Share market outlook of the week: Global cues to weigh on sentiment

• Nifty snapped three-week winning streak led by global volatility to settle 1.4% lower as fears of US recession resurfaced. Nifty Midcap index corrected 1% while Small cap index closed flat.
• Going forward, we expect last week highs of 25,400 to act as strong hurdle in coming week and Nifty to undergo retracement of past three-week rally as prices reached overbought conditions. Meanwhile stock specific action may continue with key support for index at 24,500 levels where supportive efforts are expected to emerge.
• Seasonality: Historically, September has been a month with elevated volatility both domestically and globally. With Nifty already witnessing three-week rally, we expect markets to witness bouts of volatility and undergo short term corrective phase. From structural point of view, this will only make long term trend healthy.
• Brent on verge of breakdown: Brent prices were down 7% during last week as fear of slowdown and higher US production weighed on sentiment.
• Breadth: Over past 10 sessions, on 70% occasions breadth was in favour of declines indicating profit taking after a good run up. This may continue for next few sessions.
• Sectorally, Pharma, FMCG , IT are expected to relatively perform better. PSU banks appear oversold technically and are poised for a bounce back.

US Elections to trigger further volatility

• Apart from mid-September rate cut expectations, all eyes are on US elections to be held in November. Both the candidates have announced their prospective policy routes for the economy.
• Democrats (Kamla Harris) are promising less inflationary route for the economy by price control and affordable housing. Markets may react negatively to their proposal for higher taxes as they propose to hike corporate taxes from current 21% to 28%.
• Republicans are proposing cutting taxes to 15% amid protectionist trade policies at the cost of higher fiscal deficit. On the other hand, They are also looking at boosting economy by encouraging domestic manufacturing.
• Thus we expect volatility to increase going into US elections in mid- November.

Bajaj Housing Finance – a diversified play on Indian housing finance market, Recommend Subscribe

• Bajaj Housing Finance is a subsidiary of Bajaj Finance engaged primarily in housing finance is coming up with an IPO raising Rs 6,560 crore, comprising fresh issue of Rs 3,560 crore and OFS of Rs 3,000 crore. Bajaj Housing Finance IPO price band is between Rs 66 to 70 for each share. Subscription will be open from 9 – 11 September 2024 with listing expected on 16 September 2024.
• Bajaj Housing finance is engaged in individual home loans (prime category), loan against property, lease rental discounting and developer finance. With an AUM of Rs 97,071 crore (as of June 2024), Bajaj Finance remains one of the fastest growing HFCs. Healthy growth (25-35%), diversified asset mix to deliver strong margins, superior return ratios (RoA at 2.2-2.5%) and best in class asset quality (GNPA – 0.28% as of June 2024) remains core strengths of the business.
• At upper price of the band, the lender is available at ~3.2x current BV, which seems to be reasonable given outlook on growth and sustained profitability. Thus, we remain positive on the future prospects and recommend subscribing for the IPO.

Customer accretion aid steady growth in credit card spends – 2HFY25 could witness gradual revival

• In data on credit card for the month of July 2024 (reported by RBI), credit card spend has witnessed healthy growth at 19.3% YoY to Rs 1.98 lakh crore. However, this growth is primarily led by customer accretion (16.4% YoY growth) while spends per card has remained slower at 2.5% YoY. An uptick in seen in credit card for smaller transactions, though competition from UPI has limited growth in spends per card.
• Within large players (market share at 73.2%), SBI and HDFC Bank has remained relatively slower with growth in spends at 3.5% and 12.6% respectively, thus resulting in decline in market share at 15.6% (-30 bps MoM) and 25.7% (-40 bps QoQ). Axis Bank has gained market share (+70 bps MoM) at 11.9%, led by pedalling of customer accretion.
• While credit card outstanding has witnessed moderation in growth, still it continues to remain ahead of spends at 32.4% YoY (Rs 2,75,601 crore). Asset quality, witnessed hiccups in past 3 quarters, remains watchful. Expect 2HFY25 to be better, led by gradual improvement in asset quality, continued steady growth in spends and revolvers and uptick in margins amid reversal in interest rate cycle. SBI card remains the preferred pick.

Growth recalibration on cards in MFI sector; asset quality trend in Q2 remains key watchful

• After an impressive growth in AUM, MFI sector has been reeling under asset quality concerns for last 3 quarters. Collection efficiency has taken a hit resulting in increase in credit cost and NPA number across lenders. Lower collections led to increase in NPA and PAR (Portfolio at risk) wherein PAR90 increased 30 bps QoQ to 1.2%. Increase in delinquencies has led to moderation in credit growth with microfinance sector witnessing first sequential decline in AUM at Rs 4.33 lakh crore in June 2024.
• While incremental stress formation has been arrested, recovery from earlier slippages continue to remain a challenge. Natural calamities in some pockets also remain a point of pain, though extent of the same is not expected to be substantial. Geographical disparity in terms of collections continue with improvement seen in some northern states, while eastern states witness increased volatility owing to local unrest and climatic hazards.
• Borrower over-leverage continue to remain a concern. Thus, Q2 remains watchful to gauge asset quality trend and structural moderation in business growth (owing to caution and cap on exposure and maximum number of lenders imposed by MFIN). Thus, we continue to maintain caution stance on MFI sector, despite correction in valuation until signs of stability emerges.
• Lenders (banks and NBFC) scout for diversification in funding sources; margin pressure seen to continue in near term.

