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Markets to continue making new life highs, short term Nifty target raised to 19,400

ICICI Securities 27 Mins 02 Dec 2022
  • Nifty surpassed life highs to hit our target of 18,900 amid firm global cues after US Fed signaled smaller rate hikes ahead and china covid related worries ebbed. Nifty closed at 18,800
  • We maintain our structural positive stance and expect index to gradually head towards 19,400 in coming weeks while midcaps to outperform in coming weeks. Strong support is now placed at 18,300 levels.  Use dips to create long positions
  • Nifty surpassed life highs of 18,600 registering a strong breakout from 13 month consolidation phase
  • Market breadth measured in terms of percentage of stocks above 200dma surpassed 65% for first time in 11 months indicating broader participation
  • Dow Jones Industrial retraced last falling segments high in faster time as 9 week decline was retraced in 6 weeks, first time since January 2022 highs
  • Dollar Index and US 10Y yields continue to form lower high-lows after breaking from rising channels indicating further downsides. Both have inverse correlation with equities
  • India VIX made lowest monthly close since August 2021 with lower high-low indicating lower risk perception by market participant
  • Key technical development: Relative ratio of NiftyIT against Banknifty has resolved at 3 month high, first time since May 2022 indicating that IT may relatively perform better than banking in the short term
  • IT, Telecom, Infra, Metal and Consumption are preferred sectors
  • Preferred large caps are Reliance Industries, TCS, SBI, Ambuja Cement, Adani Ports, Tata Steel, Tata Motors, DLF
  • Preferred Midcaps are CUB, Coforge, Sonata Software, Concor, Polycab, Cummins India, JK Cement, Bhel, Supreme Industries, Tejas Networks, Brigade Enterprises, Timken, KNR Construction

Indian GDP Q2FY23

Real GDP growth at 6.3% YoY at Rs 38.17 lakh crore; the same in H1FY23 grew at 9.7% YoY to Rs 75.02 lakh crore

Nominal GDP growth at 16.2% YoY to Rs 65.31 lakh crore, while for H1FY23 nominal GDP is at Rs 130.26 lakh crore; up 21.2% YoY

Keeping in perspective H1FY23 performance, Indian nominal GDP is expected at USD 3.3 trillion in FY23E (real GDP growth at ~7% in FY23E). This seems to be following healthy trajectory towards achieving USD 5 trillion in medium term.

Auto Volumes – November 2022

  • Wholesale dispatches for November 2022 came in muted, largely continuing the tapering trend post the festive season amidst approaching calendar year change.
  • 2-W, CV and 3-W space reported double digit MoM volume decline while it was contained at single digit MoM decline for the PV space with Tractors domain outperforming its peer-set wherein OEM’s reported early double digit YoY sales volume growth
  • In the tractor space, M&M's tractor sales were up 10.3% YoY to 30,528 units whereas Escorts’ grew 11.9% YoY to 7,960 units
  • In the 2-W space, market leader Hero reported 14% MoM decline in volumes to 3.9 lakh units, with Bajaj Auto and TVS Motors reporting >20% de-growth (largely led by domestic operations). Royal Enfield brand at Eicher Motors too reported muted prints at 70,766 units, well below the 80k+ run-rate sustained for the last two months
  • In the PV space, volumes at Maruti Suzuki de-grew 5% MoM at 1.56 lakh units led by decline in Mini & Compact segment whereas UV space grew 5.1% MoM (the only silver lining). M&M's volumes were down 5.9% MoM at 30,392 units while volumes at Tata Motors were up 2.2% MoM at 46,425 units. EV sales at Tata Motors came in at an all-time high of 4,451 units
  • In the CV segment, market leader Tata Motors (TML) reported volumes of 29,053 units, down 11.7% MoM. The decline was however limited at Ashok Leyland which posted just 2% MoM decline to 14,561 units with decline led by LCV space amidst sequential MoM growth witnessed in the M&HCV domain
  • In the 3-W space, recovery path paused with all players reporting MoM volume decline, with M&M being the only exception reporting marginal growth largely driven by its electric offerings in this space
  • We expect OEM’s to report tad muted and similar reading for December 2022 amidst calendar year ending wherein the OEM intent is to calibrate inventory levels and hence the discounts.

With governments spend on infrastructure, improved fleet utilization, strong order book aided by slew of new launches, we expect PV and CV space, in particular, to witness a healthy pick-up in sales volume, going forward. We remain positive on the auto sector given the expectation of double digit volume growth for FY23E coupled with benign commodity price outlook leading to healthy margin recovery. Our Top bets are Maruti Suzuki (target: Rs 11,200), M&M (target: Rs 1,590), Eicher Motors (target: Rs 4,310) and Ashok Leyland (target: Rs 185).

