Nifty is likely to take cues from policy announcement by major central banks along with union budget after breaching near term supports

Market Outlook

Contrary to our expectation, index breached the key support of 17,800. We believe, the index is turning lighter on the face of Union Budget coupled with US Fed meet to be presented next week.

The breach of five weeks low 17,800 signifies extended correction. We believe, ongoing corrective phase to find its feet around key support of 17,500-17,300. In the process, 18,200 would act as immediate resistance.

IT, auto, Infra, PSU are expected to remain in focus. IT, Auto, FMCG relatively outperformed while recently rallied financials underwent profit booking.

US Fed likely to reduce the magnitude of rate hike:

US Fed is likely to reduce the pace of the rate hike as series of economic data shows signs of sluggishness in the US economy. Sluggish economic data signals that Fed fight against soaring inflation is bearing fruit but at the cost of economic slowdown.

What we expect:

We expect Fed to dial back the pace of hike and increase the rates by 25 bps to a range between 4.50% - 4.75% as recent economic data from US signals that economy is feeling the heat of rate hike and lagged effect of Fed aggressive rate hike are beginning to take their toll. The CME fed watch tool indicates 98.1% probability of 25 bps rate hike in February meeting.

FIIs Flows remains elevated

FIIs have been relentlessly selling in Indian Equities for the almost entire January month. In the shortened last week, they have sold nearly Rs 4,000 crores while DIIs have provided support with a buying of Rs 4,500 crores. In the month of January so far they have sold nearly Rs 17,000 crores in secondary markets. Considering Union Budget along with the 3 major central banks meeting lined up next week, we believe its nervousness ahead of events which took indices to its 3 month lows and we should find some stability after the events.

Adani Group stock under pressure

The stock prices of both ACC /Ambuja Cement and Adani Ports have seen a sharp correction in the past 3 days with prices of both ACC and Ambuja declining by 21% and 27% respectively and Adani Ports over 30%. As the fundamentals of the sector and the company per se continue to stay strong, we believe that this sharp correction in the stock prices of both these companies offers very good opportunity to enter from a longer-term perspective. 

Ambuja

It has strong brand with pan-India presence, cost efficient and robust balance sheet. The management plans to increase consolidated capacity to ~140 MT in the next five years (i.e. at 16% CAGR).

The valuation of Ambuja Cement post this correction has now come down to 9.7x CY23E EV/EBITDA vs its avg trailing valuation of 13x (last 4 year average). On EV per tonne as well the stock has now come down to $172/tonne vs Ultratech Cement EV/tonne of $230/tonne. 

ACC

The structural change in the ownership as well as aggressive expansion strategy through organic/inorganic route could pave the way for growth as well as margin expansion led by cost synergies and operating leverage opportunities.

Immediate cost benefits to come from royalty cost savings (~1% of revenue), raw material sourcing like flyash, coal on better terms.

In terms of its valuation, the EV/tonne is trading now at $90/tonne which far below the replacement cost of Rs 130-140 for any midcap companies. With govt likely to focus on infra growth along with the promoter's intent to bring down the cost going forward through its vast logistic and power support, the fresh investment in both ACC and Ambuja can be undertaken.

Adani Ports

Adani Ports is backed by strong FCF (5.3% FY24 FCF yield at CMP 620) generating assets (14 ports, 81 trains, 9 MMLPs, 1.4 mn sq ft warehousing, 620 kms of rail tracks etc) with a 15%+ RoCE. Further rests on a comfortable below 1 D/E ratio and also, it does not have any cross holdings with any of the group companies. Adani Ports commands 25% share of Indian EXIM cargo and aims to reach 40% by CY25.

53% of its overall cargo is sticky in nature. It has been diversifying its revenue base (70% ports, 8% logistics and 22% others) and is expected to reach 500 MMT volumes by FY25. The second and third best private port players stands at 62 MMT (JSW Infra), 48 MMT (Essar ports) respectively and hence Adani leads the pack by a mile.

Budget Expectations:

From macro data perspective (like fiscal deficit, Gross tax collection, subsidy reduction), no major disruption is seen and accordingly likely to be a non-event.

• We expect fiscal deficit at 5.8% for FY24 from 6.4% as budgeted in FY23.
• Nominal GDP to grow at around 11% in FY24 to cross Rs 300 lakh crore.
• The growth in gross tax revenue in FY24 is likely to moderate due to higher base and slowdown in global growth but will remain healthy at 11.4% of GDP.
• In FY24, significant savings in subsidies is likely at around Rs 2.0-2.5 lakh crore with majority of it coming from food and fertiliser (around Rs 1 lakh crore each). Fertiliser subsidy is likely to reduce from Rs 2.5 lakh crore to Rs 1.5 lakh crore and may get further reduced if measures on nano urea are announced.

