Nifty to continue its march towards lifetime highs amid declining volatility and inflation

• Nifty climbed higher amid global tailwinds and lower crude prices to settle at 18,500, up 1%. Midcaps and smallcaps performed better with >2% gain
• We reiterate our positive stance and expect Nifty to head towards 18,900 in December 2022 while 18,100 is expected to act as strong support. Midcaps expected to catch-up. Buy the dips. BFSI, IT, Telecom, PSU and Infra are preferred sectors
• Nifty continues to make higher high-low after breaking out from one year trading range
• Brent prices continue to trend lower in a well channeled fashion. Expect downtrend to further accelerate below 81 mark with strong resistance at 95
• Dollar index continued lower high-low pattern after breakdown from multi month rising channel indicating reversal which is positive for equities
• India VIX corrected another 10% in the week continuing its down trend highlighting low risk perception amongst market participants
• Midcap and Small caps: Midcap and small cap indices have approached maturity of price/time maturity of correction after 12 week consolidation. We expect them to catch up from hereon
• Sectors in focus: IT index managed to surpass its 200-day EMA for first time since its breach in April 2022 indicating improved price structure. We remain positive and expect index to rally further 10-15% in coming quarters

Impact of Roll-back of Export duty

On Carbon Steel players

• The recent step of roll back of 15% export duty on steel has failed to spark a rally in the steel stocks. Global steel demand has been subdued which has put downward pressure on international steel prices. Currently the domestic HRC prices are at a premium to the landed costs of imports to the tune of ~ ₹ 3,500-4,000/tonne. Hence, there has not been a major uptick in the domestic steel prices post this relief. Over the longer run, the recent step of removal of export duty on steel products does provide an opportunity for domestic players to enhance their export volume notably as and when the global steel prices strengthens. The roll-back back of export duty does remove a significant headwind for the steel sector.

• Post the rollback for carbon steel players we have upgraded Tata Steel to BUY with a revised target price of ₹ 125 (CMP – ₹ 105, 19% upside, Mcap – ₹ 1,28,773 crore) maintained HOLD on JSW Steel (Target price of ₹ 700) and (CMP – ₹ 722, 4% downside, Mcap - ₹ 1,75,454 crore) maintained HOLD on SAIL (Target price of ₹ 90) (CMP – ₹ 83, 8% upside, Mcap – ₹ 34,135 crore)

On Stainless Steel players

• This step is more positive for stainless steel players as compared to the carbon steel players.  Stainless steel players viz. Jindal Stainless (JSL) & Jindal Stainless (Hisar) (JSHL) are expected to be the key beneficiaries. Currently, the export market is more favorable for stainless steel players compared carbon steel players as European players have curtailed production due to the ongoing energy crisis. With the recent relief, the share of exports is expected to increase for both JSL and JSHL.  The recent relief also augurs well for volume growth in FY24, as JSL is planning to commission its 1 million tonnes per annum (MTPA) stainless steel capacity in Q4FY23. Hence we have revised BUY on both JSL and JSHL and our revised target are as follows –
• Maintained BUY on Jindal Stainless with a revised target of ₹ 200 ( CMP – ₹ 173, 16% upside, Mcap – ₹ 9,102 crore)
• Maintained BUY on Jindal Stainless (Hisar) with a revised target of ₹ 390 (CMP – ₹ 338, 15% upside, Mcap – ₹ 7,978 crore).

On Iron ore miner – NMDC

• The government has also withdrawn the export duty on iron ore lumps and fines below 58% Fe content and iron ore pellets to nil. Export of iron ore lumps and fines above 58% Fe content will now attract a lower duty of 30% (reduced from 50% earlier). The duty reduction also augurs well for NMDC. Though NMDC doesn’t export iron ore, it will benefit as the surplus iron ore in the domestic market can now be exported. This would aid in firming up of domestic iron ore prices, which will augur well for NMDC. We have Upgraded NMDC to BUY with a revised target price of ₹ 130 (CMP – ₹ 118, 11% upside, Mcap – ₹ 34,317 crore)

Sugar Exports

• In 2022-23 sugar season, Indian millers have contracted for 4.5 million tonnes (MT) of sugar exports after government allowed 6 MT of exports in November 2022. Global refined sugar & raw sugar prices are hovering ~₹ 39/kg (ex-factory) & ₹ 36/kg respectively. These prices are trading better than domestic sugar prices. Given, India is expected to produce & consumer 36 MT &  28 MT of sugar respectively in 2022-23 season, ~8-9 MT of sugar would be available for exports. We believe government would allow another 2-3 MT of exports in Jan-Feb 2023.

