Market outlook of the week: Union Budget outcome and earnings to weigh on sentiment

• Indian equity benchmarks lagged global peers weighed by consistent selling by foreign institutional investors in heavyweight banks.
• Nifty corrected 1% against 1-2% gain in major global equity indices.
• In the upcoming week, volatility is likely to remain elevated owing to earnings progression, US Fed meet and Union Budget.
• As Nifty has already corrected 4.5% from life highs (22,124) and entering budget week on a lighter note, we expect Nifty to hold key support of 20,800 (38.2% retracement of rally) and head towards psychological level of 22,000 in the short term.
• In run up to this year’s interim budget, we expect companies with exposure to rural areas, infrastructure, Capital goods, PSUs, BFSI to remain in focus.

RBI liquidity measures

• In response to the escalating liquidity deficit within the banking system, the Reserve Bank of India today has announced a substantial liquidity infusion of Rs 2.50 lakh crore through a 15-day variable rate repo (VRR) auction.
• 1-month and 2-month bank CD rate has declined 25 bps today morning post the announcement. More than 3-months and higher maturity CD rates have declined by 3-10 bps.
• Since last 1 month, the liquidity in the banking system has turned deficit and this week has risen to a record high of Rs 3.4 lakh crore (Rs 1.3 lakh crore on 1^st January 2024).
• Reason for higher system liquidity deficit include - Moderation in government spending, higher tax outflows in december, Slower bank deposit growth among others.
• Due to tight liquidity, Money market (3-6 months Bank CD) rates had increased by 25-40 bps in last 1 month. 3-month CD has increased from 7.45% to 7.85%, while 6-month CD rates has increased from 7.58% to 7.84% Longer dated G-Sec yield however have remained stable.
• With Thursday’s liquidity infusion, the liquidity concerns will be addressed to a certain extent. Also, Government spending is likely to be increased in Feb and March as we near elections and the same will help liqudity to normalise.

Kotak Mahindra Bank (CMP - Rs 1,770, Mcap - Rs 3,51,904 crore)

• Kotak Mahindra Bank reported healthy performance in Q3FY24.
• Advances growth came a tad lower at 15.7% to ~Rs 3.6 lakh crore, though focus on high yield book (personal loans, credit card and MFI) led proportion to increase by 60 bps QoQ to 11.6%. Deposits grew 18.6% YoY, supported by robust traction in ActivMoney.
• Asset quality remained broadly stable with Slippages at ~30 bps of advances and GNPA inching up ~18 bps QoQ to 1.9%.
• NII increased 15.9% YoY with margins steady at 5.22%. Despite trading loss of Rs 168 crore, other income grew 17.9% YoY. Higher provision at ₹ 571 crore (~40 bps of advances), led by ₹193 crore for exposure to AIF, kept PAT growth slower at 7.6% YoY to Rs 3,005 crore.
• Healthy and balanced growth with focus on high yielding segment and garnering of deposits remains encouraging. However, given higher share of external benchmark loans, maintaining margins remains a challenge.

Axis Bank (CMP - Rs 1,038, Mcap - Rs 3,20,156 crore)

• Axis Bank reported healthy performance in Q3FY24 led by business growth and improved asset quality.
• Advance increased by 22% YoY to Rs 9.3 lakh crore while deposit grew by 18% YoY (LCR steady at 118%).
• Continued decline in margins (-10  bps QoQ) kept NII growth at 9% YoY, while healthy fee based income was utilized to improve distribution capabilities resulting in flat operating profit.
• Lower credit cost led PAT growth at 4% YoY to Rs 6,071 crore.
• Focus on high yield segment, accretion of CASA and maintaining outflow of deposits are levers supporting margins. However, relatively the bank posted better performance. Thus, we remain positive on the stock given current valuation of 1.9x FY25E ABV.

IDFC First Bank (CMP - Rs 80, Mcap - Rs 56,213 crore)

• IDFC First Bank reported continued business momentum.
• Advances growth continued at 25% YoY to Rs 1,89,475 crore, led by focus on non-corporate loans. Liabilities franchise remained healthy with 37.2% YoY growth in deposits and 27% YoY run down of relatively high-cost borrowing.
• Margins improved further by 10 bps QoQ at 6.42%, led by increasing proportion of retail loans.
• Elevated opex (CI ratio at 73.1%) and credit cost (~35 bps) restricted PAT growth at 18.4% YoY.
• The bank unveiled 2.0 (FY24-29E) with deceleration in advance growth at 20% CAGR, Improvement in operational efficiency is expected to aid RoA trajectory towards 1.9-2%.
• Kicking in of operating leverage remain the key catalyst which can aid improvement in RoA. Given achievement on most of the matrices guided earlier, we remain positive on the long term potential.

