Markets to turn stock specific in expiry week, Nifty holding 16,800 to lead technical pull back

What to expect in upcoming truncated week, amid derivatives expiry

• In coming truncated expiry week, we expect further consolidation/base formation in 16,800-17,200. Only a decisive close above prior week’s high of 17,200 would pave way for extended technical pullback towards 200-day ema placed around 17,600
• Barring volatility around derivatives expiry, expect markets to turn more stock specific ahead of Q4 earnings and financial year end
• Private banks, capital goods, Infra and select Pharma look better placed to lead technical pull back while IT is oversold after five week decline ahead of earnings
• Brent crude prices and US dollar index continue in well-defined down trend, which remain supportive to equities

US Fed signals pause in rate hike cycle and quantitative tightening

• The US Federal Reserve raised its interest rate for the ninth consecutive time taking the range between 4.75% and 5.0% but signaled an end to its rate hike campaign sooner. Acknowledging the strain in banking system, Fed believed that the desired slow-down in economy may be engineered by current crisis which may cool-down the inflation.
• Possibility of rate cut is expected next year only. However, recent declines in short term yields( 2-Yr below 4% against Fed rate of 5%) suggests that market is expecting the rate cut cycle to begin in the second half of the year.  
• Meanwhile quantitative tightening seems to be behind us. The Fed Balance sheet has increased by almost US $ 400 billion in last 2 weeks suggesting a pro-active approach towards ongoing financial crisis.

Accenture’s outsourcing business on strong footing; growth momentum likely to continue

• Accenture is one of the leading global IT services & consulting company with annual turnover of more than US$60bn. The company has two business i.e IT services (47% of revenue mix) and consulting (53% of mix). Majority of the revenue comes from North America (47% mix) and Europe (34% mix).  
• Outsourcing business grew by 12.1% YoY in US$ and 16% YoY in local currency while new bookings for the same stands at US$11.4bn, grew by 31.8% YoY. Consulting business performance continue to be muted.
• The company changed overall revenue guidance to 8 to 10% in local currency (2% inorganic, implied organic is 6-8%) from 8-11% earlier (2.5% inorganic, implied organic 5.5%- 8.5%).
• Vertical wise Communication, Media & Tech declined by 3.8% YoY while all other verticals reported growth in the range of 4-12% on YoY basis.
• In our IT coverage, we prefer TCS ( CMP: Rs 3,124, TGT: Rs 3,780, 21% upside) & Infosys ( CMP: Rs 1,374, TGT: Rs 1,730, 26% upside).

Reliance FMCG entry could take sheen from existing FMCG companies outlook

• Reliance Consumer’s entry into FMCG space with destructive pricing across beverage, home & personal care categories could take sheen from FMCG companies.  
• It has launched smaller SKUs in soaps, detergent, dishwashing & carbonated drinks category at 30-50% lower price points. Reliance is setting up distribution network for general trade channel apart from its existing modern trade network. This along with pricing disruption would be a beneficial for reliance in gaining some market share.  
• FMCG companies witnessed a sustained margin uptick in last decade with benign raw material prices & limited competition across categories. HUL has seen 800 bps operating margin improvement in last ten years. This led to re-rating of FMCG stocks. Though, it would be difficult for new entrant to gain huge market share just on pricing strategy, but it could result in pricing cuts by existing companies (HUL, Godrej Consumer & Jyothy Lab) & in turn margin could get capped or contract in medium term. We believe smaller companies like Jyothy Lab would find it extremely difficult to maintain its margin & volume growth at the same time.  
• FMCG stocks are trading at premium valuation multiples of 50-60x two year forward earnings. We believe susceptibility of market share loss & pressure on margins could result in de-rating through time correction / stock price correction. 
• We have a Hold rating on HUL (Target Price : Rs 2,800 /share), Nestle India (Target price : Rs 22,000/share) & Jyothy Lab (Target price : Rs 215 /share).    

