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Markets oversold, Odds favor relief rally

ICICI Securities 22 Mins 05 Mar 2023
  • Indian equity benchmarks ended choppy week on a positive note as Nifty gained 1% to settle at 17,594. Midcap and Small cap indices outnumbered benchmark with a gain of >1.5%. Major global markets oscillated in a narrow range, more of an extended consolidation
  • Benchmarks are in the process of higher base formation over past three months as they corrected 9% from its life high registered in December 2022
  • Current chart setup has glaring similarities with that of CY13, CY16 and CY18. In each of these instances, indices formed a higher base over a period of three to four months, followed by indices rallying back to highs in the subsequent quarter

Odds favour a rally in March

  • Over past two decades, on all ten occasions when Nifty corrected for three consecutive months, in the subsequent month, index gained on an average 6% from lows. Odds favour market to follow this rhythm and eventually head towards 18,300 in March
  • For the coming week, we expect index to hold 17,200 and head towards short term hurdle of 17,800, sustainability above which would lead to acceleration towards 18,300 in March
  • Sectors like BFSI, Power, Infra and IT favoured

Adani stake sale - Enhanced liquidity of Adani group promoters to allay market concerns

The Adani group companies witnessed major block deals in 4 group companies. Promoter sold shares worth Rs 15,446 crore in the 4 Adani Group companies through open market to GQG partners (a boutique global investment firm). 

Deal details: The promoter entity sold 8.86 crore shares of Adani Ports at Rs 596.2 per share aggregating to Rs 5,282 crore, while it sold 5.56 crore shares of Adani Green Energy at Rs 504.60 per share aggregating to Rs 2,806 crore. Also it sold 2.84 crore shares of Adani Transmission at Rs 668.4 per share aggregating to Rs 1,898 crore and 3.87 crore shares of Adani Enterprises at Rs 1,410.86 per share aggregating to Rs 5,460 crore.

The commitment of large funds by a global investor signifies the confidence of the investor in the current and future business prospects of these companies. The four Adani group companies are key players participating in the India infrastructure growth story as these companies own and operate some of the largest and most important infrastructure assets throughout India.

Among the Adani group companies, we prefer Adani Ports and Ambuja Cements given the strong balance sheet and healthy operating assets.

Adani Ports – (CMP - Rs 665; Target Price - Rs 800, upside -20%)

  • Adani Ports and Special Economic Zone (APSEZ) is the largest commercial port operator in India with 25% share of port cargo movement in India. APSEZ has embarked on becoming India's largest integrated transport utility company by 2030 and is strengthening its capabilities in all logistics segments (ports, CTO, warehousing, last mile delivery, ICDs, etc).
  • Adani Ports is backed by strong FCF (~5% FY24 FCF yield at CMP 665) generating assets (14 ports, 81 trains, 9 MMLPs, 1.4 million sq ft warehousing, 620 kms of rail tracks etc) with a 15%+ RoCE. Further it has a comfortable Debt/Equity ratio close to 1. We have valued APSEZ on SOTP basis with a target price of Rs 800.

Ambuja Cement: (CMP: Rs 390, TP: Rs 500, upside: 28%)

  • Ambuja Cement (Now Adani group conglomerate) is one of India’s largest cement player with capacity of 31.5 MT.
  • The new management plans to increase consolidated capacity (including ACC capacity of 36.1 MT) to ~140MT in the next 5 years (ie. at 16% CAGR).
  • Also, the group’s exposure into energy and logistics will help them to improve cost dynamics and gain supply chain efficiencies. Overall, as per our rough estimates, we expect cost savings of Rs 300-350/tonne from the current run rate. Company continues to have a strong balance sheet having debt free status.