Major expectations

• Higher outlay on capex to continue: The allocation to capex is expected to grow 18% YoY in FY24BE to Rs 8.9 lakh crore.
• PLI, productive subsidy allocation to remain in focus: PLI scheme to be extended to new sectors like leather, bicycle, toys, IT hardware to attract more investments.

Personal Income tax expectations

• Budget likely to make the alternative simplified direct tax structure more attractive. As per media sources only 5 lakh tax payers have opted for New personal income tax regime as compared to more than 8 crore IT returns filed.
• Capital Gains tax: Cut-off period for short term and long term classification in equities is currently at 1 year. For Debt it is 3 years, real estate it is 2 years. This disparity may be removed and may be all asset classes may bought at 2 years for short term/long term classification. There is some market apprehension for increasing tax on long term capital gains from current 10%. That could be negative if it comes.

Auto – Gross margin expansion underway, volume recovery to follow

As expected gross margin expansion was the centre stage in all OEM results with most of the players reporting more than anticipated gross margin recovery. Gross margins improved the most in the case of Bajaj Auto at 280 bps QoQ followed by 110 bps at Tata Motors and 44 bps at Maruti Suzuki.

All players guided for large part of decline in commodity price reflective in Q3FY23 results with economies of scale the natural lever for further margin expansion in coming quarters.

In the ancillary space as well, margin recovery was centre stage with companies like Amara Raja reporting 290 bps gross margin expansion and consequent 170 bps QoQ EBITDA margin expansion. In the case of CEAT, a tyre player, gross margins expanded 220 bps QoQ with management guiding for further benefits to accrue on this front in Q4FY24 amid benign commodity prices.  

All the three results were better than estimates post which we have retained BUY on Maruti Suzuki (target Price: Rs 11,200) , hold on Bajaj Auto (target price: Rs 4,100) and upgraded Tata Motors to a BUY (target price: Rs 530)

1. Maruti Suzuki (Market Cap: Rs 2.6 lakh crore; Rating: BUY; Target Price: Rs 11,200; Potential Upside: 29%)

• Maruti Suzuki (MSIL) reported steady performance in Q3FY23. Average Selling Price (ASP) came in at Rs 5.98 lakh/unit, up 8.3% QoQ and was the positive surprise. EBITDA in Q3FY23 stood at Rs 2,833 crore with corresponding EBITDA margins placed at 9.8%, up ~50 bps QoQ. Consequent PAT in Q3FY23 came in at Rs 2,351 crore, up 14% QoQ. PAT performance was driven by higher absolute EBITDA and higher other income (Rs 861 crore, up 40% QoQ). Management remained positive on the demand outlook with volume growth likely to taper in FY24E (at ~8-10%) on a higher base of FY23E (20%+ industry growth). We retain our BUY rating on the stock tracking reignited focus on SUVs, market share gain ambition, clear timeframe for EV launch and robust order book. We value MSIL at unchanged target price of Rs 11,200 i.e. 28x P/E on FY24E-25E average EPS of Rs 400/share.
• Other positives include, recent pre-booking for the new model launches in the Auto Expo 2023 like Jimmy and Fronx at ~15,000 units. Moreover, company’s parent i.e. Suzuki Motors has recently shared its vision for growth and EV’s for FY2030. For Indian operation it has informed about 6 EV models to be launched by 2030 with BEV,HEV penetration to be ~15%,25% respectively by FY30. The company also informed about first EV to be launched in FY24. At the Global level SMG also committed a spend of 4.5 trillion yen (~US$ 33 billion) over FY23-30 on R&D (EV’s, ADAS, etc.) and Capex (battery EV plant, etc.). Indian Capex in this domain by SMG is announced at ~Rs 10,000 by FY26E.  