• High global refined sugar prices would improve blended sugar realization for sugar millers with high refined sugar capacity. In our coverage universe, Dalmia Bharat Sugar & Triveni Engineering would be biggest beneficiary of high global refined sugar prices. Moreover, addition of distillery capacity would aid ethanol volumes in next two years.  We remain positive on Dalmia Bharat Sugar with the target price of ₹ 490 / share & Triveni engineering with Target price of ₹ 380 / share

Cigarettes Stocks

• Cigarettes stocks are in flavour from last few quarters as cigarettes volumes surpassed pre-Covid levels in H1FY23. Stable taxation on cigarettes & crackdown on illicit cigarettes supply chain is benefiting cigarette volumes in last one year  Further, ₹ 10 / price point cigarettes (mainly Gold flake) is gaining strong traction due to ease of coinage

• ITC has gained market share in last one year mainly due to strong presence at ₹ 10 price point. We believe current ITC volumes are ~15% above pre-Covid levels. We expect structural mid-single digit volume growth in cigarettes with stable taxation in future. We remain positive on ITC with target price of ₹ 405 / share

• VST Industries has launched its flagship brand ‘Total’ at ₹ 10 price point in May-June 2022 in king size category.  Though, it is too early to gain traction in this segment, but VST is looking to re-gain volume market share with new variants & different price point cigarettes. VST would continue to maintain 70% dividend pay-out in future makes it attractive play from dividend (4-5%) yield perspective

Tata Consumer – Bisleri International

• According to Media Reports, Tata consumer is set to acquire Bisleri International in water category. Bisleri International is estimate to clock | 2,500 crore of revenue & ₹ 220 crore of profitability in FY23. Tata Consumer is present in water category with NourishCo brands i.e Tata Water Plus, Tata Gluco Plus & Himalayan

• With acquisition of Bisleri, Tata consumer would become biggest in water category. Further, Bisleri brand can be extended in beverage categories given fruit drinks, Nectars, Juices and healthy beverages are growing faster at double digit volume growth. With the acquisition of Bisleri, TCPL will get nearly 130 co-packers, over 5,000 distributors and more than 1 million retail touch points

• Given, both the companies margin profile is similar, overall TCPL margin would not dilute. Further, packaged water is largely dominated by unorganized (~50% market share of organized brands), growth opportunity is much higher for Tata consumer is packaged water category. We remain positive on Tata consumer with the target price of ₹ 950 / share

Life Insurance

• Business growth remains a healthy at 34.7% for April – Oct 2022 (base effect) and 15% YoY for the month of Oct 2022. Private insurers witnessed relatively slower traction at 21.5% (YTD) and 11% in Oct 2022.

• Near term underperformance in life insurance sector is owing to slower accretion in individual business and uncertainty on sustenance of the growth momentum ahead.

• HDFC Life is facing challenge on 3 fronts – slower premium growth, pressure from Exide Life merger and uncertainty on parent stake. IPru Life underperformance is linked to premium growth in single digit while SBI Life stock is trading in a narrow range on concerns regarding sustenance of relatively superior growth in H2FY23

• Players to focus on ULIP to garner AUM growth while annuity and guarantee products to safeguard superior VNB margin

• Moderation seen in individual term premium accretion. However, healthy credit off-take, especially in retail and SME segment, to lead to pick up in high margin protection business

• Continue to remain bullish on structural growth story given massive under-penetration. Expect life insurance to exit premium growth at ~15% in FY23E

Stocks

SBI Life Insurance (CMP – ₹ 1,242, Target – ₹ 1,500, Rating - BUY)

• Healthy business momentum with 25% YoY growth guidance in premium traction led by focus on non-par and protection segment

• Launch of annuity and guarantee products and strengthening of distribution network (both banca and fintech tie-ups) to boost growth

• Gradual improvement in non-par and protection mix to aid VNB margin (31% in Q2FY23)

• Continued healthy growth momentum supported by distribution strength and superior VNB margin to aid valuation. We remain positive valuing the insurer at 2.8x FY24 EV

General Insurance

• Premium growth healthy at 15.3% (YTD) and 15.5% in October 2022. Standalone Health insurers continued to witness higher at 20% in October 2022 while multi-line insurer reported 17.5% YoY accretion in premium

• General insurers have witnessed a decline in claim ratio and thus improvement in combined ratio. However, gradual moderation in premium growth despite hike in premium rates has kept stock price of general insurer in a narrow range.

