Share market outlook of the week: Earnings progression to steer stock specific moves

• Nifty maintained its wining streak to gain for sixth week in a row, in tandem with global peers. Nifty, along with Mid and small cap indices gained around 0.6%. Sectorally rotation into IT stocks was a highlight as prospects of rate cut in US boosted sentiments.
• We expect Nifty to gradually head towards 24,800 in coming weeks and transitory shakeouts would offer buying opportunity. Immediate support is placed at last week low of 24,100. We expect focus to be on sectoral churns and stock specific action as Q1FY25 earnings season picks up from coming week.
• Nifty IT Index breaking out: Key highlight of the week has been the breakout in IT index from 10 quarters of consolidation, following rate cut expectations in US. Given the significant weightage of this sector in Nifty, this could act as a cushion going forward.
• From structural perspective, strong domestic fund flow, firm global setups and Budget expectations along with monsoon progression domestically would be key factors influencing market direction.
• Midcap and small caps are overbought: Both indices have rallied 22% and 27% respectively from election day lows leading them into overbought conditions. We recommend being choosy in this segment as retracement of rally is likely to pan out and could lead to some shake outs.

US Inflation eased more than expected in June

• US Inflation eased more than expectation in June amid cheaper gasoline and moderating rents. CPI on YoY basis increased by 3.0% in June 2024, smallest gain in almost a year. Core-CPI which excludes energy and food slipped to 3.3% in June, lowest since April 2021. 
• Shelter prices rose 5.2% from year earlier accounting for over two thirds of total increase in all items less food and energy. However, they have gradually moderated from 7.80% increase seen in June last year.
• Rate Cut Expectations - With recent decline in US inflation, markets are now expecting two rate cuts during the year starting from September. Sharp decline in US bond yields are also suggesting the same. We expect that US rate cut should pre pone the FPI flows into Indian markets. While FIIs have already turned net buyers in Indian markets post-election verdict after almost 6 months, we believe there should be significant increase in the flows in coming weeks.

MF monthly flows data

• Domestic inflows into mutual funds came in at record high at 40,600 crore in June 2024 vs Rs 35,000 crore in May 2024. Even ex-NFOs, inflows were at record high at Rs 26,238 Vs Rs 25,134 crore in May. While higher inflows was reported in media during election result day fall (4th June), flows ex-that day also seems to be strong MoM.
• Sectoral Funds continue to witness higher inflows on the back of continuous NFOs Inflows (Rs 22,000 crore vs Rs 19,000 crore). However, even ex-NFOs flows are highest in sectoral funds across category (Ex-NFOs, run-rate since last 2 months at Rs 9,000 crore vs average of Rs 4,000-5,000 crore) as outperformance by specific sectors like defense, PSUs, power, oil & gas, metals etc. attract flows into these sector funds. These sectors have low weightage in broad indices like Nifty 50, Nifty Next 50, BSE 100, BSE 500 etc. which are benchmarked by widely held flexicap and largecap funds.
• There is some moderation in inflows in Smallcap funds. Smallcap: Rs 1,900 crore vs Rs 2,700 crore. Midcap funds largely stable at Rs 2,500 crore vs Rs 2,600 crore. Multicap funds saw higher inflows in June at Rs 3,700 crore vs Rs 2,600 crore. Flexicap Funds also saw higher inflows at Rs 3,000 crore.
• SIP inflows continue to rise at Rs 21,260 crore vs 20,904 crore.
• ETFs inflows remain strong at Rs 9,100 crore vs Rs 10,700 crore.

