Nifty to extend consolidation amid soft global cues

Indian equity benchmarks consolidated within prior week range amid lackluster global cues while Midcaps relatively outperformed.

• For the coming week, we expect Nifty to extend its consolidation in the 17,800-18,300 amid stock specific action, ahead of onset of quarterly earnings with IT companies. A decisive close above 18,300 would lead to resumption of directional uptrend
• We maintain our overall structural positive stance as current consolidation is part of healthy retracement of October – November rally, with strong support being placed at 17,500 levels

1. Nifty has retraced its 9 week rally by 50% over five weeks indicating slower pace of retracement and inherent strength
2. Index has strong support at 17,500 as it is confluence of 200 day EMA and equality with September – October decline
3. India VIX has remained flat on weekly time frame despite correction in headline indices indicating no major risk perception by participants

• Sectors to focus during ongoing consolidation: BFSI, PSU, IT, Infra
• Preferred large caps: Reliance Industries, SBI, HDFC Life, L&T, Ultratech Cement, NTPC, Tata Steel/Hindalco, Maruti
• Preferred Midcaps: PFC, IDFC First Bank, PNB, KEC, NCC, IOC, GPPL, National Aluminium, Mahindra CIE, Nelcast

Decline in Crude oil and gas prices – a welcome relief

• Crude prices fell 9% over the last couple of days from US$86/bbl to US$78/bbl due to demand concerns from China and a weak economic outlook by the IMF. China has increased export quota of refined crude products signaling weak domestic demand. Cracks on diesel and jet fuel have thus fallen ~US$7/bbl each to US$29.6/bbl and US$31.4/bbl, respectively in a span of 2 days. This has led to a correction in Singapore GRMs too which have declined from US$11.3/bbl to US$7.5/bbl. 
• On the other hand, this fall in crude prices would be favorable for OMCs as losses on diesel would narrow down and profits on petrol would increase, improving their marketing segment performance
• Natural gas prices in US and Europe have fallen on account of a milder winter which eased demand concerns. Gas prices in US have fallen around 11% from US$4.6/mmbtu to US$4.1/mmbtu in a week's span. In Europe, gas prices have fallen sharply by 22% during the same period. LNG imports from US and storage facilities being 83% full at the end of December have helped the EU meet its gas needs. 
• Gas prices in Asia too have declined to US$29.5/mmbtu on account of high inventory levels, milder weather conditions and demand concerns from China
• These measures bode well for Indian midstream (Petronet, Gail) and downstream CGDs (IGL, MGL, GGL)

Auto Volumes – January 2023

• Wholesale dispatches for December 2022 came in mixed, with double digit MoM de-growth witnessed across the PV and 3-W space whereas the 2-W space reported single digit MoM decline.

• The CV space however reported healthy volume prints with double digit MoM growth across all segments primarily the M&CV space. Tractor domain too surprised positively and reported healthy monthly volumes with high double digit YoY growth in a seasonally weak month amid robust Rabi season sowing domestically, expectations of healthy Kharif procurement and likely exports of farm produce.

• In the 2-W pack, market leader Hero MotoCorp outperformed peers and reported flat MoM numbers at 3.9 lakh units. While royal Enfield brand at Eicher Motors witnessed 3.3% MoM de-growth at 68,400 units. The product mix however improved at Royal Enfield in favour of >350cc segment.

• In PV space, volumes at Maruti Suzuki de-grew 11.9% MoM at 1.4 lakh units (already guided for a decline) led by muted show by Mini & Compact segment while UV volumes grew 1.4% MoM – the key silver lining.

• In CV segment, Tata Motors reported volumes of 33,949 units, up 16.9% MoM while Ashok Leyland posted 24.6% MoM growth to 18,138 units.

• In the tractor space, M&M's tractor sales were up 27.2% YoY to 23,243 units.

Key outperformer in the segment domain this time around was the CV space with >20% MoM volume growth across all segments (i.e. bus & truck). Key outperformers within key segments were M&M in the tractor & PV space, Ashok Leyland in the CV domain and Hero MotoCorp in the 2-W space. Vahan registrations for December 2022 totaled 16.2 lakh units i.e., ~88% of pre-Covid levels and witnessed a decline vs. festive fervour led rise in retails in October and November 2022. With continued spends on infrastructure, improved fleet utilisation and profitability, a strong order book aided by a slew of new launches planned in auto expo 2023, we expect the PV & CV space, in particular, to witness healthy sales volumes, going forward. The premiumisation trend in the 2-W category is anticipated to continue in the near term.

