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Share market outlook of the week: Geo political developments and earnings to weigh on sentiments

ICICIdirect 24 Mins 19 Apr 2024
  • Equities traded volatile last week amid geo-political worries and US Fed signaling higher rates for longer.
  • Nifty corrected 3% during the week in tandem with most global markets. Nikkei was key loser (6% down) after multi-month rally.
  • Going forward, key support for Nifty is placed around 21,400 while Thursdays high of 22,300 would remain strong resistance. Expect index to consolidate in this range amid stock specific action as Q4 earnings season gathers pace.
  • Our structurally positive stance remains intact, as we have seen in the past that once anxiety around such events settles down, markets tend to resume their primary up trend. We therefore maintain our stance of using panics if any as buying opportunity.
  • Sectors: Oil&Gas , Power, Metal sectors have outperformed within recent volatility and expected to outperform. While Banknifty is oversold and would be key driver for index recovery going ahead.
  • Breadth: Percentage of stocks above 50 day has not deteriorated amid recent volatility and remains above 65%.
  • Commodities: Base metals remain in rising trajectory and would have bearing on direction of metal stocks. Short term retracements in Metal stocks would offer buying opportunity.
  • Global Setup: There has been noise around higher interest rates amid higher inflation. Technically, US indices have rallies ~23% since November and current decline is part of retracement of rally. So far indices have corrected 5% from highs. Usual bull market corrections in S&P 500 tends to be around 7-8%.

Monsoon: IMD forecasts above normal rainfall in upcoming monsoon season 2024 at 106% of LPA

  • In its long-range forecast for the upcoming Monson season 2024, IMD in its press release this week has forecasted monsoon to be above normal in nature with rainfall at 106% of LPA (long period average). Monsoons accounts for ~70% of total rainfall received annually in India.
  • It is indeed a positive development with all domestic and global weather monitoring agencies forecasting normal to positive monsoon for India in 2024.
  • Notably, IMD press release assigns 61% probability to above normal and excess rainfall categories, 29% to normal rainfall category and just 10% to below normal domains.
  • Abundant rainfall is positive for entire rural consumption play which includes FMCG, consumer durables and automobile especially tractor and 2W segments.
  • It will rainfed the upcoming Kharif crop while at the same time fill reservoirs which will be eventually used for Rabi crop thereafter.
  • Our top beneficiary of healthy monsoons would be Mahindra and Mahindra which is the leader in the tractor space (market share at 40%+) and LCV segment.

Infosys Q4 Result: Weak performance; Deal wins only silver lining

  • Performance: The company’s revenue declined by 2.2% QoQ in CC terms in Q4, more than expected, due to renegotiation and rescoping of contract (15% de-scoped) by a large financial services client. EBIT margin of the company declined by 40 bps QoQ to 20.1%, due to headwind of 180 bps, comprising 100 bps from one-time impact of contract rescoping & renegotiation by a financial services client & 80 bps impact of salary & travel cost increases mitigated by tailwinds of 140 bps.
  • Deal Wins: Deal wins remain strong despite no improvement in discretionary spending environment. Won large deal TCV of US$ 4.5 bn in Q4 (up 37% QoQ) & US$ 17.7 bn in FY24.
  • Guidance: The company is guiding for 1-3% revenue growth & margin band of 20-22%. However, the company also indicated that growth will be front ended and H1FY25 will be better than H2FY25. Company has high discretionary business mix & weakness in the same is reflected in revenue outlook vs. TCS which is likely to witness ~7% growth in FY26.
  • New Acquisition: Infy acquired in-Tech an ER&D service provider (largely auto) for Eur 450 mn which had CY23 revenues of Eur 170 mn (Price to sales of 2.6X). The revenue from acquired company is not accounted in the guidance.

Valuation: Infy is currently trading at 2 years forward multiple of 19.5x which is ~8% discount to 5 years PE multiple. The premium of TCS valuations over Infosys has expanded to ~23% (24x vs. 19x two year forward P/E, respectively) vs. historical average of 15%.

Mastek: Named as one of the suppliers in GBP 1.2 bn contract by UK’s Ministry of Defence

  • Mastek is named as one of the supplier in UK’s Ministry of Defence’s GBP 1.2 bn Digital & IT Professional Services (DIPS) Framework which will run over a period of 4 years, providing near term revenue visibility for Mastek. The company is awarded a place on Lot 1 which includes enterprise & tech architecture, data, innovation, tech assurance and knowledge & information management.
  • Although the deal TCV is not declared we believe that the deal TCV would be significant as not only has it won as a supplier but it will also get contracts as a sub-contractor for providing dev ops, sys design, app support, cyber security, crypto, sec ops & integrated systems.
  • Mastek has a healthy order backlog and also robust pipeline which implies that the company is expected to report healthy revenue growth in medium term. We expect the company to report revenue CAGR of 15.6% between FY23-26E in dollar terms & 17% in rupee terms. We also expect the company’s EBITDA margin to increase from 17.8% in FY23 to 19% in FY26E while EBITDA & PAT is expected to grow at CAGR of 19.7% & 18.7% respectively between FY23-26E.