IT Sector

  • We remain positive on the sector in the medium term on relatively soften stance on rate hikes in US but we believe that meaningful impact would be visible on more sustained downward trend on the inflation. IT companies continue to win deals both on revenue maximization as well as cost optimization initiatives which coupled with current healthy order book provides visibility for medium term revenues
  • However in the near term, There would be some furlough impact on the revenues in IT companies in Q3 , but we believe it is already baked in in revenue growth guidance given for FY23 by the companies.  
  • We remain watchful for Europe as a region (25% of revenue mix) in Q3 especially considering energy crises and depreciation of GBP/EUR against Dollar
  • Vertical wise  Retail sector and BFSI sector ( Mortgage) are the sectors to be watched where IT companies are witnessing some softness
  • Cloud migration continue to be a long term growth driver which along with new areas such as ESG, quantum computing is expected to propel growth in the long term
  • Margins are expected to improve from here on due to continued focus on offshoring, utilization improvement, moderation of subcontractor costs and price increase

Stocks preferred

  • Infosys: BUY (TGT Rs 1,670 , 23x FY25 EPS): The company is looking at minimum 15% CC growth in FY23. Large deal TCV continue to be robust at US$2.7bn which provides visibility for near term revenue growth. The company indicated following levers for margin expansion going ahead: a) moderation of attrition which is now visible both on LTM as well as on quarterly annualized basis , dip 130bps in Q2 to 27.1% b) Moderation of subcontractor costs to historical levels of around 7% of sales vs current at 10.1% of sales c) Utilization improvement as fresher’s becomes billable ( ongoing process), currently at 76% ( vs historical high of 83.3%). There is a scope of valuation gap to narrow with TCS if margin gap narrows.
  • HCL Tech: (BUY TGT Rs 1,115 , 18x FY25 EPS): The company is guiding for 16-17% CC growth in FY23, ~5% CC growth in 4 out of last 5 quarters including Q2FY23. New deal TCV continue to be robust at US$2.4bn (5th consecutive quarter of US$2bn+ new deal TCV) which provides visibility for near term revenue growth. The company indicated following levers for margin expansion going ahead: a) They have been pushing for price increases from last 4-5 quarters and now started getting price hikes from the clients b) moderation of attrition which was flat QoQ to 23.1% c) Moderation of subcontractor costs to historical levels of around 12-13% of sales vs current at 15% of sales . There is a scope of valuation gap to narrow with TCS/Infosys if margin scale up from 18-19% to nearby to Infosys or TCS
  • Coforge: (BUY TGT Rs 4,570 , 24x FY25 EPS): The company is guiding for at least 20% CC growth in FY23, ~5% CC growth in last 4 consecutive quarters leading to Q2FY23. The company is looking to hit US$1bn annual revenue in FY23 and aspiring to reach US2$ annual revenues in next 5 years i.e FY23-28. Fresh order intake ( TCV)  continue to be robust at US$304mn ( 3rd consecutive quarter of US$300mn+) which provides visibility for near term revenue growth. Attrition for the company continue to be lowest in the industry at 16.4% ( down 160bps QoQ in Q2). It is guiding at 18.5-19% EBITDA margin
  • Persistent  : Reported 6.6% QoQ CC revenue growth. Dollar growth 5.8% QoQ. EBITDA margins improved 20bps QoQ to 18%. TCV remained steady at US$368mn ( including all deals new+renewal). LTM attrition 23.7% down from 24.8%. net adds 838 for Q2. TGT : Rs 4,370 per share, Rating BUY

Banking credit growth remain buoyant driven by retail, NBFC and uptick in large corporate

  1. Continued robust traction witnessed in banking credit at 17.1% YoY for the month ended October 2022
  2. Credit demand seen across segments/ verticals - 22.5% in services, 20.2% in retail credit and 13.6% in agri and industry portfolios each
  3. Industry growth at 13.6% YoY, highest in last 5 years, driven primarily by continued traction in MSME loans (Rs 7.7 lakh crore) and gradual uptick in large corporates. Major sectors driving credit demand include petroleum, infra, chemicals, beverages
  4. Revival in consumer demand, rise in demand for working capital and increase in government spending could act as catalyst to drive credit demand from industry further
  5. Services segment witnessed continued traction at 22.5% YoY primarily led by 17% YoY growth in trade (contributing 5.8% of overall credit) and 38% YoY growth in NBFC (contributing 9.8% of overall credit). Of incremental deployment in services segment, ~58% is to NBFCs
  6. Growth in retail segment remained buoyant, driven by continued healthy momentum in consumption. Among retail, home loans (contributing 14.2% of overall credit) grew 16.2% YoY, while traction in auto loans (3.6% of overall credit) remained robust at 22.1% YoY. Lenders focus on unsecured credit, festive season led to 28.4% YoY growth in credit cards and 24% YoY in other personal loans (together contribute 9.1% of overall credit) 
  7. Recovery in economic activity, continued robust spend on consumption coupled with gradual re-leveraging in corporate segment to drive credit growth ahead of 12-14% for FY23E

