Share market outlook of the week: Election outcome led nervousness leading to Index consolidation

• Indian equity benchmarks declined 2% last week amid rise in volatility ahead of key General election Outcome.
• Global markets outperformed with 2% gain.
• Coming week, expect Nifty to extend consolidation in 21,700-22,400 range and undergo base formation as it approaches lower band of past two-month consolidation phase.
• Price Structure: Nifty is undergoing shallow retracement of 20% rally between Nov-23 to March 24. 5-7% correction would be orderly during such retracement and would present a buying opportunity.
• Mid-Small caps: Indices have corrected 6-7% from life highs. Another 3%-5% correction would be part of Bull market retracement. Buy the dips in quality mid-small caps.
• Sectors like: Prefer Corporate facing banks, Power, Infra, Oil&Gas to buy on dips.
• Market behaviour during polling phase: Nifty, over past four elections, has undergone average 6% correction during polling phases. In current context index has corrected 4% from life highs and remains in sync with empirical evidence.

MF monthly flows remain robust

• Ex-NFOs, Inflows came in only marginally lower at Rs 17,700 crore vs Rs 19,600 crore in March despite markets moving up higher.
• The highlight was the rebound in the smallcap category with inflows of Rs 2,200 crore Vs marginal outflows in March at Rs 100 crore. After the shake-up of confidence in March when smallcap index fell by more than 15% and there were outflows, confidence seems to have comeback with rebound in smallcap index.
• NFOs in March was higher. Total inflows was Rs 18,900 crore vs Rs 22,600 crore in March. Inflows only marginally lower despite markets being up in April.
•  Flows in other category:
• Midcap category also saw higher inflows at Rs 1,800 crore vs Rs 1,000 crore.
• Largecap saw lower inflows at Rs 360 crore vs Rs 2,100 crore.
• Multicap and Large & Midcap category saw higher inflows.
• SIP inflows crossed 20k mark. At Rs 20,371 crore vs Rs 19,270 crore in March.

L&T- Margin worries impact near term outlook, outlook intact (Mcap: Rs 4,50,000 crore, CMP: Rs 3,260, Target Rs 4,150, Rating: Buy)

• L&T reported a good set of results for Q4FY24. Consolidated revenues grew by 15% YoY while the same for FY24 grew by 21% YoY. From a segmental perspective, infra segment Hi tech manufacturing segment revenues grew by 22% YoY and 15% YoY. On the order inflows front, the company reported 31% YoY growth in FY24 inflows while the same declined by 5% on account of code of conduct and volatile export markets. The consolidated backlog stood at Rs 4,75,800 crore, up 20% YoY.
• Consolidated EBITDA came in at 10.8% vs. 11.3% on account of miss of margins in H1FY24 in the infra segment (largest share in revenues) on account of delay in client claims and projects not reaching margin recognition stage. The project and manufacturing margin stood 9.6% vs. 9.2% (infra segment margins expanded from 7.9% vs. 7.5% in Q4FY24) . The bidding pipeline for FY25E stands at Rs 12.1 lakh crore, up 24.1% YoY mainly led by infra and hydrocarbon segment.
• The company expects to maintain order inflow/ revenue growth at 10% and 15% YoY respectively whereas margins at the project and manufacturing segment will be maintained at 8.25% (Flattish YoY), which was below market expectations of an improvement in FY25E. The NWC improved considerably to 12%, an improvement of 400 bps YoY and QoQ. L&T has reached ROE of 15% in FY24. Strong backlog and bidding pipeline will ensure robust execution and profitability trends. The company’s focus on creating value is clearly visible from the enhancement in ROE from 10% in FY21 to 15% in FY24 via monetisation of non-core assets, reducing working capital intensity and executing profitable growth. We believe L&T is the best way to play the India capex story. We have a buy rating on stock with a target of Rs 4,150 per share.

Regulator tighten provision norms for infrastructure exposure

• RBI has recently released a draft paper suggesting increase in standard provision from 40 bps to 500 bps pertaining to exposure to projects under implementation (under-construction). This step is expected to impact lenders across spectrum as it will entail lower RoE for lenders or higher cost of borrowing for the developer (in case lenders pass on cost of increase provision).
• While all lenders will be impacted, substantial divergence is expected among financiers. Private banks seem to be least affected amid lower proportion of exposure to infrastructure sector. Relatively PSU banks have some exposure to infrastructure projects and the impact could be in low single digit. However, infrastructure financiers including PFC, REC are expected to witness impact to the tune of 8-10%.
• Recent clarification from an infrastructure financier indicated that exposure to government backed projects will be excluded for higher credit cost. However, higher provisioning on standard asst will exert pressure on profitability of lenders and could impede capex momentum amid increase in cost of project. Lenders are expected to communicate their opposition to the central bank, though RBI’s stance will remain watchful. 
• RBI tightens cash disbursement for NBFCs
• RBI, in recent communication, has asked NBFCs to adhere to the norms of maximum cash disbursement not exceeding Rs 20,000. While this regulation is not new, emphasize on adherence by the regulator remains crucial especially in the backdrop of recent bans.
• In our view, restriction of cash disbursement upto Rs 20,000 could impact growth of financiers engaged in last mile lending i.e micro-finance and gold financiers. This is because a large proportion of their customer base deals in cash with limited access to formal financial system. Thus, restriction on cash lending could impact business growth, especially for players with substantial exposure in low ticket size lending including gold financier (Manappuram & Muthoot Finance) and micro-finance players (CreditAccess Grameen, Spandana Spoorthy, Fusion Microfinance, L&T Finance). 

