Share market outlook of the week: Earnings to drive stock specific action; eyes on US Fed policy

• Bank Nifty underperformed last week (-3%) as earnings of large banks weighed on sentiments. Nifty closed flat for the week post Union Budget, helped by IT, Consumption, Auto and PSU stocks. Midcap and Small caps outperformed with 2% gain.
• On global scale, rotation out of mega cap tech to rate sensitives continued amid prospects of rate cut by Fed in H2CY24.
• In the coming week, we expect Nifty to challenge life highs of 24,850; sustaining above which will lead index to head towards 25,200 over few weeks. Meanwhile strong support exist at 24,200 levels. Since beginning of January 2024, buying dips to the tune of 3%-4% in Nifty has worked well. Meanwhile, stock specific action would prevail amid progression of earnings.
• Market breadth: Net of Advance/Decline (Nifty500) bottom out at its bearish extreme reading (-450) on Union Budget Day and made a sharp reversal supporting argument for stock specific action.
• India Vix: which is a gauge of market sentiment, crashed 18% for the week as anxiety settled post Budget event, indicating that market participants are not expecting a significant volatility.
• Sectors in focus: IT sector continues to outperform post its recent breakout while new breakouts on larger degree were observed in insurance companies. Further Auto and Oil&gas sectors are coming out of their consolidations. Expect these companies to relatively outperform over next few months.
• Global setup: In US major sector rotation has taken place over past few weeks ahead of US Fed policy in coming week. Dow Jones and Russell 2,000 small cap index both have given a significant breakout indicating that rally in US is broadening now.

Union Budget – Key takeaways

Key highlights of Budget:

The spotlight of the Union Budget 2024-25 was anchored on pillars of a) Youth skilling and Job creation, b) Tax simplification, c) Consistent capex momentum & d) Smooth and Efficient accessibility of credit to MSME. On a broader level, fiscal deficit of 4.9% and 4.5% for FY25E and FY26E, respectively, signifies government’s prerogative to carve out a sustained economic model of inclusive growth and development. To sum up, the Union Budget reflects a realistic set of measure to drive long term growth ahead. Nonetheless, market would await long term roadmap for specific growth pockets.

• On the fiscal deficit front, the Government has bettered its own estimate for FY24 and FY25. Actual FY24 fiscal deficit is pegged at 5.6% as against earlier estimate of 5.8%. Similarly, FY25 fiscal deficit target estimate is now lowered at 4.9% versus interim budget estimate of 5.1%.
• In absolute terms, FY25 fiscal deficit is reduced from Rs 16.85 lakh crore estimated in interim budget to Rs 16.13 lakh crore. Government borrowing, however, has been reduced only by Rs 12,000 crore leaving the potential reduction in borrowing later in the year. Medium term target of 4.5% fiscal deficit by FY26 seems well on track now.
• The subsidy allocation has remained unchanged for broader heads and is on a declining path as a % of GDP.  It has declined from 1.9% of GDP in FY23 to 1.4% in FY24 & further to 1.2% of GDP in FY25. Absolute subsidy allocation for the major heads is down 7.8% YoY to Rs 3.8 lakh crore for FY25E.
• Capex intensity has been maintained despite capex spending growing at a CAGR of 20% over FY21-FY25BE. The Government has budgeted growth at 11% YoY in FY25BE to Rs 11.1 lakh crore. The capex to GDP is pegged at all-time high of 3.4% in FY25BE vs 3.2% in FY24RE. Key segments like Roads, railways, defence segments have seen allocation rising between 3-9% given FY22-FY24 had witnessed strong double digit growth thereby creating a high base. In others category, segments like Housing (PM Awaas Yojana) has seen a growth in outlay to the tune of ~8% YoY.
• The major focus of the budget has been to simplify and rationalize the capital gains. The concept of indexation is done away with and Long term capital gains across asset classes are now brought at 12.5%. Long Term Capital gains tax rate on sale of property has  been reduced from 20% to 12.5%, however, indexation benefits has been removed. Short Term Capital Gain Tax has been raised from 15% to 20% for financial assets.

Draft proposal to tighten LCR requirement – one-more hit for bank’s margins ailing under pressure

• In lieu to strengthen banks liquidity in case of stress, RBI, in draft proposal on Liquidity Coverage Ratio (LCR) has proposed that banks assign additional 5% run-off factor for retail deposit enabled with mobile and internet banking (IMB) i.e IMB enabled stable retail deposit to have run-off factor of 10 and less stable deposits to have run-off factor of 15%. Additionally, unsecured wholesale funding from non-financial small business should be categorised as retail for calculation of LCR. 
• Effective from April 2025, higher run-off factor on retail deposits will result in decline in existing LCR by 10-15% which will require banks to shore up investment in liquid assets (like G-sec) putting pressure on margins and thus earnings momentum.
• Public sector with relatively lower CD ratio and higher G-sec investment are better placed compared to private peers.