Banking Q3FY23 business performance continues to remain healthy

• Indian banking industry witnessed continued robust traction in credit growth at ~18% YoY
• Continued retail credit demand and working capital keep advance growth strong for majority of lenders (large as well as mid-size banks)
• Hike in rates has propelled deposit accretion, though the pace is still behind advances trajectory. HDFC Bank being an exception with focus on garnering higher term deposits.
• Continued robust credit growth and elevated CD ratio (incremental CD ratio at ~100%) to offset pressure of increasing cost of deposit thereby keeping margin trajectory elevated

Bajaj Finance Q3FY23

• Bajaj Finance reported reasonable growth in AUM at 27% YoY, which was lower that its previous quarter growth of 31% YoY
• New loan additions came strong to 78 lakh vs 68 lakh QoQ. Number of customer additions also grew QoQ to 31 lakh vs 26 lakh
• Management has always guided to grow ~25% over next 3-5 years
• Accordingly, inspite of meeting the growth guidance, the stock saw steep correction anticipating the growth is below par in the festival quarter

Technology Preview - IT sector revenue growth to moderate while margins to expand

• We expect IT companies to post QoQ CC revenue growth between 0.5% and 3.5% for Q3FY23. We expect HCL Tech (IT services) to grow 2.5% in CC terms leading the growth among Tier I IT companies while TCS, Infosys & Wipro are expected to report revenue growth of 1.5%, 1% & 1%, respectively. Among tier II IT companies, LTIMindtree is expected to report its first consolidated results after Mindtree’s merger with LTI. We expect it to report growth of 3% QoQ in CC terms. Among other Tier II IT companies, we expect Coforge and Tech Mahindra to report revenue growth of 3.5% and 0.5%, respectively, in CC terms.  
• We expect cross currency headwinds to continue impacting the revenue of companies and expect the impact to be in the range of 20-50 bps on dollar revenues.  
• We expect the companies to report margin expansion in the range of 10-70bps QoQ except LTI Mindtree which is expected to report margin contraction of 200bps QoQ on integration as well as higher furlough impact.  The companies are witnessing moderation of attrition due to ease of supply and is expected to be a margin driver along with rupee depreciation for Q3. Moderation of some of the other costs like subcontractor costs etc are likely to be medium term margin drivers. We are expecting EBIT margin expansion in the range of 10-70bps for the companies in Q3
• Sequential growth in IT companies in CC terms is expected to moderate after strong growth reported in H1. Companies continue to maintain that they are witnessing weakness in tech spending in few pockets of client portfolio i.e BFSI (Mortgage), Retail, telecom, Hi-Tech etc  which along with furlough impact will impact Q3 revenues.  
• In our view, Infosys and HCL Tech are likely to maintain their revenue guidance of 15-16% and 13.5-14.5% in CC term for FY23 as the ask rate for H2 is not stretched in our view.

Auto Preview – Margin recovery to take centre stage

• To put things into perspective, key raw materials like Steel, Aluminium and Rubber are down in the range of 15-20% over the past 6 months while Plastics is down ~50% over the past 6 months. Even after factoring the quarterly lag, we expect OEM’s to largely report gross margin expansion of ~150 bps on QoQ basis while in the tyre space for players like Apollo tyres we expect the gross margin expansion to be ~250 bps QoQ.

• On volumes front, total industry volumes are nearly flat on YoY basis however down ~10% on QoQ basis with 2-W & PV space reporting lower double digit sequential volume decline which CV and tractors outperforming with QoQ volume growth.

• On aggregate basis, for our coverage, Ex-Tata Motors (the performance of which is quite volatile courtesy JLR), we expect topline to degrow 3% QoQ (amid volume decline pegged at ~10%). EBITDA for the coverage is seen growing 6% QoQ with corresponding margins at 12.9%, up 110 bps QoQ. PAT is seen posting a decline of 4% QoQ partly due to higher other income in base quarter (Q2FY23).

This time around, auto- ancillary space is seen outperforming the OEM pack with margin recovery in the ancillary space is pegged at 120 bps QoQ at 15.6% vs. 100 bps QoQ improvement in the OEM space at 12.4%. In our universe M&M (Buy rating, target price: Rs 1,590) and Ashok Leyland (Buy rating, target price: Rs 185) are expected to report robust performance in the OEM pack while Apollo tyres (Buy rating, target price: Rs 350) is seen outperforming in the ancillary space.

