Nifty target raised to 20,000, Sensex at 66,600 driven by earning upgrades in Banking

Market Outlook

• Indian benchmarks snapped four-week winning streak as profit booking set in led by normal anxiety near all-time highs
• We expect Nifty to undergo healthy consolidation of past four week’s 9% gains and make higher base formation above 17,900, before eventually challenging life highs of 18,600 and 18,900 later
• Sectorally, we remain positive on BFSI, Capital goods, PSU, IT which can contribute to upsides
• Brent crude prices (- 6% for week) continue their down trend in well channeled manner which is supportive for Indian equities
• India VIX continued its lower high-low for seventh week and stayed at multi month low indicating low risk perception amongst participants
• PSU Sector in focus: BSE PSU index has given a resolute breakout from 11 year range indicating structural turnaround. Historically sectors coming out of multiyear underperformance, outperform post breakout for next few years. Smaller PSU banks continue to outperform and expected to further catch up larger PSU banks in process
• Small and Midcap indices: Over past couple of weeks, midcap and smallcap indices have lagged large caps. Structurally they are undergoing higher base formation above their 100 and 200 day averages. Both indices have retraced their 11 week rally from June lows by just 38% in equal time. Shallow retracement indicate inherent strength and we expect both indices to resume uptrend in December as they approach price/time maturity of correction

Nifty EPS upgraded to ₹ 950 for FY24, up 3%

Quarterly earnings in Q2FY23 stood at 9% ahead of estimates wherein the Nifty EPS stood at ₹185/share vs. our estimates of ₹170/share. It was up 4.5% QoQ and 2.8% YoY.

• The key outperformance was driven by index heavy banking space especially corporate banks as well as Oil & Gas, Pharma and Capital Goods domain
• For banks in Q2FY23, key positives were a revival in business growth (~17-18% YoY), improvement in margin (~5-25 bps QoQ) and declining NPA ratio with healthy PCR
• Disappointment was witnessed in the Auto (Muted show at Tata Motors, JLR) & Metals (Sharp decline in ASP’s amidst high RM costs) domain

 Over FY22-24E, earnings are seen growing at a CAGR of 14.9%.

 We now value Nifty at 20,000 i.e. 21x PE on FY24E EPS of Rs 950. Corresponding target for the Sensex is at 66,600.

PSU Banks - Q2FY23 performance

• PSU banks continued to deliver industry in-line credit growth led by focus on retail and MSME segment
• NII witnessed 20% YoY owing to improvement in margins. Further, transmission of rate hikes and lower CD ratio to ensure steady margins in 2HFY23
• Impressive growth of 39% YoY in PPP and 19.1% YoY in PAT led by strong traction in NII, steady other income and gradually improving efficiency
• Improving trend in asset quality continued with sequential decline of ~10% in absolute GNPA and ~16% decline in absolute NNPA (~30-40 bps QoQ decline in NNPA)

 SBI (CMP – ₹ 600, Target – ₹ 700, BUY)

• Credit growth guidance of ~14-16% to be driven by steady margins, healthy deposit franchise and strong demand pipeline, which will also aid business growth and overall performance
• Steady NIMs at ~3% with adequate provision buffer to aid healthy earning momentum ahead. Expect PAT to grow at 24% CAGR in FY22-24E
• Thus, improving RoE trajectory at ~14.1% and RoA at 0.9% to aid improvement in valuations
• We remain positive on the stock and value the bank at ~1.3x FY24E ABV and subsidiaries at ~₹ 192/share

 Road Construction Companies

• The road awarding activity has been slow in H1FY23 with ~4,092 km awarded by the MorTH (includes NHAI and state highways/expressways), down 11% YoY. The activity within the same has been much slower by NHAI which awarded 777 km in H1 (down by 60% YoY). This was reflected in order inflows of major road players such KNR, PNC which failed to win any road orders in H1. Exception was that HG Infra won EPC contract for Ganga Expressway from Adani worth ₹ 4,500 crore in H1. Thus, the backlog is likely to come into awarding in H2FY23. Even in the limited awarding, most major players stayed away given the aggressive bidding by small player as NHAI had relaxed bidding norms. The managements have indicated towards a decline in competitive intensity to decline ahead as MoRTH/NHAI is gradually removing relaxations provided due to Covid-19 pandemic

• In terms of execution in Q2, major road players had muted quarter (except KNR which had some execution traction in water segment). Margins were largely stable YoY. While, October was weak with rains in some part, execution should pick up for most of the players by Q3 end and Q4FY23. Also with new ordering in H2, we expect healthy double digit growth for most road players in FY24 also with margins firming up/stable ahead, as commodity prices have cooled from the highs

• Thus, we remain positive on the road companies which are well placed to tap this recovery, have a) strong track record, b) lean balance sheets and c) stable margins record and d) healthy return ratios (ROCEs > 20%)    