Bajaj Auto Q4FY24 Review: Reports healthy performance, marginally ahead of street estimates

  • Total operating income for the quarter came in at Rs 11,485 crore, up 29% YoY amidst 25% YoY growth in volumes at 10.7 lakh units (2-W volumes at 9.2 lakh units while 3-W volumes at 1.5 lakh units).
  • EBITDA for the quarter came in at Rs 2,306 crore with corresponding EBITDA margins at 20.1% (flat QoQ). Margin performance at the company came in healthy tracking ~80 bps gross margins gain amidst better product mix (both in terms of higher share of 3-W and cc upgrade in motorcycle segment).
  • PAT in Q4FY24 stood at Rs 1,936 crore (up 35% YoY). Company declared a final dividend of Rs 80/share which along with amount spent on buyback at ~Rs 5,000 crore (inclusive of tax) resulted in >95% payout to investors for FY24.
  • Management commentary was positive around the Chetak brand in E-mobility space as well as Triumph bikes in the premium category. It is looking at aggressive product launches in the ICE as well as EV category as well as network expansion. It also shared that Pulsar is now a Rs 10,000 crore brand and domestically company witnessed healthy market share gains in the 125-cc motorcycle category.
  • It expects domestic 2-W industry to grow at high single digit in FY25E while 3-W space is expected to grow at an organic rate post robust recovery over past 2 years.
  • On the exports front, situation is not yet out of the woods however encouragingly it has received approvals for its quadricycle i.e. Qute for Egypt market (under 3-W ban since April 2022).
  • It however now trades at a premium valuation (2 year forward PE at ~23x) to its historical averages (2 year forward PE at ~16-18x) which will limit the stock price appreciation going forward. We have a HOLD rating on the stock.

HDFC Life (CMP – 595, Hold) – Base effect led to muted growth; missed on VNB margin

  • HDFC Life reported mixed performance in Q4FY24. Growth in APE (Annualised Premium Equivalent) remained muted at 1%, the same was expected owing to high inflow in previous Q4 amid amendments in taxation. Continued focus on persistency provides comfort on healthy traction in renewal premium growth.
  • Among product segments, unit linked (86% YoY), protection (26% YoY) and annuity business (21% YoY) witnessed healthy growth while non-par (-33% YoY) business saw de-growth owing to base effect of last year.
  • While premium growth was anticipated to remain muted in FY24, VNB margin at 26.3%, a decline of 130 bps YoY, which was led by faster growth in low yield unit linked business.
  • Strategy focusing on customer accretion and improving penetration in urban & semi-urban area to continue which is expected to result in new business growth of 12-15% in FY25E. Further, business growth remains priority with marginal trade-off on margins ahead.
  • At current price, the stock is trading at ~2x FY26E EV. Given anticipated volatility in margins, scope for multiple re-rating remains limited. However, anticipated healthy business growth should gradually get factored in the valuation resulting in limited upside.

Ambuja Cement – Adani stake buy

  • Adani family has recently infused Rs 8,339 crore in Ambuja Cement through the final tranche of warrants conversion. With this, the promoters have infused total Rs 20,000 crores in the company in three tranches over the last 20 months. Promoters stake have increased to 70.3% now from 63.2% in Dec'23.
  • The fund infusion and increase in stake suggests promoters' conviction and focus on cement business. This would help the company in meeting its capex requirements through internal accruals. Company’s balance sheet is already strong with cash & bank balance stood at Rs 8,500 crore as of Dec'23.
  • Ambuja plans to increase its consolidated capacity to 140 mtpa by FY28E from 77.6 mtpa at present which implies ~16% CAGR. Adani Cement targets to increase its market share to 20% by FY28 (from current 14%).
  • Moreover, company is also in process of investing significantly in other operational efficiency measures like optimizing raw material cost, increasing share of green power and non-fossil fuels and logistical efficiency.
  • We believe that both Ambuja & ACC would benefit significantly in the coming period in terms of strong volume growth (led by aggressive capacity expansion plans) and improvement in margins (led by operational efficiency measures and positive operating leverage).