Healthy Chinese PMI indicates early signs of green shoots for Metals

  • Chinese manufacturing PMI shot up to 52.6 in February 2023 from 50.1 in January 2023. That was the highest reading since April 2012
  • The better-than-expected PMI signaled a healthy revival of the Chinese economy. The Chinese steel prices has seen an uptick of ~5% over last 1 months and is currently hovering at ~ US$ 675/tonne. In Indian market also, during the 1st week of March 2023, domestic steel players have taken HRC price hike of ~ Rs 1,000-2,000/tonne to ~ Rs 60,000 -62,000/tonne.  Indian steel players exports volume has also picked up. In Jan 2023, export volume rose 33% MoM to 0.75 MT, highest level in the past seven months

Top Picks

Tata Steel (CMP – Rs 106, Target Price – Rs 130, Rating – Buy, Upside – 23%)

For Q4FY23, with respect to Tata Steel’s Indian operations, realisations are expected to higher by ~Rs. 1,400-1,500/tonne QoQ, compared to Q3FY23. For Q4FY23, with respect to Indian operations coking coal consumption cost is expected to decline by ~US$10/tonne QoQ when compared with Q3FY23. Aided by sequential increase in realisations, Tata Steel Indian operations EBITDA/tonne is expected to improve in Q4FY23 from Q3FY23 level.

Hindalco (CMP – Rs 414, Target Price – Rs 520, Rating – Buy, Up]side – 26%)

For Hindalco’s domestic operations, the cost of production (CoP) of the Indian aluminum business is likely to decline by ~ 5% in Q4FY23 when compared with Q3FY23. The sequential declining trend in thermal coal prices (one of the biggest cost element) is likely to aid this sequential fall in Cost of Production (CoP), thereby auguring well for Hindalco’s Indian Aluminum operations.

Domestic pharma to maintain 10-12% of growth trajectory - MR expansion, patent expiries, pricing power

  • We expect domestic pharma business to maintain 10-12% sustainable growth.
  • After a gap of almost two years, we observe significant field force expansion during FY23 by all leading players to focus on brand building and geographical expansion. A case in point is Sun Pharma which has added ~1,200 MRs to its 11,000 strength in FY23.
  • As per Abbott management, ~ 500 odd drugs are expected to lose patent exclusivity over the next 5-10 years in India. This is expected to provide additional avenues for growth as post expiry the market is expected to expand significantly due to affordability. A case in point would be the Heart Failure drug Vyamda which went off-patent recently and which was growing at a CAGR of ~30%. The market size of the same was Rs 500 crore.
  • Despite volatility globally, the pricing growth is ~5%. This reflects substantial pricing power devoid of market volatility.

Top Picks

Sun Pharma (Target price 1,210) -  India formulations accounts for ~32% of the revenues which is expected to grow at a CAGR of 12% CAGR during FY23- 25E.

Cipla (Target price 1,290) - India formulations accounts for ~45% of the revenues which is expected to grow at a CAGR of 12% CAGR during FY23- 25E

Ajanta Pharma (Target price 1,385) - India formulations accounts for ~31% of the revenues which is expected to grow at a CAGR of 13% CAGR during FY23- 25E.

P&G Health (Target price 5,315) - Derives ~60% revenues from fast growing Vitamins category, overall sales expected to grow at a CAGR of ~10% during FY23-25E.

Auto volumes –February 2023: CV, tractors continue to rule high!

Feb Auto volumes came in steady with CV & Tractors leading the charge. This month’s volume has to be seen in the context of less number of production days vs. other months and some OEM’s are again raising concern over supply chain issues.

Out-performance for the month was led by Tata Motors in the CV space, Maruti Suzuki in PV domain.

  • Overall Demand continued to remain robust in the PV space amidst 7+ lakh units pending orderbook at industry level.
  • Maruti Suzuki volumes were flat MoM at 1.7 lakh units with UV volumes coming at ~30k units. Volumes at Tata Motors were down 10.7% MoM at ~43k units with highest ever EV volumes at ~5k+ units. M&M's volumes were down 8.1% MoM at 30,358 units.
  • In CV segment, market leader Tata Motors reported 11.5% MoM growth at 26,565 units. Ashok Leyland posted 8% growth to 18,571 units. Growth in CV space was primarily led by M&HCV.
  • In the 2-W pack numbers came in mixed with market leader Hero MotoCorp surprising positively with 10.6% MoM growth while volume prints for Royal Enfield was muted.
  • In Tractor space, M&M's tractor sales were up 26.2% YoY at 25,791 units. Both the players surprised positively & reported healthy monthly tractor volume despite seasonally weak month amidst healthy farm income and robust farm sentiments.

