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Recent weakness in stock markets led by FII selling should subside by next week

ICICI Securities 29 Mins 13 Jan 2023

Market Outlook

  • Most major global equity indices outperformed last week against Indian equities. US (Oversold), Europe (Relatively strong) and Hang Seng (China reopen) gained between 3-5% for the week. Current week’s decline is driven by few index heavyweights and profit taking in large banking stocks after sharp run up.
  • In the past six weeks, Nifty has undergone shallow retracement (50%) of preceding nine weeks rally (16,747-18,887) indicating inherent strength. In coming weeks, in an event of 17,800 being breached, one should not panic rather use volatility as buying opportunity ahead of Union Budget. For upward momentum to resume, index needs to sustain above 20-day ema and last week’s high at 18,150 levels.
  • FII’s remained sellers throughout the week and sold nearly Rs 9,600 crore in secondary markets last week. In the month of January so far FII’s have sold near Rs 16,000 crores in secondary markets. We believe the recent selling pressure seen from FIIs is part of their portfolio rebalancing seen at the beginning of the year and should subside by next week.
  • Globally risk assets extended their recovery and gained further traction and underperforming markets from Europe and Asia saw significant up move. However, the move came at the cost of performing markets like India. US equity markets saw gains of near 2% led by recovery in Technology heavyweights. Even European indices exhibited significant move and UK’s FTSE made their fresh 52-week highs last week while.
  • Dollar index also remained under pressure and moved to seven months low amid further decline in US inflation numbers. Dollar Index plunged sharply to 102.30 levels and
  • As a result, bullion prices have continued their positive momentum. Moreover, China reopening has triggered fresh positivity in base metals and Copper gained almost 7% last week.

Global & Domestic inflation cooling off

US Inflation - US inflation eased for sixth consecutive month and has come down to 6.5%. Most of the metrics of inflation have subsided significantly in last 6 months apart from the shelter prices which constitute almost 38% of the overall inflation numbers. It was up by 7.5% in December compared to 7.1% in November over the last year. US 10 year treasury yield’s slipped to 3.445% and US 2 year yields came down to 4.14%. Markets is now expecting a smaller rate hike of just 25 bps in next FED meeting. The CME fed tool watch indicates 94.2% probability of 25 bps rate hike in February meeting

India Inflation - CPI Inflation for last 2 months has come below market expectations. The latest print is at 5.7% while market expectation was of around 5.9. CPI inflation in last 3 months is down 170bps from 7.4% in Sep 2022 to 5.7% currently. Food inflation driven by which has brought inflation down in last 3 months. Core Inflation has been sticky at around 6.0% since last almost 2 years. Q3FY23 average inflation is now at 6.1% Vs RBI’s last projection of 6.6%. The base effect is also more favorable going forward. Debt market is expecting one last residual rate hike by RBI of around 25 bps and it is unlikely to change with latest inflation print.

Strong numbers from IT major given weak global macros

  • TCS: Reported 2.2% QoQ CC revenue growth. Dollar growth 2.9% QoQ ( 70 bps cross currency tailwind). EBIT margins improved 50 bps QoQ to 24.5%. TCV remained in the guided range of US$7-9bn at US$7.8bn ( including all deals, new+ renewal). LTM attrition declined by 20 bps to 21.3% , net declines of 2,197 for Q3. BUY rating, TGT of Rs 3,780, 26x FY25 EPS.
  • Infosys: Reported 2.4% QoQ CC revenue growth. Dollar growth 2.3% QoQ (10bps cross currency tailwind). EBIT margins flat QoQ to 21.5%. TCV up 22.2% QoQ to US$3.3bn ( Only large deals). LTM attrition down 280bps 24.3% net adds 1,627 for Q3. Revenue guidance: 16-16.5% in CC for FY23, EBIT margin guidance 21-22%. BUY rating, TGT of Rs 1,730, 23x FY25 EPS.
  • HCL Tech: Reported 2.1% QoQ CC revenue growth (IT services). Dollar growth 2.5% QoQ ( 40 bps cross currency tailwind). EBIT margins for IT services up 10 QoQ to 16.8%. TCV up 4% QoQ to US$2.3bn ( Net new deals). LTM attrition down 210 bps to 21.7%. net adds 2,945 for Q3. Revenue guidance: 13.5-14% in CC for FY23 (for company) while 16-16.5% for Services, EBIT margin guidance 18-18.5%. BUY rating, TGT of Rs 1,220, 19x FY25 EPS.

