E mainly skewed towards renewables.
• In a nutshell, this change of DNA will lead to improvement in ROEs given renewable projects are relatively shorter time projects and risk of feedstock and clearances are negligible which will result into faster capitalization of CWIP into ROE generating fixed assets.

Hidden Gem

United Spirits (CMP: Rs 1,085, Target: Rs 1,250, Upside: 15%)

• United Spirits (USL) is India’s leading alcoholic beverage company and subsidiary of global leader Diageo plc. It manufactures, sells premium liquor brands such as Johnnie Walker, Black Dog, Black & White, Vat 69, Antiquity, Signature, Royal Challenge, McDowell’s No 1, Smirnoff and Captain Morgan. Prestige and above segment comprise 80% of its volumes.
• The company aims to grow its revenues in double digits and expects its operating margin to remain in mid to high-teen levels in the medium term.
• Accelarating premiumization: USL portfolio re-shape strategy in FY23 has led to accelerated revenue growth in the luxury and premium category (up 37% in FY23), strengthening play in Upper prestige (up 32%), better value proposition in lower and Mid-prestige (up 43%). Most of the brands in the Luxury and Premium category are global brands (Johnny Walker, Black and White, VAT69 etc) which directly compete with global brands of Pernod Ricard (Chivas Regal, Absolut etc). We expect healthy realisations ahead.
• IMFL is the biggest volume, revenue segment in the alcobev sector: India is predominantly a spirit’s market with 92% alcohol consumed as spirits (rest 8% and 0.1% contributed by beer and wine), which is dominated by IMFL alone. Also, India’s percentage of drinking population is expected to grow from 33% in CY21 to 39% in CY25. Overall, the Spirits segment is expected to grow in higher single digits.
• Excise policies focus on volume growth: In recent years, the excise policy thrust has been focussed towards generating higher volume growth within the IMFL segment, vs rather than mere raising the excise rates and also an undercurrent to shift towards private retail and opening of more premium retail shops in esp. metros. Overall FY23 was one of the best years for the company to receive pricing in multiple states (however, inflation still continued to beat it).
• EBITDA up, in-spite of volatility along GMs: Operating environment continues to remain challenging for the company due to double digit inflation seen in critical raw materials (ENA, Glass etc). The management intends to counter it by managing product mix, getting price hikes, lower working capital and further improving enterprise productivity. The company has been able to guide for 15%+ EBITDA margins inspite of continued volatility along the gross margins.
• Revenues/EBITDA/PAT expected to grow at 9%/22%/11% FY23-25 CAGR. Return ratios are expected to reach 24% levels (ROIC even higher).
• We value United Spirits at Rs 1,250 based on 65x FY25E P/E multiple.