Banks and NBFC are seeking to diversify funding sources

• While NBFCs, with good credit rating, are tapping overseas market for borrowing, banks are looking to raise Tier II and infrastructure bonds.
• Among private players, Axis Bank raised Rs 3,925 crore, through sale of 10-year infrastructure bonds at 7.45% coupons. PSU banks are seeking to follow suit with Bank of Baroda planning to raise Rs 5,000 crore, through infrastructure bonds (which is second tranche to be raised in current fiscal). Canara Bank has mobilised $300 million via the IFSC Banking Unit through issue of notes with 5 years maturity and coupon of 4.896% paid semi-annually.
• NBFCs, amid increase in funding cost and moderation in bank funding, are seeking to diversify borrowing mix through public deposits and overseas funding. Shriram Finance is seeking to raise $300 million through dollar denominated bonds which is a part of strategy to raise $1.25-1.5 billion from overseas markets.
• While deposit mobilization challenge seems to be transient rather than structural, lenders are currently scouting for diversification in funding mix amid continued competition in deposit accretion. Thus, cost of borrowing is expected to remain elevated and keep margins under pressure in near term. In the event of anticipated decline in interest rate, yields could witness a faster decline (owing to externally linked loans), however, cost of deposits could continue to remain elevated, thus posing pressure on margins.

Solar Power Capacity leading the charge in the Renewable Space

• India used to add ~7 GW annually on an average between FY17-FY20. With pick up in new project announcement, favourable government policy and emerging solar equipment ecosystem, the same average has risen to 13.5 GW over FY22-FY24 with 15 GW added in FY24 itself. The share of solar capacity in the overall cumulative renewable capacity has risen from a low 10% in FY24 to 57% in FY24.
• To put things in perspective, H1CY2024 has witnessed 282% growth in installations to nearly 15 GW, which is the highest-ever half-yearly installation while tenders issued rose by ~51% YoY from 27.5 GW in H1CY23 to 41.4 GW in H1CY24.
• India’s large-scale solar project pipeline stood at 146 GW, with projects totaling another 104 GW tendered and pending auctions as of June 2024.

Auto Volumes August 2024: 2-W outshine amid muted OEM show, CV disappoints

• August sales volume came in broadly muted with 2-W space outperforming the other segments with positive YoY volume growth prints. PV space broadly witnessed a single digit decline while drop was sharp in CV space at double digit especially in the truck segment while Buses continued to do good. Tractor space reported flattish performance.
• M&M, Bajaj Auto and VECV arm of Eicher Motors outperformed peers in the respective segments.
• In 2-W pack, Bajaj Auto outperformed its peers led by total volumes at 3.35 lakh units, up 18% YoY. Also, TVS Motors reported healthy growth of 14% YoY at 3.8 lakh units. Royal Enfield at Eicher Motors reported muted performance with volumes at 74k units, down 5% YoY, the mix however improved with 47% YoY growth in >350 cc segment. 
• In PV space, M&M outperformed its peers with growth of 16% YoY at 43k units. Tata Motors volumes were down by 3.2% YoY at 44k units. Maruti volumes were also down by 4% YoY at 1.8 lakh units. However, Tata Motors’ flagship EV volumes reported a MoM recovery of 18%, reaching 6k units. Even for Maruti, product mix improved in favour of UVs with volumes up 11.3% in this space on MoM basis at 63k units (forming ~34% of total).
• In CV segment, market leader Tata Motors reported volumes of 27k units, down 15% YoY. Ashok Leyland volumes also de-grew by 7% YoY to 14.5k units. While VECV arm of Eicher Motors witnessed growth of 1% YoY at 6.5k units. Within M&HCV space, buses sub-segment continued to perform better than trucks.
• In tractor space, M&M reported volumes of 22k units, up by 1% YoY while Escorts reported a growth of 0.4% YoY at 5.6k units. Notably, the recent pick up in rainfall activity across the country bodes well for domestic tractor space amidst broader forecast of above normal monsoon season’24. 