2. Bajaj Auto (CMP: ₹ 3,950; Market Cap: ₹ 1.1 lakh crore; Rating: HOLD; Target Price: ₹ 4,100; Potential Upside: 4%)

• Bajaj Auto (BAL) reported healthy performance in Q3FY23. Blended ASPs surprised positively for the quarter & stood at Rs 92,015/unit, up 6.9% QoQ. Reported EBITDA margins stood at 19.1% up 184 bps QoQ. Consequent reported PAT was down just 2.5% QoQ to Rs 1,491 crore amidst 15% QoQ drop in volumes. Management guided for increasing offerings in EV space with captive electric 3W slated to be launched by March 2023. However on the exports front, it is still witnessing headwinds in terms of political unrest, currency devaluation and constrains on dollar availability in some of its key export markets. Consequently, we retained our HOLD rating on the stock valuing it at Rs 4,100 i.e. 15x core earnings on FY24-25E average EPS and market value of its stake in KTM parent.

3. Tata Motors (CMP: ₹ 445; Market Cap: ₹ 1.5 lakh crore; Rating: BUY; Target Price: ₹ 530; Potential Upside: 19%)

• Tata Motors posted robust performance in Q3FY23. JLR reported EBITDA margins of 11.9%, up 160 bps QoQ while CV business reported EBITDA margins of 8.4% (up ~340 bps QoQ, highest in the recent past) & PV business reported margins at 6.9% (up ~150 bps QoQ). Consolidated profit after tax stood at Rs 2,958 crore (includes forex gains of ~Rs 1,200 crore). Going forward, on the JLR front the management guided about gradual recovery in volumes with easing supply side issues. It also maintained positive EBIT margin & breakeven FCF guidance for FY23E. We believe management commentary on future demand prospect was positive with focus to deliver market-beating growth, improved profitability and consequent free cashflows. We have upgraded the stock to BUY wherein we have arrived at Rs 530 as the target price for the stock on an SOTP basis (10x, 2.5x FY24E EV/EBITDA on India, JLR; Rs 158 value to Indian EV business).

Decline in gas prices to augur well for CGDs

Spot LNG prices have declined to ~US$17-18/mmbtu from highs of US$35/mmbtu. Long term gas prices too have declined from US$14-15/mmbtu to US$11/mmbtu. This fall in gas prices has come on the backdrop of crude rising from US$78/bbl to US$88/bbl. Thus, gas prices have started becoming relatively attractive vis a vis alternate fuels. This bodes well for Gujarat Gas which has more exposure to long term and spot gas sourcing. In the medium to long term, this is beneficial for IGL and MGL too.

The commencement of operations at Freeport LNG terminal in USA and countries like Qatar and Mozambique which are expected to add new LNG supplies to the tune of 32 MMTPA and 13 MMTPA, respectively by CY25 could make the gas market more lucrative for end consumers.

In India, the gas infrastructure is already in works with upcoming LNG terminals expected to add 31MMTPA of capacity to the existing 42.7 MMTPA capacity. Along with this, around 13,000 km of natural gas pipeline work is under construction which would take the total length of the natural gas pipelines to 34,000 km.

Petronet LNG (Target Price: Rs 230)

Petronet LNG's adjusted topline and net income were below I-Direct estimates. However, reported topline and net income were above estimates on account of "Use or Pay charges" contract (Rs 8,489 crore for CY22 vs Rs 416 crore for CY21). Petronet's revenue/EBITDA/PAT came in at Rs 15,776 crore/ Rs 1,675 crore/ Rs 1,180.5 crore, down 1% QoQ, up 43%QoQ, up 59% QoQ, respectively. 

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In the current quarter (Q4FY23E-TD), spot LNG prices have started softening from the elevated levels seen in previous quarters. In Q4-YTD, the utilisation level stands at 81% vs 58% in Q3FY23. The management indicated that this utilisation level is likely to be maintained if LNG prices stay below US$16/mmbtu. Current long term contracts are in the range of US$11-12/mmbtu. Global LNG prices and any subsequent impact on volume demand will be key monitorable in near term.

IGL

IGL reported Q3FY23 results that were lower than estimates on profitability front. Revenue/EBITDA/PAT stood at Rs 3,710.8 crore/ Rs 428.5 crore/Rs 278 crore, up 4% QoQ, down 19% QoQ, down 33% QoQ, respectively. The company announced an interim dividend of Rs 3/share.

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IGL increased CNG and domestic PNG prices in Q3FY23 on account of the revision in domestic gas prices October 1 onwards. However, these price hikes were not sufficient enough to pass on the increase in gas costs which impacted their margins. Softening of gas prices would reduce the sourcing cost for CGDs and improve their margins and also likely bring down CNG and PNG prices. Volume growth coupled with steady margins will be key monitorable in the near term. 