Indian Bank (CMP - Rs 465, Mcap - Rs 62,634 crore)

• Indian Bank reported continued steady performance with lower provision supporting earnings.
• Advance growth came at 13% YoY to Rs 5.09 lakh crore, led by growth across retail, agri and MSME segment. Deposit accretion remained steady at 10% YoY.
• Decline in margins (-5 bps QoQ) kept NII growth at 6% YoY, while traction in other income supported higher opex (including provision related to wage provision) resulting in flat operating profit. Lower provision led earnings growth at 52% YoY to Rs 2.119 crore.
• At current price, the stock is trading at ~1.1x FY25E ABV which seems reasonable amid healthy liabilities franchise in the current tight liquidity environment.

Auto OEM’s: Report healthy numbers, largely beating expectations

Bajaj Auto : Posted robust performance in Q3FY24

• Total operating income jumped 30% YoY amidst 22% YoY growth in volumes at 12 lakh units.
• EBITDA margin went up 20.1% (up 30 bps QoQ).
• Margin performance came in healthy amidst adverse product mix (lower share of 3-W in total sales volume; at 13% down 300 bps QoQ).
• Management commentary was positive around the Chetak brand in E-mobility space as well as Triumph bikes in the premium category.
• Company however expects exports to pick up slow.
• The company now trades at a tad premium valuation to its historical averages supported by heathy buyback announcement in the recent past (Rs 4,000 crore buyback @Rs 10,000/share).

TVS Motors: Reported healthy performance in Q3FY24

• With 25.2% YoY and 2.5% QoQ growth in total sales volume at 11.01 lakh units, net sales for the quarter came in at Rs 8,245 crore (up 26% YoY, 1.2% QoQ).
• EBITDA for the quarter came in at Rs 924 crore with corresponding EBITDA margins at 11.2% (up 20 bps QoQ largely led by RM cost savings). PAT in Q2FY24 stood at Rs 593 crore (up 11% QoQ).
• EV sales for the quarter came in at 48,000 units i.e., ~4.5% of total sales volume in the 2-W space.

Auto Ancillary: Report steady numbers, falling short of expectations

Exide Industries: Report steady numbers, falling short of expectations

• Total operating income was up 12.8% YoY. EBITDA for the quarter came in at Rs 440 crore with corresponding EBITDA margins at 11.5% (down 30 bps QoQ).
• The company is taking tangible steps in the Li-On Cell manufacturing space and is well poised to be India’s first EV cell manufacturing company providing its first movers advantage in this space.

Balkrishna Industries: Posted steady set of numbers for Q3FY24

• Standalone revenues were up 6.4% YoY amidst 9.4% YoY growth in volumes at 72,749 tonnes. 
• Q3FY24 marks the first quarter of YoY volume growth at BKT after four quarters of volume decline. The company’s performance however was marginally short of our expectations.
• EBITDA in Q3FY24 stood at Rs 539 crore with corresponding EBITDA margins at 23.6%, up 30 bps QoQ.
• The company guided for flattish volumes in Q4FY24 with pressure on margins in the short term amidst rise in shipping costs.
• The company aim to attain ~10% market share in global OHT segment over next 3-4 years.

Tata Steel: Improvement in Indian operations lifts overall performance

• On the consolidated basis, total operating income came in at Rs 55,312 crore (down 3% YoY) with steel sales volume of 7.15 million tonne (flat on YoY basis).
• Reported EBITDA for the quarter came in at Rs 6,264 crore vs. Rs 4,268 crore in Q2FY24, largely due to low raw material cost.
• Standalone operations reported adjusted EBITDA/tonne of Rs 16,903 vs. Rs 13,564 in Q2FY24, i.e. a higher on QoQ basis.
• Europe revenues were £1,842 million and EBITDA loss stood at £276 million.
• The company reported positive PAT of Rs 522 crore on consolidated basis during the quarter vs. loss on both QoQ as well as YoY basis.

Tech Mahindra: Long road ahead for recovery, growth strategy to be unveiled after Fiscal Year ends

• Tech M in Q3 reported revenue growth 1.1% QoQ in CC terms against the street expectation of revenue decline due to certain one off revenues.
• Vertical wise Manufacturing & Retail reported sequential growth of 2.9% & 6.4% respectively while CME, BFSI & Hitech declined by 0.3%, 2% & 2.9% respectively due to furloughs impact.
• Geography wise Americas region (51.9% of mix) declined by 1.5% QoQ while Europe & RoW grew by 2% & 6.3% QoQ respectively.
• EBIT margin of the company increased by 70 bps QoQ to 5.4% while adj. margin excluding the portfolio rationalizing activity came at 7%.
• TCV for the quarter came at US$ 381 mn, down 40.1% QoQ.
  The company’s overall performance was weak on both the revenue & margins front which was expected in a seasonally weak quarter in the current challenging macro environment.
• The company’s immediate focus is on margin expansion and indicated that the margins have bottomed out.