State Bank of India – best ever performance (CMP - Rs 823, Mcap - Rs 7,34,228 crore, Buy)

• State Bank of India reported highest quarterly earnings at Rs 20,698 crore in Q4FY24, up ~24% YoY, led by higher other income and lower provision during the quarter. Operational performance remained steady with NII growth at 3.1% YoY, led by ~16% YoY growth in advances. Liabilities accretion remained healthy at 11.1% YoY, primarily led by term deposits.
• Margins witnessed a sequential uptick of 8 bps at 3.3% (domestic NIM up 13 bps at 3.47%) partially led by IT refund of Rs 1,240 crore. Strong other income (up 24.4% YoY) backed by treasury gains and miscellaneous income aided operating profit.
• Post wage revision in Q3FY24, opex normalized in Q4FY24, while credit cost remained lower at 17 bps (annualized). Asset quality continued to improve with slippages at 62 bps and 18 bps QoQ decline in GNPA at 2.24%.
• Though the quarter witnessed some non-core income boosting earnings, healthy growth in business aided operational performance. Going ahead, industry in-line growth (13-15%) with continued focus on prudent asset quality and steady margins at ~3-3.1% is expected to aid gradual improvement in RoA at 1-1.1% level.
• Given sustained performance, strong liabilities franchise and levers to support operational performance, standalone bank is valued at 1.6x FY26E BV and Rs 184 is ascribed to subsidiaries leading to target price of Rs 1,000. Treasury gain (amid reversal in interest rates) and and recovery from existing stressed book remains catalyst driving optimistic outlook.

DRL - US drives growth numbers

• Revenues grew ~13%% YoY to Rs 7,114 crore driven by growth 29% growth in the US to Rs 3,263 crore and 32% growth in ROW markets to Rs 490 crore.
• US revenues got a significant boost in FY24 on the back of continuing traction from gRevlimid besides new launches and also consolidation of Mayne Pharma portfolio. However, gRevlimid has more or less peaked in FY24 and expected to shrink significantly, going ahead which is expected to create significant void.
• The company is bracing for the same with new launch momentum (+20 in the next two years) in the US besides incremental R&D spend which is expected to be around ~8-9% of the revenues. Of which, ~20% earmarked for biosimilars which the company expects to launch in the US from FY27 onwards.
• The company has also struck scores of in-licensing / partnership deals in India and abroad to venture into uncharted areas and therapies for growth. In FY24 itself it has entered into 8 such deals. While this bodes well if some deals fructify as per expectation, this has also stretched DRL’s balance sheet with higher intangibles.
• Our target price is Rs 6,440 based on 21x FY26E EPS of Rs 302.7 plus NPV of Rs 83 for gRevlimid. We assign HOLD rating as we continue to monitor progress on the launches and R&D front.

Hero MotoCorp: Reports healthy Q4FY24, offers attractive play on domestic 2W recovery

• Total 2-W sales volume for the quarter stood at 13.9 lakh units, up 10% YoY. Topline in Q4FY24 stood at Rs 9,519 crore, up 15% YoY with Blended ASPs at Rs 68,365/unit, up 2.6% QoQ.
• EBITDA in Q4FY24 stood at Rs 1,359 crore with corresponding EBITDA margins at 14.3% (up 30 bps QoQ). Gross margins expanded 90 bps on QoQ basis with ICE portfolio margins at 15.3%.
• PAT for the quarter came in at Rs 1,016 crore, up 18% YoY.
• Management guided for double digit revenue growth in FY25E with blended margins in this range of 14-16%. It will ramp up capacities in the premium side (Maverick, Karizma, Xtreme 125, etc.).
• On the valuation standpoint, it trades inexpensive to its competition and in our view offers an attractive play on 2W volume recovery domestically.
• Hero MotoCorp has a capital efficient business model with cash rich b/s. With focus on premiumisation and Electrification, it now has the right product slate to grow ahead of the industry. Consequently, we turn positive on HMCL and assign BUY rating on the stock. We have valued it at Rs 5,600 i.e. 17x PE on standalone earnings and 3x P/B to its long-term investment.