Budget emphasizes on MSME financing to aid small business financiers

• The Union Budget has proposed a slew of measures to support MSMEs including proposal to introduce a credit guarantee scheme for facilitating term loans for purchase of machinery and equipment without collateral or third-party guarantee and a guarantee from a government-promoted fund to provide credit support during stress period.
• Further, limit under Mudra loans has been doubled to Rs 20 lakh. Public sector banks have been asked to formulate new mechanism to assess credit worthiness of MSMEs.
• These measures announced in budget will ensure improvement in timely and smooth flow of credit to MSME sector which will aid business growth for banks and small business financiers (Ugro Capital).

Axis Bank Q1FY25 performance remains dismal

• Axis bank reported weak performance in Q1FY25 results. Moderation was seen in credit growth at 14% YoY to Rs 9.8 lakh crore, with corporate segment driving growth in Q1FY25. Deposit accretion remained slower with focus on term deposits.
• Core operating profit increased 16% YoY to Rs 9,637 crore, driven by a 12% YoY increase in Net Interest Income (NII) and a 16% YoY growth in fee income. However, higher provision kept PAT growth at 4% YoY to Rs 6,035 crore. Margins seems to be stable at 4.05% vs 4.06% in Q4FY25, however excluding interest from IT refund, margins declined by 6 bps QoQ.
• Slippages remained higher at 1.97% resulting in higher credit cost at 21 bps vs 12 bps in Q4FY24 and Q1FY24. GNPA and NNPA inched up 11 bps and 3 bps QoQ to 1.54% and 0.34%. Management indicated some stress witnessed in unsecured retail credit (personal loans and credit cards).
• Management reiterated focus on risk adjusted growth ahead, however, moderation in balance sheet momentum coupled with hiccups in asset quality and thereby credit cost could impact near term valuation. At current price, the bank trades at 1.7x FY26E standalone BV and Rs 100 for subsidiaries which seems in a neutral zone.

Bajaj Finance – Healthy on balance sheet growth though operational and asset quality hiccups visible

• Bajaj Finance's reported mixed performance in Q1FY25 with continued growth in balance sheet, though asset quality witnessed some hiccups. AUM came healthy at 31% YoY to Rs 3,54,192 crore, driven by ~1.1 crore new loans, reflecting a 10% YoY increase. Customer base expanded by 44.7 lakhs, taking total to 8.8 crore.
• NII increased by 25% YoY to Rs 8,365 crore, despite 23 bps decline in margins (13 bps impact due to increase in CoF and 10 bps led by change in AUM mix). Higher credit cost at Rs 1,790 crore, kept PAT growth slower at 14% YoY to Rs 3,912 crore. GNPA and NNPA ratios stood steady at 0.86% and 0.38%, respectively.
• While growth remained healthy, some concerns remained on asset quality. Management expects loan losses to remain elevated in Q2 before normalizing from Q3. Net loan loss to average AUM is projected to be around 1.75%-1.85% for FY25E. Near term headwinds could keep valuation in a range, listing of housing subsidiary could act as breather.

L&T: All round performance (Target: Rs 4,300) 

• L&T reported strong operational performance for Q1FY25 across all parameters. Given a seasonally weak quarter coupled with general election, the company managed to report Rs 71,000 crore order inflows, up 8% YoY mainly led by international markets. The current backlog stands at Rs 4,90,900 crore, up 19% YoY.
• Strong execution in the infrastructure segment (revenues up 22% YoY)  and hydrocarbons (up 27% YoY) space led to consolidated revenue growing by 15% YoY at Rs 55,100 crore. Consolidated EBIDTA margins came in at 10.2% flat YoY. Positive surprise also came in from the expansion of 40 bps margins in the core Project & manufacturing segment at 7.8%.
• In terms of business prospects, for 9MFY25E, the company has a bid pipeline of Rs 9.1 trillion which has declined 10% YoY on account of project deferrals/cancellation in the international hydrocarbon space. Despite this, the company is quite confident of meeting its 10% YoY inflow growth guidance.
• The company also retained its revenue growth and margin guidance for FY25E. The NWC ratio stood at 13.9% vs. 17% YoY and 12% QoQ. Consequently, PAT grew by 12% YoY despite 20% YoY decline in other income in Q1FY25.
• Securing order inflows near the guidance range in a tough quarter speaks of the diversity of the company’s operations. We believe given the backlog growth and pick up in execution in remaining 9MFY25, there remains a strong probability of a beat on the revenue growth guidance. With continued focus on improvement of overall return ratios and aspiration of 18% ROE by 2026 looks a realistic one. Hence, we believe L&T will remain our best capex play in large-cap capital goods space.