TCS Q1 Result: Decent Performance; Maintains growth outlook uncertainty

• Performance: The company’s revenue of US$ 7,505 mn up 1.9% QoQ & 3.9% YoY (in CC terms: 2.2%QoQ/4.4% YoY) driven by strong ramp up on BSNL orders. EBIT margin of the company came at 24.7%, down ~133 bps QoQ due to headwinds from wage hikes (~170 bps) and higher third-party expenses mitigated by operating efficiencies including better productivity, improved utilisation and reduced subcon costs. Vertical wise the growth was led by Regional Markets (14% of mix), Manufacturing (8.8% of mix) and Lifesciences (11% of mix) which grew by 37.7%, 9.4% & 4% YoY in CC terms while Communication (6.2% of mix), BFSI (30.9% of mix) & Retail (15.4% of mix) declined by 7.4%, 0.9% & 0.3% respectively.
• Deal Wins: Deal wins remain weak with TCV of US$ 8.2 bn with BFSI, Retail & US reporting TCV of US$ 2.7bn, 1.1 bn & 4.6 bn respectively. This was attributed to delay in closure of certain deals which are now expected to close some time in Q2.
• Gen AI: Increased traction is seen in AI/GenAI projects as it has nearly doubled its AI/GenAI pipeline to US$1.5bn from US$900 mn last quarter. Company also informed that Many Gen-AI deals have moved from Proof of Concept to actual contracts (including a recent large deal).
• Outlook: Company reiterated that FY25 will be better than FY24 in terms of revenues. Nonetheless, it also highlights that demand outlook remain uncertain especially for discretionary demand along with risk of project delays/cancellations. For margins, post absorption of wage hike in this quarter, it should improve going ahead. Key levers in the short term to aid margin growth would be pyramid, utilisation and productivity while in the medium to long term focus would be on pricing and growth acceleration.
• Valuation: TCS is currently trading at 2 years forward multiple of ~25x. While performance has been strong, management’s non-committal growth recovery outlook along with relatively rich valuations makes us remain Neutral (HOLD) on the stock with Target price of R 4,400/share.

Hybrids and discounts ruled the week in Auto Space

• The week started with Uttar Pradesh State Government slashing registration fee on Hybrids cars in the state.
• It clubbed strong hybrids with EV’s thereby extending zero registration benefits to strong hybrids.
• This led to substantial decline in on-road prices of strong hybrids in the state to the tune of ~10% and is expected to accelerate its sales going forward.
• UP as a state clocks 2^nd highest PV sales volume domestically with its share in total sales volume pegged at ~10%.  
• This got coupled with some industry players reducing vehicle prices amidst high channel inventory (pegged at Rs 60k crore i.e. >60 days vs. healthy run-rate of ~30 days) and product specific interventions.
• M&M reduced price for XUV 700 AX7 variant by ~Rs 1.5-2.2 lakh terming it as a celebration offer with XUV 700 reaching a milestone of 2 lakh units of sales volume since launch.
• On similar terms, Tata Motors reduced prices of Harrier & Safari models by Rs 50,000-70,000 per unit along with offering other benefits.   
• Market reaction to M&M price cut was adverse with stock down in 7% in trade as XUV 700 is the flagship product at the company with order backlog of ~16k units as of May 2024, ~8k units as fresh booking run-rate per month vs capacity of 7k units per month.
• M&M later in the day clarified there is no demand concern for XUV 700. The announced price cut of XUV 700 is a continuation of its business strategy wherein it had opined earlier that it will bring the average price point down for XUV 700 to drive growth. The said price cut for the higher-end XUV 700 variants is for a limited period of 4 months. The company also does not expect any material impact from this on its financials. It also shared that the demand for XUV 700 continues to be robust with bookings in June higher by 23% on MoM basis.
• Towards the end of week, same another sentimental boost to hybrid cars, wherein, government is contemplating over a proposal to remove cess on Hybrid cars with announcement to this effect expected in the upcoming budget. The proposal is to remove cess of 15% imposed over and above the GST rate of 28% across passenger vehicles domestically.
• Removal of cess shall make a strong buying case of Hybrid Cars placing them competitive against current ICE as well as EV vehicles.
• The government however in the past has clearly articulated its intent to promote greener fuels with strong thrust on Electric Vehicles through various subsidy schemes such as FAME, ACC-PLI, Auto OEM and Ancillary – PLI. The chances of such a relaxation are remote in our view, however it was to come true it will be a big positive for Maruti Suzuki which has 2 offering in this domain with commitment to come out with more products supporting this technology. The company however in its last Concall opined that such offering will be limited to big cars or the SUV space due to space constraints.
• In terms of preference, we have a Buy rating on both M&M with a target price of Rs 3,420 and Tata Motors with a target price of Rs 1,200 respectively and a HOLD rating on Maruti Suzuki with a target price of Rs 14,000.