Deposit growth paramount going ahead for banks

• Banking industry has been witnessing higher credit demand since April 2022. In absolute terms, banks has seen Rs 12.1 lakh crore accretion in deposits (YTD) while advances grew by Rs 13.9 lakh crore during the same period.
• In our view, credit demand is expected to remain buoyant at 14-15% in FY24 while deposit growth is anticipated to lag behind. Thus, banks are expected to raise high cost fixed deposits and tap other avenues including CD, infrastructure bonds, subordinate debt to fund incremental credit demand. In addition, banks can dip in excess SLR and liquidity buffer to support credit demand.
• Repricing of liabilities factoring in earlier rate hikes and intensifying competition among lenders for deposits, margins are expected to first normalize in 1HFY24 and further decline in margins could be ruled out if external rates remained stagnant. Thus, pressure of deposit constraint should be seen on margins rather than credit growth.

Kotak Bank(CMP – Rs 1,736, Target – Rs 2,175, BUY)

• Kotak Mahindra Bank reported healthy performance with PPP growth at 42% YoY, led by 22.8% YoY growth in advances with proportion of unsecured retail loans inching up to 9.3% and ~30 bps QoQ improvement in NIM at 5.47%.
• Asset quality improved with ~18 bps QoQ decline in GNPA ratio at 1.9% and PCR at ~76%.
• Management plans to focus on granular deposit growth, increasing unsecured loan mix to mid-teens and building alternate investment AUM.
• We value Bank at ~3.35x FY25E ABV and assign Rs 497 to subsidiaries with a target price of Rs 2,175.

Axis Bank (CMP – Rs 873, Target – Rs 1,100, BUY)

• Business growth and operational performance were robust. Advance growth at 15% YoY, improvement of 30 bps in NIM, 23% YoY growth in fee income and 12 bps sequential decline in GNPA ratio at 2.38%. Major proportion of incremental disbursement from corporate segment was unanticipated.
• Management plans to grow book at 4-5% above industry with sustainability, risk based return in focus. Some benefit of asset repricing to augur in Q4FY23. Citi acquisition to get completed in Q4FY23.
• We value Axis Bank at ~2.2x FY25E ABV with a target price of Rs 1,100.

IDFC First Bank(CMP – Rs 56, Target – Rs 70, BUY)

• IDFC First Bank reported strong operating performance led by 25% growth in advances and 38 bps QoQ expansion in NIMs at 6.36%. Other income Other income registered strong growth of 49.9% YoY, mainly led retail based income.
• Deposit growth, though slower, remained robust compared to peers. Asset quality improved with 22 bps decline in GNPA to 2.96%
• Restructuring of balance sheet largely over. Management now focussed on 20-25% growth, replacement of borrowing with relatively low cost of deposit and gradual reduction in CI ratio (currently at 72%) which would together drive RoA at 1.3-1.5% ahead
• We value IDFC First Bank at ~1.5x FY25E ABV with a target price of Rs 70.

Besides policy, stocks specific likely in consumption stock

Dabur

• Dabur is expected to report muted results with 4.4% revenue growth largely led by pricing growth . Weak rural demand conditions have continued to impact volume growth even in Q3.
• Gross margin is likely to improve sequentially by 50 bps however expected to contract by 249 bps YoY basis. We expect 214 bps contraction in operating margins to 19.2%. We estimate 4.9% decline in net profit to Rs 479.7 crore.

Tata Consumer

• TCPL is expected to witness 7.4% revenue growth led by 26.6% growth in foods business. We estimate 1% growth in India beverage business & 3.4% decline in International beverage business. India tea business is expected to see low single digit volume growth with deflation in tea prices. The strong growth in foods business is likely to be led by pricing growth.
• We estimate 87 bps contraction in gross margins during the quarter. Net profit growth is expected to grow 10.8% to Rs 321.3 crore.

ITC

• ITC is expected to witness 5.9% revenue growth on the back of strong growth in cigarettes, FMCG, Paperboard & Hotels business. Agri business is expected to see sales decline mainly due to restriction on wheat & rice exports during the quarter. We estimate 10.3% cigarettes sales growth led by 7% volume growth. FMCG business is expected to see strong 19.2% growth led by traction in discretionary categories, price hikes taken in last one year & recovery in education & stationary business.
• Stable taxation on cigarettes is expected to maintain current volumes run-rate.