PVR Inox Merger

  • PVR Inox has received the merger approval from NCLT. The tribunal approved the scheme of merger in a verbal order and a written order is expected over the next 15-20 days.
  • The merged company (with ~1,600 screens which is ~50% of multiplex screens) will benefit from a faster growth trajectory (the management is looking to add 200+ screens every year and ~2,000 screens over the next seven years). Key synergy, in our view, will be bargaining power across the value chain, given the scale boosting revenues across segments such as advertisements and distribution. Thus, we remain constructive on multiplexes with medium to long term consolidation benefits in sight.
  • Q3 will be a decent quarter with a box office recovery aided by movies such as Avatar 2, Drishyam 2 and Kantara.
  • Thus, multiplexes are expected to witness ~35-40% QoQ growth in box office revenues with a footfall recovery (up 22-30% QoQ) and average ticket price (ATP) growth at ~7% QoQ for Inox and PVR. PVR, relatively will witness less QoQ growth of ~22% QoQ in footfall as its Q2 base was better. Advertisement remains at ~60-64% of pre-Covid for Inox, PVR, respectively.
  • We expect both PVR and Inox to get back to profitability with 13% and 14% ex-Ind AS EBITDA margins, respectively vs. losses in Q2. With a decent content line-up ahead, we expect box office collection momentum to remain healthy ahead.
  • We have a BUY on both PVR and Inox with target price of Rs 2,130 and Rs 675, respectively providing an upside of 23% and 32%, respectively.

Banking sector to keep trending with HDFC bank results in focus

  • Indian banking industry witnessed continued robust traction in credit growth at ~18% YoY.
  • Our banking coverage universe expected to deliver strong NII growth (19.3% YoY / 3.5% QoQ) led by better margin profile.
  • Provisions to remain contained during Q3FY23, resulting in earnings growth of 33.8% YoY / 3.3% QoQ at Rs 39,724 crore.
  • As per provisional data, HDFC Bank reported 20% YoY growth in advances. Corporate segment reported muted growth, while strong growth in retail segment to aid margins improvement. We expect a PAT growth of 16% YoY (13% QoQ) at Rs 12,021 crore.


  • Advances growth came in strong at 20% YoY (as per provisional figures). PAT growth to continue at steady run rate of ~16% YoY (at Rs 12,021 crore), led by steady margins (at ~4%), GNPA ratio (at 1.2%) and credit cost (~20 bps).
  • We remain watchful on management’s strategy on deposit growth and outlook on growth in corporate segment especially after a flattish sequential quarter.

IDFC First Bank

  • IDFC First Bank is expected to report better than industry credit growth of ~25% YoY (5.2% QoQ). Operational performance to be healthy driven by steady margins (~6%) and marginal improvement of 10-12 bps in GNPA ratio. Hence, the bank is expected to double the PAT (YoY) at Rs 583 crore.
  • Management strategy on liability franchise and trajectory of anticipated decline in CI ratio are key watchful.

Federal Bank

  • The provisional numbers indicated strong growth in advances (~19% YoY). Improvement in NIMs (~10-14bps) and decline in credit cost to aid PAT growth of ~47% YoY at Rs 769 crore.
  • Growth outlook and any further improvement in RoA trajectory would be a positive trigger.

IndusInd Bank

  • The provisional figures indicated strong advances growth of 19% YoY. With improvement in NIMs (~10 bps), decline in credit cost and steady asset quality (GNPA ratio at ~2%) to result in robust PAT growth of 64.9% YoY at Rs 1,915 crore.
  • Outlook on growth and margins in FY24 would be monitorable. Specific focus on any specific segment (like unsecured loans) will help to determine earnings growth ahead.