FMCG companies benefitting from softness in input prices

  • With crude prices declining over 10% in last one month, FMCG companies breathes a sigh of relief. Palm oil prices started declining from Q1FY23 onwards & it is down ~50% from the peak of May-2022. However, crude & related commodities were firm especially considering INR depreciation of 15% in last six month
  • We believe Gross margins for FMCG companies bottomed out in Q2FY23 & sequential improvement in margin is imminent. Moreover, these companies would be able to take price cuts, grammage increase & perk up advertisement & promotion spends to drive volume growth. Given, rural growth was adversely impacted by high inflation & grammage reduction in LUPs (Low Unit Packs) in last one year, these measure would bring back volume growth in rural India
  • We believe imported commodities related categories like Detergent, Soaps & personal care products are likely to see volume recovery in next few quarters. We also remain positive on packaged food categories for long term perspective. Dabur with target price of Rs 700 / share, Tata Consumer with target price of Rs 950 / share & ITC with target price of Rs 405/share remain our top pick in the sector

Metals on upswing

The signals of China softening its zero-covid policy coupled with the correction in dollar index has augur well for the metal sector thereby aiding the recent rally in metal stocks.

China’s top Covid officials signaled possible relaxing of the country’s strict zero-covid tolerance approach to the virus, after nationwide protests calling for an end to lockdowns. In a latest statement, Chinese Vice premier Sun Chunlan indicated that the Omicron variant was weakening and vaccination rates were improving. Sun, a central figure behind China’s pandemic response, said new situation would require new tasks. She made no mention of the zero-Covid policy in her latest remarks, suggesting that covid restrictions might be relaxed soon. The shift in tone aid augur well for the metal sector. Meanwhile, authorities have already lifted Covid restrictions in the Chinese cities of Guangzhou and Chongqing. Also, the recent correction in dollar index from ~112 levels a month back to ~104.7 level currently has improvement the sentiments for the metal sector. Supported by the correction in dollar index, during the last one month, base metal prices on the LME have increased in the range of ~8-12%.


The Centre has set in motion the strategic disinvestment process of NMDC Steel (NSL) by inviting expression of interest (EoI) from bidders. The steel plant is already being demerged from NMDC and transferred to NSL with the government of India owning 60.79% stake and public the rest. Government of India (GoI), via DIPAM, shall divest its 50.79% shareholding in NSL along with management control to a strategic buyer through a competitive bidding process. Additionally, government shall offer 10% stake in NMDC Steel to NMDC after the strategic buyer is identified through the bidding process. The estimated project cost of the plant was ~Rs 21,940 crore and the plant is likely to commence operations from March 2023. While earlier we had valued steel plant at Rs. 22/share, the recent removal of export duty on steel products coupled with improving sentiments in China is likely to have a positive rub-off on steel plant valuations.

Gas Pricing

The Kirit Parikh committee has proposed few changes to the existing domestic gas pricing mechanism. It has recommended a floor price of US$4/mmbtu and ceiling price of US$6.5/mmbtu for legacy gas fields such as that of ONGC. This price cap would be raised by US$0.5/mmbtu every year. For the HPHT fields of Reliance, no changes have been proposed to the current pricing formula. The committee has further suggested linking the domestic gas prices to the market in 3-4 years’ time.

The proposed changes are positive for the CGD sector in the near to medium term as it lowers uncertainty surrounding gas prices (however, legacy contracts would be reviewed if proposed regulations accepted). However, In the long run, making the gas prices-market linked will ensure higher investments in E&P in overall gas sector

  • The recent progressive regulations made in the pipeline industry seconds the Government's vision of increasing investments in the sector which would be positive for both the upstream and downstream companies in medium to long run

Hidden Gems

KNR Constructions : Target Price: Rs 290

  • Road is one of the key segment of infrastructure spending. To put into perspective, out of ~7.5 lakh crore of budgeted capex of the government for FY23, road capex is ~1.88 lakh or 25% of the total.  Going ahead, FM has spelt out the government’s intent to use capital spending to sustain strong economic growth, and media reports indicate that overall capex budget could be ~9 lakh crore for FY24. Thus, we believe roads, being a key spending will benefit from sustained increase in spending
  • KNR is likely to be one of the prime beneficiaries of roads & water segment. KNR Constructions is one of the leading companies in the Roads and Highways sector having executed 6,000+ lane km of projects across 12 states in India. Reported 16.3% revenue CAGR over FY17-22 and has consistently delivered industry-leading operating margin of ~20% throughout past 3 years. It enjoys prudent management, robust return ratios (RoCE: 20%+)
  • Strong order book position, receipt of appointed date in most of its projects, and execution pick-up to translate into 11.2% topline CAGR over FY22-24E, with stable margins at ~19%

We have a BUY rating with target price of Rs 290.


 No need to panic given life high, rally is getting broadbased

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