• Buoyant auto sales volume to support growth in motor premium while increasing penetration to keep growth in health segment ahead of overall industry growth. Emphasize continue to remain to shore up distribution strength (off-line and online partnership)

• Claims ratio back to normalised level resulting in improvement in combined ratios, though product mix defines blended combined ratio across industry players

Stocks

Star Health (CMP – ₹ 635, Target – ₹ 850, Rating - BUY)

• Star Health to maintain its leadership position with focus on product launches and strengthening distribution network.

• Recent underperformance in stock price could be attributed to relatively slower premium growth (10.7% YoY) owing to management’s strategy to reduce non-individual business (now ~7% of premium)

• With de-growth in group segment largely done, expect ~10-12% volume based and 8-10% value based growth to aid premium growth at 20-22%

• Lower group business and moderation in monsoon related reported claims to keep claim ratio at 62-65%, thereby keeping combined ratio below 100%

• Leadership in under-penetrated retail health insurance segment with long term growth opportunity and strong fundamental (distribution strength and operational performance) to aid premium valuation. We remain positive and value the stock at 2.8x FY24 premium/ float

Retail Sector:

• Buoyed by strong pre-festive buying and a normalized period after a gap of two years, lifestyle retailers displayed a strong show with robust topline growth in H1FY23. Fashion/apparel players such as Shoppers Stop, Bata, ABFRL and KKCL witnessed their highest revenue recovery rate of 120-140% over pre-covid levels, driven by double digit SSSG and price hikes undertaken (12-15%). Other discretionary categories such as luggage (VIP Industries) and Jewelry (Titan) too witnessed robust traction. Trent and Titan continued to be the outperformers with sales more than doubling vs. pre-Covid levels

• Despite footfalls in offline stores recovering back to pre-covid levels, companies continued to focus on building digital capabilities (omni-channel play). The share of online revenues continues to be significantly higher compared to pre-covid levels.  For instance, ABFRL’s e-commerce revenue is currently operating at an annual run-rate of ₹ 1300 crore (~12% of sales) which is nearly 4x of pre-covid levels. Similarly, online share of revenues for Westside stood at 6% which wasLimeRoad.ABFRL has committed to invest ₹ 400-500 crore in acquiring majority stake in 8-10 D2C brands by FY23
• On the balance sheet front, capex more than doubled YoY (except for D-Mart) in H1FY23 as companies accelerated store addition pace (store additions: 25 Pantaloons, 25 V-Mart, 51 Zudio, 15 Westside, 63 Titan’s Jewellery stores). We note that most of the companies funded capex requirements through internal accruals as operating cashflows were healthy in H1FY23
• Despite inflationary pressure and price hikes, discretionary consumption stayed strong at premium-end of the market (ABFRL, Shoppers Stop, Titan and Westside were insulated). Inflationary stress was more acute at lower price point categories as seen in Relaxo’s and V-Marts performance wherein volumes were down double digit (ASP’s < ₹ 400)
• We note that while apparel players maintained gross margins (owing to lower discounting days and calibrated price hikes), EBITDA margins were under pressure owing to increased marketing spends and higher opex cost. For instance, ABFRL and Titan enhanced its marketing spends by more than 2.5x YoY in Q2FY23

• Retail sector appears to be on the cusp of delivering strong sustained revenue growth. Expect revenues in H2FY23 to further accelerate on the back of increased spends on discretionary purchases supported by a strong festive and wedding season. The growth is expected to be aided by healthy store addition pipeline for FY23 (Pantaloons: 70, Westside: 35, Zudio: 100, V-Mart: 60). We expect the revenue of companies in our coverage universe to grow at a CAGR of 26% in FY22-24E (CAGR of ~17% from pre-Covid market in FY20) driven by healthy space addition pipeline coupled with higher focus on omni-channel play (physical + online). We expect premium valuations for the retail sector to sustain given India’s retail long term growth prospects

Stocks Preferred

Shoppers Stop (CMP: ₹ 680, TP: ₹ 940, upside: 34%): Shoppers Stop (SSL) is one of India’s leading departmental stores (90+ stores) and has undergone various structural changes with focus on enhancing its share of private label brands and beauty portfolio. We believe the new MD (former Westside CEO) would bring in his expertise in the private label brands domain and focus on improving the share of high margin private label brands (~15% of revenues). It has embarked on a healthy store addition plans with opening of 12 stores in FY23E and steady SSSG of 9-11% in the near term. Company’s liquidity position remains fairly stable with cash & investments worth ₹ 147 crore and debt worth ₹ 134 (net surplus ₹ 13 crore, D/E: 0.2x).

