Share market outlook of the week: Global cues to weigh on sentiments in monthly expiry week

• Globally, equities traded lacklustre to positive as investors reassessed slowdown concerns in US ahead of Jackson hole Fed symposium. Nifty gained 1% while small caps outperformed with 3.5% gain.
• In the coming week, markets are expected to continue with stock specific action amid 24,400-25,200 range with global cues providing directional bias. Monthly expiry could trickle in some bouts of volatility.
• Sectorally, Consumption, IT, Pharma to outperform while PSU banks, Metal and Capital goods companies provide decent reward-risk proposition after recent corrective phase.
• Breadth: Percentage of stocks above 50dema has improved from 43% to 60% last week indicating broader markets continuing momentum.
• Structure: Despite global volatility, Index has maintained its rhythm of not correcting more than 5% (pricewise) and two weeks (time wise) since beginning of CY24. Key take away is that post such price/time correction Nifty has tendency to surpass life highs in each of the four instances.
• Global cues: Global headline indices, led by US are in steady uptrend and S&P 500 remains within 1% of life highs. Steady global markets would act as cushion.

Nifty Index rebalancing

• NSE is yet to announce the changes for the half yearly rebalancing. However, we believe that Trent and BEL will be part of Nifty in the place of Divis Lab and LTIM.
• So while Divis and LTIM will be now part of Nifty Next 50( Nifty Jr), couple of other names like JSW Energy and NHPC may also join them in the Next50 Index at the cost of names like SBI Cards and Berger Paints.
• During the month end, MSCI rebalancing will also take place where significant flows are likely to be seen in HDFC Bank (due to weight increase). At the same time, Bandhan Bank will see outflows due to its exclusion.

Monsoon Update

• With pick up in rainfall activity in the recent past, the cumulative rainfall in the ongoing monsoon season 2024 pan India now stands at +3% of LPA.
• Cumulative rainfall in Northwest India is at par with LPA while is +21% of LPA in South Peninsula, +8% of LPA for Central India and is deficient at -12% of LPA for East & Northeast India.
• In terms of crop sowing, area sown as of 20^th August 2024 stood at 103.2 million hectares (up 2% YoY). It is up healthy 6% across pulses and paddy while is down 9% in the case of cotton.

Domestic Steel Industry: Government looks at tariff barriers to control imports

• The government has launched an anti-dumping investigation into the import of hot rolled flat steel from Vietnam, prompted by complaints from domestic steel makers.
• This development bodes well for the domestic steel industry, which is grappling with a rise in steel imports from Vietnam, as one of the top five steel exporters to India in FY24.
• As per media sources, India imported ~0.62 MT of HRC steel from Vietnam, which contributes ~20% of the HRC steel imports in FY24.
• The surge in imports from China and ASEAN countries have negatively impacted the domestic steel prices which is currently at the 3 years low of ~Rs 50,000 per tonne.
• India continues to be a net importer of steel for April’24-July’24 period, with imports reaching 2.69 million tons, while exports stood at 1.57 million tons. China was the largest exporter of steel to India at 0.8 MT for the said period followed by Japan and South Korea.
• Consequently, imposition of anti-dumping duty is the need of the hour and will provide some relief to domestic steel manufacturers.
• Within the overall domestic steel space, we prefer JSW steel as our top pick owing ambitious expansion plans to reach 50 MTPA steel capacity by 2030, superior product portfolio, and healthy profitability guidance. We have a BUY rating on JSW Steel with a target price of Rs 1,085.

Indian Non-Ferrous Metals Sector: Government push for rise in recycled content

• As per media sources, government is likely to mandate that all new products made from non-ferrous metals to have a minimum of 5% recycled content starting FY28E.
• This shall further increase progressively and by FY31E, government intends products made from aluminium should have 10% recycled content, those made from copper should have 20% recycled content and zinc applicants should have 25% recycled content.
• This is largely following the principal that these metals are rust free and involve energy intensive production process from mining to smelting and finishing.
• We believe this is a step in the right direction from both sustainability perspective as well as judicious use to country’s mineral resources.
• For Copper and Aluminium metal, India is still a net importer and hence it will have no impact on metal producers operating in this space such as Hindalco however it might marginally lower the primarily demand of Zinc metal impacting Hindustan Zinc.
• These are however initial prints and we shall closely monitor developments in this space.
• We have a BUY rating on Hindalco with a target price of Rs 825. 