Bharat Forge: Reports healthy Q4FY24, defence business steals the show

• Standalone revenues for the quarter came in at Rs 2,329 crore up 17% YoY, amid 3% tonnage growth to 66,619 tonnes.
• Standalone EBITDA in Q4FY24 stood at Rs 659 crore, with consequent margins at 28.3% down 100 bps QoQ. Reported standalone PAT stood at Rs 390 crore, up 59% YoY & 3% QoQ.
• On consolidated basis, EBITDA margins stood at 15.4% on account of subdued performance at its overseas subsidiaries. On the consolidated basis, PAT stood at Rs 227 crore in Q4FY24.
• Defence sales was ~Rs 560 crores in Q4FY24 with FY24 sales in this domain pegged at ~Rs 1,560 crore vs. the earlier management guidance of ~Rs 1,000 crore and the real positive surprise for the quarter. The executable order book in the defence space stood at ~Rs 5,200 crore as of March2024 with management expecting scaling its annual revenues from this domain to Rs 2,500 in couple of years (excluding artillery guns). It expects ATAG gun order anytime soon (mostly post union elections). It expects US class 8 truck market and domestic CV market to be largely flattish for FY25E.
• On the valuation front, it now trades at ~30x PE on FY26E basis with RoCE profile of ~15-20%. The stock was already up ~12% post results and captures much of the upsides in our view.

Hindalco: subsidiary Novelis reports healthy Q4FY24, IPO filing to keep sentiments upbeat

• At Novelis, Total operating income for the quarter came in at $4.1 billion (up 4% QoQ & down 7% YoY) with shipments of flat rolled product at 951 kilo tonnes (kt) (up 4% QoQ & 2% YoY).
• Adjusted EBITDA for the quarter came in at $514 million with corresponding adjusted EBITDA/tonne at US$540/tonne (up by 25% YoY and 8% QoQ). The EBITDA per tonne for the quarter exceeded the expectations, reaching US$540/tonne compared to management’s forecast of $525 per ton. This was attributed to higher recycled content and lower operating costs.
• Going forward, the company expects the EBITDA/tonne to sustain at similar levels and gradually move to the medium-term guidance range of $600/tonne, driven by favourable market dynamics combined with capacity expansion & rise in recycling content.  This augurs well for Hindalco considering Novelis contributed ~65% and ~56% of Hindalco’s consolidated sales and EBITDA in FY23.
• We have a positive stance on the stock driven by healthy demand for Aluminium metal given its incremental application in automobile and renewable spaces, strategic capacity expansion at Novelis and Hindalco and controlled leverage on B/S with Debt to Equity at ~0.5x.
• Interestingly, in the past week, as per media sources, Hindalco Ltd. is looking at raising US$ 1.2 billion from the proposed IPO of its overseas wholly owned subsidiary i.e. Novelis, the valuation of which is pegged at US$ 18 billion. It had filled for IPO with US regulatory body in Feb 2024 which is primarily an OFS with all IPO proceeds coming back to Hindalco.
• The valuation pegged for Novelis (at US$ 18 billion) in greater than our implied valuation (Enterprise Valuation of ~US$ 15.6 billion) in our target price calculation of Rs 780 and provides a room for further upgrades. We shall closely track the developments in this space.

Hidden Gem

Gujarat Fluorochemicals (Target price is Rs 3,970)- Fluoropolymers to lead the way for recovery in FY25

• Revenues grew 14% QoQ to Rs 1,133 crore driven by flagship Fluoropolymers business (up 18% QoQ) and Fluorochemicals (up 23% QoQ). Commoditized Bulk Chemicals segment was down 1% QoQ. EBITDA grew 15% QoQ and margins stood at 21% (flat QoQ). PAT grew 26% QoQ to Rs 101 crore.
• Fluoropolymers (57% of sales)- Prices remained stable and volumes have improved from the previous quarter especially for the high-grade Fluoropolymers where Chinese competition is negligible.
• Fluorochemicals (27% of sales)- Sequential recovery in Refrigerant volumes due to seasonality but in for specialty chemicals both volumes and prices continue to be sluggish due to Chinese dumping.
• Bulk Chemicals (27% of sales)- Caustic soda/MDC prices continue to remain subdued due to increased supplies on account of excess capacities globally.
• Fluoropolymers segment is witnessing recovery and brighter future with changing global dynamics. The company has invested heavily in high-grade Fluoropolymers capacity build up over the last few years.
• This, coupled with exit of some global legacy players such as 3M is expected to improve the growth prospects of Fluoropolymers in FY25.
• Other segments such as Fluorochemicals and Bulk chemicals however are expected to remain muted on account of Chinese dumping and excess capacity built-up.
• The management is confident of achieving the FY23 EBITDA level (Rs 1,965 crore vs Rs 907 crore in FY24) mainly on the back of superior Fluoropolymers performance. We expect Fluoropolymers and the newly carved out battery materials segment to drive growth in the future.
• Our target price is Rs 3,970 based on 37x FY26E EPS of Rs 107.3. We believe the premium valuation is justified on the back of significant traction expectation in Fluoropolymers and battery materials with a lag.