• India Meteorological forecast of high temperatures between March and May 2023 is generating fears that we may experience power crisis in the peak summer season.
• Peak power demand is expected at 230 gigawatts (GW) this summer vs. 210 GW last year.
• Over past 5 years, renewables have seen the highest capacity addition in the country, so day time challenges are not expected.
• The concern largely persists from the evening to night-time peak demand wherein the renewables might not be able to dispatch power. April night-time peak demand is expected to hit 217 GW, up 6.4% on the highest night-time levels recorded in April last year. India's power availability in "non-solar hours" this April is expected to be 1.7% lower than peak demand.
• The government is taking various proactive steps to ensure smooth power availability.

1. Asking all imported coal-based power plants to run at optimum capacity,
2. Allowing IEX to launch a high-power day ahead market (DAM) with a ceiling of Rs 50 per unit,
3. NTPC to operate and sell power from 4,000 MW gas-based power plant (peaking power) and also generate 5,000 MW from  its own gas based capacity
4. Railway Ministry to provide 418 rakes

Power sector companies will be clear beneficiaries during the peak season. NTPC (Target Price: Rs 207), in our view, will be a big beneficiary given higher demand for power will lead to higher PLFs and incentives while strong capacity additions (11,000 MW of capacity under construction and average addition of 4,000 MW of capacity during the last 5 years). Along with this, monetisation of stake in renewable subsidiary (value pegged at Rs 19,000 crore) and a PAT CAGR of 13% over FY22-FY25E could lead to a rerating of the stock. On the other hand, we believe the worst is over for IEX (Hold Rating Target Price: Rs 136) in terms of volume decline (volume is expected to grow ~ 15% average for FY24E and FY25E) as the high-power Day Ahead Market (DAM) will provide the much-needed volume fillip during the peak season.

Intense summer forecast signals robust demand for ACs

• The leading AC companies have witnessed a muted stock price performance (down by ~8%-10%) owing to erratic weather conditions. However, expectation of intense summer and warning of higher-than-normal temperature in many parts of the country for the extended period as per IMD, will likely boost demand of Air conditioners. We believe, AC companies are likely to post meaningful recovery with 15-18% volume growth in Q4. This will be supported by build up of fresh inventory at dealer’s level amid expectation of early onset and harsh summer season.
• On the margin front, companies are likely to witness a sharp recovery in EBITDA margin in the range of 250-400 bps on a sequential basis aided by lower raw material prices and improved operating leverage.
• Under our coverage we like Havells considering its market share gains and aggressive expansion plans (of Rs 800 crore in FY23) to expand product portfolios in FY23. We believe, robust Balance sheet condition and focus on improving profitability of Lloyds business makes Havells an attractive stock at current valuation in the FMEG space. (Havells TP: Rs 1,420)