Marico

• Marico is likely to witness revenue growth of 3.2% led by 6% volume growth. Parachute hair oil segment has seen low single digit volume growth. Given, deflation in copra prices, we believe parachute sales to see a decline. Further, sharp decline in vegetable oil prices have resulted in mid-teen volume growth in Saffola Oil. The company has taken price cuts to pass on benefit of RM price decline. We estimate gross & operating margin improvement of 85 bps & 95 bps respectively in Q3FY23. Net profit is likely to grow at 5.8% to Rs 335.4 crore during the quarter.

Ashok Leyland (Rating: BUY, Target price: Rs 185)

• Ashok Leyland is expected to lead the OEM pack and report a robust performance in Q3FY23 amid 5% sequential rise in volumes for the quarter at 47,562 units. M&HCV: LCV ratio for the quarter was at 65:35 vs. 61:39 in Q2FY23. With 4% QoQ rise in ASPs at Rs 19 lakh/unit, net sales are seen at Rs 9,025 crore (up 9.2% QoQ). With improving gross margins amid decline in key RM prices, EBITDA & EBITDA margins for the quarter are seen at Rs 737 crore and 8.2% (up 166 bps QoQ), respectively. Ensuing PAT for Q3FY23 is seen at Rs 365 crore vs. Rs 199 crore in Q2FY23.

Apollo Tyres (Rating: BUY, Target price: Rs 350)

• Apollo Tyres is expected to report a robust performance in Q3FY23 largely reaping the benefits of lower raw material prices. On the demand front, it is expected to be a steady quarter domestically while seasonal boost is expected at its European arm. Standalone sales in Q3FY23 are seen at Rs 4,301 crore, flat QoQ with EBITDA margins at 12.8% (up 250 bps QoQ). On a consolidated basis, net sales are expected at Rs 6,366 crore, up 6.9% QoQ. EBITDA in Q3FY23 is expected at Rs 921 crore with EBITDA margins at 14.5%, up 250 bps QoQ. PAT for the quarter is expected at Rs 348 crore, up 79% QoQ, the highest PAT clocked by it in the last eight quarters.

Hidden Gems

Tata Motors (CMP: Rs 445; Market Cap: Rs 1.5 lakh crore; Rating: BUY; Target Price: Rs 530; Potential Upside: 19%)

• Tata Motors is an auto OEM from the house of Tata’s, operating in domestic (PV, CV) as well as global markets (Jaguar Land Rover i.e. JLR). Its FY22 consolidated sales mix includes: JLR ~67%, India CV ~19%, India PV ~11%.
• Domestically it is in a sweet spot with cyclical upswing in domestic CV space and robust consumer response to its new portfolio in the PV domain. In the CV space, it had demonstrated capability in new technologies showcasing entire range of CVs powered by fuel cells, Li-On batteries (usual EV’s), CNG & hydrogen-powered vehicles in the recently concluded Auto Expo.
• It is even leading the electrification drive domestically with dominant 80%+ market share in electric PV space with Nexon as the top selling product and Harrier EV & Sierra EV slated for launch in CY25.
• On JLR front, with robust pending order book (2.15 lakh units as of CY22 end) and easing supply chain issues we expect the company to swiftly ramp up production and report better financial performance going forward. It is also readily adopting the EV transition with Jaguar going all electric by 2025 and new EV model launches planned in Land Rover domain.
• Tata Motors posted robust performance in Q3FY23. JLR reported EBITDA margins of 11.9%, up 160 bps QoQ while CV business reported EBITDA margins of 8.4% (up ~340 bps QoQ, highest in the recent past) & PV business reported margins at 6.9% (up ~150 bps QoQ). Consolidated profit after tax stood at Rs 2,958 crore (includes forex gains of ~Rs 1,200 crore). Company reported positive PAT figure after 7 quarters.
• Going forward, management commentary on future demand prospect was positive with focus to deliver market-beating growth, improved profitability and consequent free cashflows. We expect healthy 18.2% revenue CAGR at the company over FY22-25E driven by 13.8% total volume CAGR and clock healthy ~20% RoCE profile by FY25E.
• We have upgraded the stock to BUY wherein we have arrived at Rs 530 as the target price on SOTP basis (10x, 2.5x FY24E EV/EBITDA on India, JLR; Rs 158 value to Indian EV business)
• Incrementally, positives are further fund raise and valuation pegging in the domestic Electric Passenger Vehicle domain and board approval for partial stake sale of company’s holding (74.4% stake) in Tata Technologies (E&RD firm working on new technologies like ADAS) through IPO route.

Conclusion

Policy from US Fed and EU and Union budget announcements could trigger a shift in bearish market sentiments prevailing currently.

Source: ICICIdirect Research

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