 FMCG majors HUL and ITC to witness margin improvement

HUL

• HUL is expected to post 12.6% revenue growth in Q3FY23 led by mix of pricing & volume growth. We expect 5% volume growth & 7% pricing growth during the quarter. Home care segment is expected to report 23% sales growth considering aggressive price hike taken in detergents in last one year.

• We expect BPC (Beauty & Personal Care) segment sales growth of 5.3% given the company has taken price cuts in Soaps in October-22 with steep fall in palm oil prices. Foods segment is expected to grow at slower pace at 2.3% mainly on account of stagnant tea sales due to benign tea procurement prices.

• We expect 392 bps contraction in gross margins on YoY basis however 240 bps improvement sequentially. Similarly, we expect 82 bps contraction in operating margins on YoY basis & 130 bps improvement sequentially. Net profit is expected to grow by 12.3% to Rs 2,519.2 crore.

ITC

• ITC is expected to report 5.9% sales growth mainly impacted to decline in agri business due to restriction on wheat exports. However, Cigarette business is expected to grow by 10.3% on the back of 7% volume growth. FMCG business is likely to witness strong 19.2% growth on the back of healthy traction in discretionary categories & price hikes taken in last one year. Moreover, education & stationary segment is likely to aid sales growth during the quarter.

• We expect 15.7% growth in paper & paperboard segment led by mix of pricing & volumes. With the strong occupancies & ARRs, Hotel business is likely to grow at 22.9% during the quarter. With the restrictions on agri exports, the business is likely to witness 7.6% dip in agri exports.

• With the strong growth in cigarette volumes & healthy traction in FMCG, Paper & hotels business, operating margin is likely to see 324 bps improvement during the quarter. We expect 8.4% growth in net profit to Rs 4,503.7 crore aided by higher operating profit & slightly dragged by lower other income.

MIDHANI (CMP – Rs 219, Target – Rs 285, Rating – Buy (30% upside) , Mcap – Rs 4,100 crore)

• Incorporated in the year 1973, Mishra Dhatu Nigam (Midhani) is a leading manufacturer of special steel in India. MIDHANI is one of the few modern metallurgical players in the world manufacturing a wide range of Superalloys, Titanium, alloys, Special Steel etc. in various mill forms using state-of-the-art production facilities. MIDHANI has been playing a significant role in supplying materials to various strategic sectors like Space, Defence and Energy since its inception.

• In December 2022 MIDHANI had inaugurated its newly commissioned wide plate mill. MIDHANI has set up a key facility Wide Plate Mill at its existing Hyderabad Plant with an investment of around  Rs 500 Crore for rolling of slabs of various alloys. 3 meter width of the plate which can be rolled in newly commissioned mill makes it unique in world. Due to its very high capacity of rolling force, this mill can roll Ultra high strength steel to very low thickness. Technology for processing of super alloy plates has been established in very short span of time. MIDHANI has established the technology to produce high strength Titanium alloys for Space, Nuclear and Defence applications.

• The Wide Plate Mill facility would meet the requirements of special steel plates for national strategic programs. The mill is expected to serve as a national facility for development of wide plates that would meet present & future requirements and would also facilitate import substitute. Once the wide plate mill is stabilised and fully ramped up it is expected to generate revenue to the tune of ~ Rs 500 crore. The Rs 500 crore annual revenue run rate from the wide plate mill is expected reached in FY24E, once the entire product range is established.

• As on October 1, 2022, Midhani’s order book was at Rs 1,501 crore compared to Rs 1,359 crore as on July 1, 2022. In terms of order book break-up, ~55% is from the defence segment, ~35% is from the space segment while balance ~10% is from others.

• Going forward, as the facilities ramp up production, additional revenue is expected is likely to flow from wide plate mill as well as the Rohtak plant, thereby providing healthy visibility for the company. MIDHANI is currently trading at 17x FY24E EPS. We have valued MIDHANI at 22x FY24E EPS and arrived at a target prices of Rs 285, assigning BUY rating on the stock.

 Conclusion

Nifty to extend consolidation phase amid stock specific action, ahead of onset of quarterly earnings with IT companies. A decisive close above 18300 would lead to resumption of directional uptrend

Source: ICICIdirect Research

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