Government to mandate Auto Industry to use recycled steel metal, promoting circular economy

• As per media sources, government is mulling a proposal to mandate domestic auto OEMs to use 10% of steel metal used in vehicles sold 20 years ago (end of life vehicles at this point in time) in the present production process. This share will progressively increase to 20% and eventually 30% as scrapping ecosystem gains pace in the country.
• This measure shall promote OEM’s set up scrapping centres or tie-up with credible names and shall promote circular economy. It falls under the category of Extended Producers Responsibility (EPR) which is currently being enforced by on sectors such as tyres.
• Financial impact of the same is difficult to ascertain at this point in time, however this coupled with discounts on new vehicle purchase against the scrapped vehicles, will eventually make vehicle scrappage a reality and shall benefit the industry in the long run (in terms of eventually pick up in new vehicle sales).

Advance Cell Chemistry (ACC) – Reliance Industries emerges as PLI winner with 10 GWh capacity

• Reliance Industries Ltd. (RIL) has been awarded a 10 GWh Advanced Chemistry Cell (ACC) battery storage capacity under the PLI scheme, with an incentive outlay of ~Rs 3,620 crore. There are 5 other players who are in the waitlist currently which includes Amara Raja as well.
• This initiative is another step towards enhancing domestic manufacturing capacity, reducing import dependence, and positioning India as a global leader in ACC battery manufacturing.
• With this awarding the ministry has awarded largely 40 GWh capacity with PLI incentives under ACC – PLI scheme which was envisaged with a total incentive support of Rs 18,100 crore for 50 GWh capacity. The first round of the ACC PLI bidding was concluded in March 2022, and three beneficiary firms were allocated a total capacity of 30 Giga Watt hours (GWh).

Domestic steel prices at 3 years low, tapering Chinese production hint near term bottom

• Global steel production is flattish in H1CY24 at 955 MT with India the sole shining star reporting healthy steel production growth of 7.5% YoY in H1CY24 at 74 million tonne (MT).
• However, the domestic steel prices are currently quoting at a 3 year low at ~Rs 50,000/tonne (HRC) amid steep increase in steel imports from China and other ASEAN countries.
• The emerging solace for the steel industry however is the decline in steel production in China which was down 9% YoY in July’24.
• This could benefit Indian steel producers by potentially easing the import pressure from China.
• Additionally, the government is considering imposing taxes & duties on imported steel thereby supporting metal prices, which would relieve domestic steel players by mitigating the impact of rising imports.                                                                         
• This is amidst aggressive capex spend underway by steel players wherein capex spends at top 5 steel players is seen doubling from ~Rs 30,000 crore in FY24 to ~Rs 55,000 crore in FY25E & ~Rs 60,000 crore in FY26E.

Hidden Gem

KPIL: Strong Growth Trajectory (MCap: Rs 22,838cr; Target Price : Rs 1,630 Upside: 16%)

• Kalpataru projects (KPIL) is amongst the leading EPC players in infrastructure sectors such as Power T&D, Buildings & Factories, Oil & Gas, Urban Infra, Water and Railways. With a diversified portfolio, presence over 73 countries, delivering world class engineering solutions to its clients with experienced team to successfully deliver complex one-of-a-kind projects.
• The company’s revenue grew 16.2% CAGR (FY22-24) whereas, EBITDA & PAT grew by 25.7% CAGR & 23.4% CAGR respectively over the same period.
• Strong visibility in domestic market across T&D and B&F segment:  The company has set a target of Rs 23000 crore of order inflows in FY25E, which would be mainly led by T&D and B&F segment. KPIL gas secured Orders of Rs 7,015 Crores and L1 of ~ Rs 5,000 Crores till date in FY25E. The main inflows (including L1) led by T&D (61%) and B&F (28%) and Water (11%). The company commands strong order backlog of Rs 57,195 crore, up 21% YoY which will ensure strong double digit revenue growth. On the international front, KPIL’s robust international T&D order pipeline provides conviction toward the company delivering ~25% YoY topline growth in Lindjemontage while Fasttel is seeing completion of legacy orders and is witnessing growth in order backlog.
• On the margins front, the company is winning orders at double digit margin which will positively impact the margins from H2FY25E onwards. KPIL has maintained its margin guidance of 8.5-9% at the EBITDA level and 4.5-5% at PBT level.
• Non-Core Divestment on Track which will lead to improvement in return ratios: KPIL is well on track to divest Vindhyachal Expressway (VEPL) and Indore Real Estate. The management has been approached by a large global investor regarding VEPL, which has the largest exposure among road assets. The company is likely to receive cash flow worth Rs 5.5bn in FY25E.
• This along with strong operating performance and control/improvement in working capital will help the company to increase RoE’s from 10.3% in FY24 to 13.1%/15.5% in FY25E/FY26E, respectively.
• With strong Revenue and PAT CAGR of 23.5% and 46.9% over FY24-FY26E coupled with improvement in balance sheet (divestment of non-core assets) and return ratios will likely rerate the stock.
• We rate the stock as Buy and assign a Target of Rs 1,630 (23x FY26E EPS).