Mahindra Lifespace: Strong Presales growth*

• Mahindra Lifespace Developers reported pre-sales of Rs 1,019 crore, up 195% YoY and down 6% QoQ, in the residential business, driven by launches in March ’24 and launch of new tower in Tathawade.
• On financial front, Revenues stood at Rs 188.1 crore, up 91.9% YoY. It reported a PAT of Rs 12.7 crore as against loss of Rs 4.3 crore in Q1 FY24.  On segment wise, industrial cluster segment (part of profit from associates/JV) profit was ~Rs 26 crore, while residential segment had reported a loss of ~Rs 13 crore.
• The business development momentum also remained robust with company adding Rs 2,000 crore of projects in FY25YTD, in line with an objective to grow 4-5x (Rs 8,000-10,000 crore) by FY28. The company currently has a total GDV potential of around Rs 20,000 crore, which will grow massively ahead over the next 3-4 years as it scales up.
• The focus on expanding its overall scale of operation (strong launch pipeline ahead) and a comfortable balance sheet, lends us comfort. We have a BUY with TP of Rs 740.

Kajaria: Muted Performance; growth to pick up ahead

• Kajaria report muted set of numbers on expected lines. Overall topline at Rs 1,114 crore, were up 4.6% YoY. Tiles sales volumes were up ~7.8% YoY at 27 MSM. Tiles revenues were up 3.4% YoY at Rs 990 crore, with pricing decline of ~3.6% YoY. Muted topline growth impacted margins which declined by 90 bps YoY to 15%.
• The company expects Tiles revenue growth of 8-9% in FY25 with volume growth of 11-12%. We have baked in tiles volume and revenue CAGR over FY24-27E of ~11% to 147 MSM and ₹ 5492 crore, respectively. Amid benign Gas prices and operating leverage led benefits, we expect EBITDA margins to reach ~16%/16.5%/17% in FY25/FY26/FY27, respectively from 15.3% in FY24.
• Kajaria, with a net cash balance sheet and superior brand, is a solid play on the tiles sector with expanding reach to tier II/III cities. With strong real estate completion cycle kicking in coupled with benign gas costs, we expect Kajaria to remain a key beneficiary of the same. We remain constructive on the company.

Tech Mahindra: Turnaround on track

• Tech M reported revenue of US$ 1,559 mn, up 0.7% QoQ, while it was down 1.2% YoY in CC terms. Segment wise on a QoQ basis Healthcare & Lifesciences (7.7% of mix), Retail transport & logistics (7.7% of mix), Manufacturing (18.3% of mix), BFSI (15.7% of mix) and Hi-tech & Media (13.8% of mix) which grew by 7.9%, 5.2%, 2.4%, 0.7% and 0.5% respectively while its largest vertical Communications (33.1% of mix) declined by 1.9% QoQ.
• EBIT margin of the company increased by 110 bps QoQ to 8.5%. The margins saw healthy expansion of 110 bps aided by operational efficiencies & savings from Project Fortius, moderation of subcon costs (+80 bps) which were offset by headwinds from decline in revenue in Comviva.
• The company during the quarter won TCV of US$ 534 mn, up 6.8% QoQ/48.7% YoY. The management mentioned that they see no change in the demand environment from the previous quarter, however, they expect FY25 to be better than FY24.
• Tech M is well placed among the large peers in terms of earnings growth momentum driven by turnaround strategy. We believe that the company’s dollar revenue will grow at CAGR of 6.4% between FY24-26E but the operating profit growth is likely to outpace with EBIT margin to improve from 6.1% in FY24 to 13.4% in FY26E. We have constructive view on the company.

Hidden Gem

Federal Bank – Buy, Target Price: Rs 230. Healthy Q1 performance; new leadership bodes confidence

• Federal Bank reported strong performance. Advance growth came at 20.3% YoY (retail/ wholesale growth at 25%/ 15%), deposits grew at 19.6% (NRE deposit up 9% YoY).
• PAT growth came at 18% YoY on the back of 15.2% YoY rise in operating profit and 7% YoY decline in provisions. Growth in NII came at 19.5% YoY & 4.4% QoQ, with margins down 4 bps YoY & 5 bps QoQ at 3.16%, while other income was up 25% YoY, amid elevated recovery from written-off accounts.
• Asset quality remained steady with slippages at 78 bps and credit cost at 27 bps. GNPA/ NNPA ratio remained stable at 2.11%/0.6%.
• Execution on gradual focus on high yielding segment is delivering growth as well as aiding margins. Appointment of Mr. Manian with strong track record provides impetus to continuity of business model thereby aiding valuation. Recent draft proposing increase in run-off could impact growth and margins marginally. At current price, the bank is trading at ~1.35x FY26E BV remains comfortable.