Birlasoft: Short term projects aids in revenue growth, margin resilient despite wage hike

• Birlasoft reported decent revenue growth in Q3FY24 as its revenue grew by 1.8% QoQ to US$ 161.3 mn while in CC terms it grew by 1.9% QoQ.
• The growth was aided by certain short term projects despite the impact of furloughs.
• Vertical wise, growth was led by Energy & Utilities vertical (14.5% of mix) which grew by 7.8% QoQ and geography wise Americas region (85.7% of mix) grew by 1.8% QoQ.
• It posted EBITDA margin of 16%, up 20 bps QoQ after absorbing the full quarter impact wage hike.
• The deal TCV although bit soft compared to Q2, the company however indicated that the pipeline remains strong.
• The company further mentioned that it will keep its margin in narrow band of ~16% range in the near term.

JK Cement - Strong operational performance

• As the Revenue increased by 20.5% YoY while EBITDA increased by 153% YoY. Revenue growth was led by 13.5% YoY volume growth and 6.1% YoY improvement in realization.
• Healthy volume growth of 13.6% YoY is much better than the industry growth rate. This was mainly on account of ramping up of 6 mtpa capacity additions by the company during FY23.
• EBITDA/ton stood at Rs 1,329/ton which increased sharply by Rs 732/ton YoY; primarily led by 6% YoY improvement in realizations and 18% YoY decline in power & fuel cost.
• Going ahead, we believe that volume growth will remain healthy at ~11% CAGR over FY23-26E led by another 3.5 mtpa capacity addition in central India which will take the total capacity to 24 mtpa. By FY26E, company’s total capacity would reach 30 mtpa as another 6 mtpa is scheduled to be added in central and east region.
• EBITDA/ton is expected to improve from Rs 810/ton in FY23 to Rs 1,210/ton by FY26E, translating to EBITDA CAGR of 27% over FY23-26E.
• Valuation at 13x EV/EBITDA and $ 145/ton on FY26E looks attractive given that the company is entering into a league of 30 mtpa capacity, strong volume growth and margins improvement.

Bharat Dynamics – Q4 expected to be significant

• Operational performance has improved considerably on YoY basis led by pick-up in execution which was impacted during Q3FY23-Q1FY24 period on account of delays in receipt of key components for surface to air missiles and torpedoes.
• Revenue was up ~30% YoY with EBITDA margin marginally improved to ~20%, translated into EBITDA increase by ~34% YoY.
• We believe that next quarter will see further pick-up in. In November, company maintained its full year revenue guidance of Rs 3,200 crore, which implies 100%+ YoY revenue growth in Q4FY24.
• Company’s order backlog at ~Rs 20,000 crore (~9x TTM revenues) provides strong growth visibility in the coming period.
• Overall, we expect revenue CAGR at 30% over FY23-26E and PAT CAGR at ~50% during the period. Valuation at 25-26x P/E on FY26E also looks attractive considering the strong growth and multiple industry tailwinds.

Hidden Gem

State Bank of India (CMP - Rs 607, Mcap - Rs 5,41,679 crore)

• SBI is a public sector bank and also the largest bank in India with a balance sheet size of over ~Rs 55 lakh crore. Post Covid, the bank has delivered sustained recovery in both business growth as well as asset quality. Strong distribution network, diversified product mix and large customer base remains core strength of the bank which enables to deliver best operating metrics in the PSU banking space.
• Large customer base and diversified product mix is seen to aid credit growth expected to be in-line with the industry at 14-15% in FY24E. Advance growth is seen to remain broad based with focus on MSME and retail (home loans & Xpress credit) segment which will enable business growth as well as support yields. In the current environment of tight liquidity, levers including healthy liabilities franchise, excess SLR investments and scope to increase proportion of high yield segment is expected to support margins with minimal impact on growth.
• Asset quality remained resilient with GNPA/ NNPA at 2.76%/ 0.71% while restructured book stood at ~70 bps of advances. Healthy PCR stands at 76.4% for advances and ~30% coverage on restructured book provides comfort on continued benign credit cost expected at ~30-50 bps ahead.
• SBI has demonstrated its strength in previous quarters both on core operating performance and asset quality. Management confidence on growth (14-15%), steady margins and return ratios remaining ahead of 1% in FY24-25E warrants a re-rating, which is long due and should see strong positive momentum. Plough-back of profits leading to improving RoE of ~16-17% further adds to valuation.