Strong start to power consumption in FY25

India's power consumption grew nearly 10% YoY to 70.66 billion units (BU) in the first half of April this year, showing improvement in economic activities and consumption patterns, according to the power ministry data. According to the data, power consumption in the country rose to 70.66 BU during April 1-15 this year from 64.24 MU in the year-ago period. The peak power demand met or the highest supply in a day rose to about 218 GW in the first half of April compared to 206 GW in the same period a year ago. We believe strong demand trends to persist and the same will be beneficial for power utilities leading to higher PLF and strong volume growth.

NPTC (Target - 400) and Coal India (Target - 550) are our top picks in this space.

Pharma exports buck the trend in an otherwise sluggish Trade exports data for FY24

  • Pharmaceuticals exports has been one of the few bright spots in India’s trade exports which de-grew 3% in FY24 to US$ 437 billion.
  • Pharmaceutical exports grew ~10% YoY to US$ 27.9 billion in FY24.
  • This 10% growth is on the heels of flattish or zero growth in FY23 and FY22.
  • The FY24 growth was driven by US which accounts for 30% of the overall exports. Exports to US grew ~15% for the year.
  • The growth has been productive which is driven by niche and complex launches such as injectables, respiratory and oncology drugs as well as stable pricing scenario across the globe. This year also witnessed very low Covid 19 sales and global low margin tenders.
  • The growth also underscores significance in the backdrop quality related allegations on some Indian pharma products in the past 1-2 years.

Our Take

  • Exports account for almost ~50% of the overall Indian Pharma sales and the growth has a direct bearing on the earnings of most of the listed players.
  • While Formulation exports (75% of overall exports) were in good shape in FY24, the API sales were muted.
  • For FY25, we expect growth tempo to be maintained as the US growth engine is looking relatively stable as compared to earlier years. Companies continue to target US with complex offerings. We also expect API sales to gather momentum on the back of improving demand scenario.
  • As regards to crisis in the gulf, we do not expect significant revenue impact as the MENA region accounts for just 3-4% of overall exports. However, we keep watch on the costs factor especially on escalation in logistics and inventory carrying costs.

Hidden Gem

Amara Raja Energy & Mobility (CMP: Rs 1,000; MCap: Rs 18,300 crore; Target price: Rs 1,200; Rating: BUY; Upside: 20%)

  • Amara Raja Energy & Mobility (AREM, erstwhile Amara Raja Batteries) is a part of the duopolistic organised Indian lead acid battery market with a strong presence across Automotive (OEM & aftermarket) and Industrial battery space (UPS, Telecom, etc.). The company realises ~70% of sales from the automotive segment and rest ~30% from the industrial segment.
  • In terms of geography mix, the company realises ~88% of its sales from the Domestic market with rest ~12% from Exports.
  • In the automobile space Amara Raja is the leader in aftermarket space. Consequently, it has on consistent basis has reported better operating margins vs. its listed peer (last 10-year average EBITDA margins at Amara Raja stands at ~15% vs. its listed peer average of ~13%, a long-term outperformance of ~200 bps).
  • Given the growing impetus on EV transition the growth prospects of lead acid battery business is a bit cloudy. However, given the present population of vehicles on Indian roads and healthy OEM sales volumes post Covid (FY22-24) coupled with company’s efforts to augment exports, we believe this segment can grow higher single digit going forward.
  • In the new energy space, the company in the recent past has made a big announcement wherein it has entered into MoU with Govt. of Telangana for setting up of Li-Ion Battery Gigafactory. The said facility is expected to have cell manufacturing capacity of up-to 16GwH & assembly capacity of up to 5 GWh with overall investment pegged at ~Rs 9,500 crores over next 10 years. In the first phase, it is setting up a Li-On cell plant of 2GwH capacity at a capex outlay of ~Rs 1,200 crore and will be operational by FY26.
  • With capex under execution and plans for sizeable foray in the new energy space, long term prospects at AREM are promising. 
  • With Healthy net cash positive B/S & capital efficient business model (core RoIC’s at ~20%) and inexpensive valuations (trades at ~15x PE & ~9x EV/EBITDA on FY26E) we have a positive view on the stock.
  • We assign BUY rating to Amara Raja Energy & Mobility with a target price of Rs 1,200, thereby valuing it at 18x PE on combined PAT on FY26E basis.

Domestic battery stocks have gained investor attention post Hyundai & Kia’s tie up with Exide in past week which acted as a validation for Indian manufacturing ecosystem in this new energy space (Li-On Cell). The stocks are still inexpensive given the opportunity size, capital efficient business models and government support to this sunrise sector.

Source: ICICIdirect Research

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