General insurance industry continues to deliver healthy momentum

• General insurance industry reported a 13.3% YoY rise in gross written premium for Q1FY25 at Rs 72,758 crore, driven by strong demand for motor and health insurance. Outlook remains optimistic with growth expected at 13-15%, primarily led by continued strong momentum in health segment and steady rise in motor segment.
• Among listed players, ICICI Lombard (20% YoY growth in Q1FY25) has been a frontrunner, with market share gain (10.6% vs 9.9%) attributable to healthy momentum in motor and health segment. Management strategy to gain market share along with improvement in combined ratio remains encouraging.
• Standalone health insurers including Star Health witnessed steady growth momentum at 17.8% YoY in Q1FY25, primarily led by individual health segment including uptick from increase in premium in 2 products (contributing ~10% of annual business). Management targets to double premium by FY28E along with improvement in combined ratio (~100 bps in FY25E) led by continued focus on market share in individual health segment and strong growth in group health segment (SME sector) wherein the insurer is at nascent stage.
• Bajaj Allianz General Insurance, with growth at 24.5% YoY, have reported healthy performance, with significant gain in market share at 6.48% compared to 5.9%.
• Our stock preference would be Star Health Insurance given its sustained market share at ~32-33% in individual health insurance business and focus on combined ratio (<100%) aids comfort on profitability. Management target to double business in next 4 years is seen to comfort concerns on growth front. Valuation at ~1.7x FY26E float remains attractive.

Glenmark Life Science to Shine after stake sale by Glenmark Pharma

• As per the new agreement, Glenmark Pharma has decided to offload it’s residual 7.81% stake in GLS via OFS route. The proposed OFS price has been fixed at Rs 810.
• 90% of the proposed OFS has been earmarked for Institutional investors and the remaining 10% for the retail investors.
• Nirma, the largest shareholder will continue to hold 75% stake and will remain the sole promoter after Glenmark’s 7.81% off-loading.

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• The proposed offloading could unlock 7.81% of promoters stake in GLS. This could pave the way for higher institutional holding (both FII and DII) in GLS which at present is at 6.41% and it is growing consistently over the last four quarters.
• We have assigned BUY rating on GLS, on the back of proven execution capabilities, strong financials and long-term expansion plans in APIs and CDMO.
• We believe the change of ownership could be beneficial especially on the expansion front as the management has got full autonomy for growth capex.
• We have assigned a target price of Rs 1,040 to GLS based on 21x FY26E EPS of Rs 49.5.

Hidden Gem

Va Tech WABAG (CMP: Rs 1,316 ; Target: Rs 1,550 ; Market Capitalisation: Rs 8,210 crore ; Upside 18%)

• VA Tech Wabag (Wabag) leader in the total water management industry, ranked 3rd globally, caters a complete portfolio of water solutions with technological (~83.5% of revenue) and operational expertise (~16.5% of revenue).
• Wabag delivers tailored water solutions such as desalination, drinking & municipal water treatment, sludge treatment, industrial water & wastewater treatment etc.
• As of FY24, the company commands a reasonable order backlog of Rs 11,400 crore, which provides decent revenue visibility in the medium term. The company has participated in projects worth $1 billion in the international markets which we believe will drive order inflows in FY25E given domestic ordering in H1FY25 might be tepid on account of the general elections. The management will continue to focus on the E&P projects rather than EPC projects.
• The company reported ROCE of 19% in FY24 and Free cash flow of Rs 168 crore which clearly indicates the strong focus of the management on being an asset light model. The target of taking O&M revenues to be 20% of overall revenues will also further augment cash flow cycle.
• Company’s operational and financial performance to improve significantly in the coming period. We estimate revenue, EBITDA and PAT to grow at ~14%, ~22% and ~25% CAGR respectively over FY24-26E. ROCE to be at 21.3% in FY26E from 19% in FY24
• Focus on improving return ratios and asset light model can lead to rerating. We value the company at Rs 1,550 i.e. 25x FY26E EPS.