Our top bets in the OEM space are:

Maruti Suzuki (CMP: Rs 8,575; target price: Rs 11,200; Rating: Buy; Upside: 31%)

Maruti Suzuki (MSIL) reignited its focus on SUVs, market share gain ambition, clear timeframe for EV launch and robust order book. We value MSIL at Rs 11,200 i.e. 28x P/E on FY24E-25E average EPS of Rs 400/share.

M&M (CMP: Rs 1,256; target price: Rs 1,665; Rating: Buy; Upside: 33%)

We have a positive view on the company amid robust order book & demand prospects across its product profile in SUV space and company walking the talk on capital efficiency (RoE).

Tata Motors (CMP: Rs 422; Target price: Rs 530; Rating: Buy; Upside: 26%)

We have a positive view on company tracking revival in demand at foreign operations & focus on profitability & FCF generation. Incremental positives are divestment of partial stake in Tata Technologies and Valuation pegging through fresh equity raise at its Electric PV arm (~25% higher than last equity raise).

Ashok Leyland (CMP: Rs 145; Target price: Rs 185; Rating: Buy; Upside: 28%)

We remain positive on the company amidst cyclical upswing in CV space aided by market share gains and pricing discipline led profitability.

Axis Bank & Citi Bank deal to accrue benefits from H2FY25

  • Axis bank completed the deal with Citi bank ahead of the estimated timeline. The deal closed for a cash consideration of Rs 11,603 crore vs 12,325 crore due to number of customers declining from 3mn to 2.4mn.
  • Merger being effective from 1 March 2023, the bank will charge Q4FY23 for one time amortisation, provisions and transaction charges, which is likely to have significant impact on Q4FY23 profitability. The other overall integration cost of Rs 1,500 crore will be amortised by Axis Bank over 18 months. This will offset PAT gain of Rs 800-850 crore estimated from deal initially for next year and it shall start flowing from a year later.
  • Acquisition will hit CET-1 by ~180 bps making CET-1 at 13.78% inching closer to threshold. This is attributable to ~137 bps towards goodwill and intangibles and ~40 bps towards increase in asset base.
  • The acquisition bodes well with Axis Bank’s premiumization strategy as it gives access to a large, affluent and profitable consumer franchise. We have BUY rating on the stock with target price of Rs 1100, valuing at ~2.1x FY25E ABV.

Hidden Gems

HDFC Bank (CMP – Rs 1,611, Target price – Rs 1,920, upside 19%)

  • HDFC Bank’s focus on building physical and digital capabilities is expected to aid customer acquisition and business growth ahead. Thus, we expect advance growth at 18% CAGR in FY24-25E.
  • Diversified asset mix, healthy liabilities franchise (CASA at 44%), relatively superior efficiency (CI ratio below 40%) and prudent under-writing is seen to keep RoA strong at ~2% ahead.
  • Merger with parent (HDFC Ltd) is expected to be completed in Q1FY24, to induce long term benefit, liabilities accretion to be in focus in medium term.
  • Post-merger, the weightage of HDFC bank (combined entity) is likely to increase from ~6% to ~13% in MSCI and may see incremental inflows of ~$2.5-$2.8 bn. The foreign investment ceiling in the merged entity may reach 17.6% vs 15% (Minimum limit required for MSCI Index) offering room for FII flows.
  • Near term volatility in stock price owing to uncertainty related to regulatory approvals offers investment opportunity. We have BUY rating on the stock with target price of ₹1920, valuing at ~2.4x FY25E ABV.


Market sentiments saw a bullish turnaround as concerns surrounding Adani group companies subsided, while strong tax collections domestically and better than expected Chinese data further boosted sentiments.

Source: ICICIdirect Research

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