Pharma CRAMS witnessing covid led growth hangover

  • Pharma CRAMs have witnessed 10-30% correction over the last three months mainly due to expectation of significant shrinkage in Covid execution as the Innovators have started moving on from Covid work. These companies witnessed significant jump in earnings in FY21 and FY22 as major global players diverted their R&D towards Covid and outsourced significant materials from CRAMs players such as Divi’s and Laurus among others.
  • Global innovators are now going back to the pre-Covid R&D besides devising new molecules. It is expected to take at least 3-4 quarters to turn their work into opportunities for Indian players.
  • However, on the positive side the inquiries for new molecules execution are growing. Similarly, the companies are still maintaining their aggressive capex guidance.
  • Divi’s Q3FY23 expectation- Revenues are expected to de-grow ~24% YoY to Rs 1,888 crore, mainly due to 47% expected decline in Custom Synthesis segment to Rs 816 crore which had a higher base of Molnupiravir execution. APIs, on the other hand are expected to grow ~20% to Rs 940 crore on a lower base. EBITDA is expected to de-grow 38% to Rs 679 crore whereas EBITDA margins are expected to decline 800 bps YoY to 36%. Net profit is likely to de-grow 40% YoY to Rs 541 crore.
  • Laurus Labs Q3FY23 expectation- Revenues are expected to grow ~14% YoY to Rs 1,455 crore tracking 62% expected growth in anti-retroviral API to Rs 330 crore. CRAMS business is expected to post 140% YoY growth to Rs 362 crore on a lower base while formulations are likely to de-grow 20% YoY at Rs 298 crore. EBITDA is likely to grow 7.6 % YoY to Rs 426 crore. EBITDA margins are expected to decline 270 bps YoY to 25%. Adjusted PAT is expected to grow 3% YoY to Rs 249 crore.

Consumer discretionary majors to witness gradual margin improvement

  • Asian Paints Q3FY23 expectation - In Q3FY23, we expect Asian Paints to see a lower volume offtake of ~3% YoY on a higher base and subdued rural demand resulting in muted revenue growth of ~5% to Rs 8,989 crore. During Q3, price of key raw material, TiO2 has declined by  ~20% YoY and ~11% QoQ. The gross margin is likely to remain flat on a YoY basis (up 77 bps QoQ) as benefit of easing raw material prices is likely to be partially offset by inferior product mix during the quarter. Low operating leverage and higher advertisement costs are likely to cause a decline in EBITDA by ~90 bps YoY (up 268 bps QoQ) to 17%, thereby resulting to a flattish PAT of Rs 1,042 crore YoY.                                                                                                                    
  • Havells Q3FY23 expectation - We expect Havells to report a better revenue growth of ~9% to Rs 3,993 crore compared to ~5-6% revenue growth of its peers in Q3FY23. Revenue growth will be led by cables segment and Lloyd division. We believe cable segment revenue growth is attributable to higher government capex while Lloyd sales growth is attributable to new product launches and market share gains. Havells' gross margin is likely to increase by 61 bps QoQ to 31.5% led by higher revenue growth and stabilizing raw material prices during the quarter. Low operating leverage is likely to drag EBITDA margin by ~210 bps YoY to ~10%, thereby resulting in decline in PAT by ~9% YoY to Rs 279 crore.

Metal sector starts CY23 on a positive note, aided by improving Chinese sentiments post reopening

  • China easing covid related restrictions and reopening had led to uptick in global metal prices, thereby auguring well for Indian metal players. Easing of Covid related curbs by world’s largest Metal consumer China has spurred hope of demand recovery and aided an uptick in Indian metal and mining stocks.
  • Over the last couple of months, steel prices in China have seen an uptick of ~20%  and are currently quoting at ~US$ 610- 620/tonne. Chinese steel prices have bounced back sharply from a low of US$ 515 which it hit in November 2022. Also recently, Chinese regional players have also taken price hikes for February 2023 shipments mainly on hopes of demand recovery in China post the Chinese New year. Baosteel has raised prices for HRC, CRC and heavy plates by US$ 15/tonne for February 2023 shipments.
  • Aided by uptick in global steel prices, during the first week of January 2023 Indian steel players have already taken a price hike of ~Rs. 1,500- Rs. 2,000/tonne for domestic steel market.  Post this hike, domestic HRC prices are currently quoting at a 3-month high of Rs 56,500-57,000/tonne.
  • There was also a steady uptick seen in Base metal prices. Over the last one month, Copper prices on the LME have increased by ~9% and currently hovering at ~US$ 9100/tonne, while Aluminum prices on the LME has seen an uptick of ~7% and currently hovering at ~US$ 2550/tonne.