Fluorination chemistry emerging most preferred chemicals theme

• Fluorination chemistry is emerging most preferred chemicals theme amid rising Pharma & Agrochem demand, newly discovered usages and high entry barriers.
• Increasing usage in pharma and agrochem - Due to growing awareness and acceptance of benefits of fluorochemicals usage thanks to improved efficacy and potency, fluorine penetration in Pharmaceutical products has improved from ~25% to 40% in new products pipeline and in agrochemicals it has improved from 30% to 50%.
• Fluoropolymers usage growing in various industries - Highest used fluoropolymers such as PTFE are increasingly being used in automobile, pipe sheets, coating, cooking pans etc. due to proven superior heat resistant and insulation qualities which were discovered recently. 
• Rising demand of Fluorine molecules from sunrise sectors - New discovery suggests that new fluoropolymers such as PVDF, FKM besides PTFE can provide significant required qualities for products used in sectors like EV, hydrogen fuel cells, solar, 5G etc. Indian companies like GFL are already manufacturing these products while SRF has announced capex for the same. 
• Legacy uses in Ref Gas Industry - Refrigerant gas such as R-22, R-410a, R-32 etc. which are used in residential A/C's, Fridges, chillers etc. contain fluorine molecule derived from fluorspar. Some refrigerant gases based on fluorination such as R-22 will be gradually phased out worldwide which is causing supply constraints globally. This has led to prices remaining at the elevated levels, thus benefiting fluorine players. 
• Significant capex by Indian players in Fluorination chemistry - SRF has announced Rs 15,000 crore capex over the next 5 years of which Rs 12,500 crore will be allocated to specialty chemicals in general and fluorochemicals. Navin Fluorine has recently increased the capacity of Hydrofluoric acid by 40,000 tonnes by investing Rs 450 crore towards backward integration. Also, Anupam Rasayan has invested Rs 670 crore for fluorochemicals catering to growing demand in the US, Europe and Japan.
• China+1 theme shift remains strong in fluorine chemistry - USA, Europe and Japan are aggressively looking at India as alternative to China. Though China has an advantage on raw material availability, we have seen India fluorine players gaining good traction, particularly SRF which has witnessed 4x increase in fluorochemicals in the past four years, while Navin Fluorine has witnessed 2x increase. 
• We expect fluorine business to maintain 15-20% of sustainable growth trajectory based on above reasons. Our Top Picks include SRF (TP – Rs 2,550 – Chemical segment accounts for ~48% of total revenue. Top-line is expected to grow at a CAGR of 18% during FY23-25E) and Navin Fluorine (TP - Rs 4,285. Top-line is expected to grow at a CAGR of 27% during FY23-25E) 

Hidden Gems

Mayur Uniquoters - Bullishness Reloaded, Auto OEM exports to drive growth! (CMP: Rs 465; MCap: Rs 2,040 crores; TP: Rs 580; Rating: Buy; Upside: 25%)

• Mayur Uniquoters is a leading player in the technical textile domain manufacturing synthetic/artificial leather with application across automotive (seat upholstery and inner lining), footwear (shoes/sandals insole and uppers), furnishing (sofa upholstery, curtains) and apparels among others. Domestic Sales: Export mix stands at ~80:20 as of FY22.
• Footwear constituted nearly 30% of sales at Mayur (key clients being Bata, Relaxo and Action among others) while Automotive segment constituted ~55% sales (key clients like Maruti, M&M, MG, Volkswagen India, etc.),
• Auto OEM exports (at ~15% of its sales) is the most lucrative business (high margin) and our key point of interest at Mayur. Its key clients in this space are quality conscious and difficult to crack Luxury car makers such as Mercedes Benz, BMW among others. Company is seeing healthy demand traction in this segment & it is seen growing to 2-2.5x the present run-rate over the next two years.
• The company stands to benefit from decline in crude prices. It has already realised gross margins expansion of ~420 bps on QoQ basis in Q3FY23. With crude prices further down by >10% in the last fortnight, it is beneficial for its overall margin trajectory, which had been in excess of 22% in the past in good times.
• Management commentary in the recent Concall was very upbeat on demand prospects and it expects to clock ~Rs 1,000 sales in FY24 on a base of ~Rs 800 crore in FY23 i.e. a growth of 25% on YoY basis and further grow to ~Rs 1,100-1,200 crore in FY25E. On a conservative basis we have built in a topline of Rs 1,000 crore by FY25E, implying a sales CAGR of 15% over FY22-25E and baked in margin improvement of ~300 bps in a similar timeframe to 21% by FY25E. Resultant PAT is expected to grow at a CAGR of ~18% over FY22-25E. It clocks healthy double digit return ratios with RoCE seen climbing to ~18% mark by FY25E.
• On B/S front Mayur continues to remain debt free cash rich company with ~Rs 150 crores of surplus cash as of FY22. Company has a history of rewarding shareholders though regular dividends and share buyback’s with last buyback completed in April 2022 at ~Rs 650/share for 6.25 lakh share translating to total buyback size of ~Rs 40 crores. We have a BUY rating on the stock valuing it at Rs 580 i.e., 18x P/E (~1x PEG) on FY24E-25E avg. EPS of Rs 32.1/share

Conclusion

Markets are likely to remain directionless as there are no major events lined up, expect India VIX to further cool off below 14 (negative correlation with index).