Trent (CMP: ₹ 1,425, TP: ₹ 1,730, upside: 21%):  In our retail coverage universe, Trent continues to be the fastest growing apparel company with industry best revenue growth. Revenue compared to pre-Covid  levels stood at an impressive 220% (three year CAGR: 30%) vs. industry average of 120-135% in Q2FY23. Trent was amongst the very few companies (owing to robust B/S: Cash & investments worth ₹ 350+ crore) who more than doubled its store presence from 220 fashion stores (Westside + Zudio) in Q2FY20 to current 500+ stores (Westside: 215, Zudio: 286). Trent has, over the years, consistently outperformed peers given the strong brand patronage (Westside, Zudio, Star, Zara) and proven business model (Westside: 100% private label). Industry leading performance and consistent revenue growth will enable Trent to sustain its premium valuations going forward.

Titan Company (CMP: ₹ 2,600, TP: ₹ 3,240, upside: 24%):  Titan has, over the years, withstood challenges and emerged as a resilient player. Despite covid related challenges, Titan's jewelry division (85% of revenues) has recorded an impressive 17% revenue CAGR during FY18-22, whereas overall industry during the same period has shown zero to marginal growth. The company has charted out aspiration to grow jewelry revenues by 2.5x by FY27 (implied CAGR: 20%). It has huge headroom for growth with current market share < 6% in ₹ 4 lakh crore market. We estimate revenue and earnings CAGR of 22%/30% in FY22/FY26E coupled with healthy RoCE (34%+).

ABFRL (CMP: ₹ 310, TP: ₹ 380, upside: 22%): ABFRL combines Madura’s portfolio of leading power brands (Allen Solly, Van Heusen, Louis Philippe and Peter England: 3200+ stores) with Pantaloons’ forte of being the largest value fashion retailer (400+ stores).  ABFRL has charted out growth strategies to become a ~US$2.8 billion entity (₹ 21,000 crore) by FY26E, translating to 15% CAGR in FY20-26E. ABFRL has strengthened its balance sheet through recent equity infusion with net debt declining sharply from ₹ 2,500 crore (in FY20) to ~₹ 230 crore.

Hidden Gems

JK Lakshmi Cement (CMP: ₹ 669, Target price: ₹ 780 Mcap: ₹ 7,800 Cr)

JK Lakshmi mainly caters to the north, west & eastern markets with total capacity of 13.3 MT (including subsidiary)

Being predominantly north (8.2 MT) and central (3.5 MT) player, the company has got a structural advantage of balanced environment in these two high growing regions

With capacity utilization reaching 90%, the company will now be adding cement capacity of 2.5 MT (1.5 MT clinker) at its existing plant in Udaipur unit (through subsidiary company Udaipur Cement Works) with total capex of | 1,650 crore. The same is likely to get commissioned by end of Q4FY24E

On completion of this expansion, consolidated capacity of JKLC and UCWL will improve to 16.4 MT and the company intends to take its total cement capacity to 30 MT by 2030

It also has a 117 MW power plant (74 MW CPP, 33 MW WHRS, 10 MW solar) that fulfills 75% of total power requirements. Self-sufficiency in power has helped the company to reduce reliance on costly grid power

Cooling down of cost pressure along with increase in renewable energy share remain key positives. We expect EBIDTA per tonne to improve to ₹ 805/tonne in FY23 and ₹ 988/tonne in FY24 from ₹ 601/tonne last quarter

Given its comfortable valuations (i.e. EV/t of $69/t), we now upgrade the stock from HOLD to BUY despite its sharp rally. We value the company at ₹ 780 i.e. 8.5x FY24E EV/EBITDA, EV/tonne of $80/t)

Conclusion

With market at new high, expect few underperforming segment like IT, Insurance, Cement among others to catch up in price performance.

Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code :07730), BSE Ltd (Member Code :103) and Member of Multi Commodity Exchange of India Ltd. (Member Code: 56250) and having SEBI registration no. INZ000183631. I-Sec is a SEBI registered with SEBI as a Research Analyst vide registration no. INH000000990. Name of the Compliance officer (broking): Ms. Mamta Shetty, Contact number: 022-40701022, E-mail address: complianceofficer@icicisecurities.com. Investments in securities markets are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The securities quoted are exemplary and are not recommendatory. Such representations are not indicative of future results. The non-broking products / services like Research, etc. are not exchange traded products / services and all disputes with respect to such activities would not have access to Exchange investor redressal or Arbitration mechanism.The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. The contents herein mentioned are solely for informational and educational purpose.