Domestic steel demand remains on a strong footing

Seasonally, Q4 is the strongest quarter in terms of sales volumes for domestic steel companies and uptick in prices during this period augurs well for domestic steel players.

On the domestic front steel demand remains healthy which augurs well for Indian steel companies. For FY23E Indian steel demand is likely to grow by ~9% and reach 115 MT and further by ~6% in FY24E to 122 MT.

  • For Q3FY23E, on a QoQ basis Steel companies domestic operations are likely to report sequential increase in EBITDA/tonne to the tune of ~Rs 2,500 to Rs 3,500/tonne, primarily aided by lower coking coal consumption costs. While on a QoQ basis blended steel realisations are expected to decline by ~ Rs 1,000-2,000/tonne, the sequential improvement in EBITDA/tonne is primarily on account of lower coking coal consumption costs which is expected to decline by ~ US$ 70-80/tonne in Q3FY23E when compared with Q2FY23.

Hindalco Q3FY23E – On a sequential basis Hindalco’s India operations is likely to report a steady performance for Q3FY23E. For Q3FY23E, Hindalco’s domestic Aluminum Operations EBITDA/tonne is likely to come in at US$ 585/tonne as compared to US$ 568/tonne in Q2FY23. Hindalco’s Aluminum operations, EBITDA/tonne is likely to further rise in Q4FY23E aided by recent uptick in Aluminum prices. Current spot  Aluminum prices on the LME are already more than US$200/tonne higher than Q3FY23 average which will aid this uptick. Currently spot Aluminum prices on the LME are hovering at ~US$ 2,550/tonne as compared to ~US$2,335/tonne in Q3FY23 average.

As earlier guided by management, due to costs related pressures Novelis is likely to report muted performance for Q3FY23 (our Novelis EBITDA/tonne expectation for Q3FY23E is of US$ 400/tonne).

Tata Steel Q3FY23E – For Q3FY23E, EBITDA/tonne of Tata Steel (Standalone operations) is expected to come in at Rs. 12,500/tonne (Rs 10,177/tonne in Q2FY23). Tata Steel European operations performance for Q3FY23E is expected to come in subdued , due to a sharp fall in European steel prices in Q3FY23 as compared to Q2FY23. Hence, for Q3FY23E Tata Steel European operations is likely to report a loss at EBITDA level with a negative EBITDA/tonne of ~US$ 75/tonne.

Hidden Gem

IndusInd Bank (INDBA), Target Price: Rs 1,450 (17% upside)


  • IndusInd Bank is a Hinduja group promoted newer age private sector bank and is fifth largest private bank in India. Vehicle finance forms ~26% of overall loans. It has a strong pan-India presence with 6,103 touch points as on September 2022
  • Bank’s operating performance remains on steady track led by healthy business growth. With focus on new growth engines, investment in retail franchise and gradual retaliation of liabilities, the bank is poised to pedal growth and report a healthy margin trajectory. Revival in corporate lending and steady disbursement in retail portfolio to aid business growth at ~18-20%
  • NPAs continue to improve led by lower slippages. Healthy provision buffer of 3.4% and focus on collections are expected to keep credit cost at normalised levels, thereby leading to improvement in RoA ahead. The management expects credit cost at 1.2-1.5% for FY23E
  • Continued investment in physical & digital capabilities to aid healthy business growth while gradual improvement in efficiency to aid earnings. We expect robust growth in earnings at Rs 9,652 crore and RoE at ~15% in FY25E

Quarterly result preview

  • The provisional figures indicated strong advances growth of 19% YoY. With improvement in NIMs (~10 bps), decline in credit cost and steady asset quality (GNPA ratio at ~2%) to result in robust PAT growth of 64.9% YoY at Rs 1,915 crore.
  • Outlook on growth and margins in FY24 would be monitorable. Specific focus on any specific segment (like unsecured loans) will help to determine earnings growth ahead.


Nifty expected to witness recovery while banking stocks to be in focus led by earnings 

Source: ICICIdirect Research

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