Our top picks are

• KNR Construction – Target Price- ₹ 290 (17% upside)
• PNC Infratech – Target Price- ₹ 350 (30% upside)
• HG Infra Engineering – Target Price-  ₹ 700 (25% upside)

 Hotel Sector

• Although Q2FY23 is seasonally weak for the tourism sector due to monsoon, the revenues for the sector were higher by 23% from the pre-covid levels vs expected growth of ~17%
• Strong leisure demand, a sharp rebound in corporate travel along with much needed reset of room rates have acted as a key driving force for growth in revenues
• Going forward, we expect next 12 months to stay strong for the sector supported by full resumption of the economy. Further, revival in foreign tourist arrivals, wedding season, G20 summit 2023 (200 meetings to be held throughout the year across 55 locations) to provide further fillip to leisure and business hotel room demand, going forward

Indian Hotels – CMP - ₹ 315, Target- ₹ 380 (Upside 21%)

• Under AHVAAN 2025, the company plans to have 300+ hotel room portfolio with zero net debt status. IHCL also aims to achieve 33%+ margins (35% for new businesses) through cost efficiencies
• We Expect revenue CAGR of 41.8% during FY22-24E. Business to recover fully to pre-Covid levels while EBITDA to surpass pre-Covid levels in FY23E; margins seen at over 33% in FY24E, which has the potential to further expand by ~100 bps thereafter
• Improved cash flows and divestment of non-core assets to help the company grow faster

Lemon Tree Hotels - CMP - ₹ 96, Target- ₹ 110 (Upside 15%)

• Lemon Tree is the largest hotel chain in the mid-priced segment in India. It operates 8,489 rooms in 87 hotels across 54 destinations in India and abroad
• Lemon Tree’s Q2FY23 performance remained ahead of our estimates bolstered by strong room rates and focus on cost optimization. With EBITDA margins closer to 50%, the company remains the most efficient players in the hotel space
• The company is expanding its footprints across mid & premium segment given the strong demand outlook. Post major capex, LTHL will be operating ~10,462 rooms in 105 hotels across 64 destinations, in India and abroad by FY24E

Consumer Durables

• Consumer Durables companies have witnessed a muted growth of ~2% in Q2 dragged by lower demand in rural regions amid high inflation, de-stocking of fan inventory and higher base of last year. Despite softening raw material prices the EBITDA margin remained under pressure (below ~300 bps to its pre-covid level) due to use of high cost inventories and low operating leverage
• Going forward, we believe, benefit of lower raw material prices (Copper -18%, PVC -20% QoQ) will lead to EBITDA margin recovery from Q3FY22 onwards
• We maintain our positive stance on the sector over medium to long term led by upcoming marriage season, channel inventory build-up of fans (at onset of Summer) and new product launches under kitchen appliances & lighting segments  

Stocks - We have BUY on Havells (Target of ₹ 1,565) considering its strong brand in the ECD space, market share gains through product launches and expectation of Lloyd business turning positive on EBIT level by Q4.

Sugar Sector

• With the announcement of sugar export quota of 6 million tonnes (MT), sugar companies have accelerated contracting for exports in last 15 days. It is estimated that ~4 MT out of 6 MT is already contracted & the entire 6 MT of sugar would be exported by May-2023. It is important to note that global white refined sugar & raw sugar prices are prevailing at ₹ 40/kg and  ₹ 36/kg (ex-factory, raw sugar cost is lower by ₹ 1/kg) respectively. These prices are better than prevailing domestic sugar prices of ₹ 36/kg
• Given Brazilian sugar season is coming to an end, most of exported sugar from brazil has already been contracted. Considering, Brazil would remain out of export market until next the start of next season in April’2023, global sugar prices have moved up sharply in last two weeks. This is also helping sugar millers to expedite exports
• We believe sugar companies with refined sugar capacity would be able to fetch higher export realization, which would improve their blended sugar realization. Moreover, addition of ethanol capacities in last few quarters would also result in higher sugarcane diversion towards ethanol.

Dalmia Bharat Sugar & Triveni Engineering in our coverage universe would be the biggest beneficiaries of refined sugar exports & higher ethanol volumes. We believe the next 2-3 quarters would see strong earnings growth for sugar companies.

Hidden Gems

Ramkrishna Forging (MCap: ₹ 3,723 crore, Target : ₹ 280, Potential upside: 20%)

• Ramkrishna Forgings is a leading forging player which stands to gain from recovery in CV volumes both domestically as well as in key export markets of US (Class 8 truck) & Europe
• With largely EV immune product portfolio, impressive new order wins in domestic as well as export markets and well defined capital allocation strategy aimed at reduction of debt on books we see it clocking close to 20% return ratios by FY24E
• Sensing the robust demand prospects, the company has embarked upon a new growth capex which will take its peak revenue potential to ~₹ 5,000 crore vs. ₹ 2320 crore clocked in FY22
• Building in the positives, we expect Sales/PAT at the company to grow at a CAGR of 24%/29% respectively over FY22-24E
• It trades at inexpensive valuations of ~11x P/E on FY24E

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