Hindalco to undertake ~$10 billion capex

Indian Operation:

• Overall, Domestic Capex has increased from the earlier planned ~$1.3 billion to ~$5 billion, with projects expected to be commissioned between FY25E and FY27E.
• One of the pivotal projects of HIL is the greenfield alumina refinery capacity in Rayagada, Odisha. The first phase with a capacity of 850 kt is expected to commissioned in FY27 with an estimated capex of ~$950 million (~Rs 8,000 crore).
• HIL is also expected to undergo brownfield expansion in Aditya Aluminium Smelter in Odisha, increasing capacity by 200 kt, thereby enhancing aluminium upstream capacity from the current 1,300 kt to 1,500 kt by FY27.
• On Aluminium Downstream front, Aditya FRP expansion project is expected to be commissioned, increasing the company’s total downstream capacity of the company to ~660 kt by FY26. This will enable the company to yield better EBITDA from this capacity expansion.
• HIL is setting up an e‑waste and copper scrap recycling plant near Bharuch district in Gujarat, with a total investment of ~$280 million (~Rs 2,400 crore). This will be the first facility of its kind in India, producing high purity precious metals and refined copper by refining e‑waste.
• HIL also plans on expanding its copper smelter capacity by 300 kt, with an estimated capex to be ~$950 million (~Rs 8,000 crore).              

International Operation:

• Novelis capex of $4.9 billion is currently on track, with the major $4.1 billion of capex at 600kt capacity of Bay Minette (US) is expected to commissioned by H2CY26 (FY27).
• With the aim of increasing the recycle content from the current 63% to 75% by 2030, the company is undergoing the total investment of $450 million in recycling capacities across various geographies.  

We have a BUY rating on Hindalco with a target price of Rs 825 per share.

IREDA mulling to raise Rs 4,500 crore capital to become future ready

• IREDA is seeking to raise Rs 4,500 crore of equity to strengthen balance sheet for continued strong business growth. A board meeting is scheduled on 29 August 2024, for approval for the said capital raising along with the mode (i.e FPO, QIP) to be adopted.
• Government’s targeting renewable energy capacity of 500 GW by FY30 presents long term sustainable growth opportunity for IREDA, which specializes in funding renewable power projects.
• Accordingly, IREDA has estimated an AUM target of Rs 3.5 lakh crore in FY30, which depicts a sustained business growth of more than 25% CAGR in next 5-6 fiscals. For FY25E, IREDA plans to disburse Rs 30,000 crore, for which approval for raising ~Rs 24,000 crore, in lieu of borrowing has been obtained by the board.
• Aforesaid capital raising of Rs 4,500 crore, will further shore up networth by ~50% and remain book value accretive to the extent of ~35% (assuming discount of 5% on current price), thus strengthening balance sheet for projected business growth for next 2 years.

PSU banks lining up to raise capital through bonds

• Several PSU banks are foraying to raise funds through bonds route amid continued competition in deposits segment. SBI is seeking to raise Rs 5,000-10,000 crore through issuance of tier II bonds while Bank of Baroda is planning to issue infrastructure bonds worth Rs 5,000 crore. Canara Bank is also likely to raise Rs 4,000 crore (including green shoe option of Rs 2,000 crore) through issuance of AT1 bonds.
• Given heightened competition in liabilities, funding through issuance of bonds will aid banks to meet incremental credit demand along with benefit of improved capital adequacy and/or exemption to keep reserves (SLR and CRR). In addition, relatively stable deposit franchise along with lower CD ratio is seen to provide cushion to the balance between growth and margin (profitability).

Positive implications of the proposed Biosecure Act for Indian CRAMs players

What is Bio-secure Act?

• In January this year, the US house select committee introduced the Biosecure Act, which intends to restrict Chinese biotech companies and manufacturers from accessing US funding and collaborating with pharma companies. 
• The legislation is also designed to effectively prevent the Chinese CRAMs from passing on information about drugs under development by US companies and also from forwarding genetic information about US citizens who have participated in clinical trials.
• The revised clause in the legislation intends to provide six years of grandfathering clause to move to the new vendor. The legislation also bans companies from entering into new agreements or extending existing contracts. The bill still needs to pass the full US House of Representatives and US Senate, before being signed into law by the US president but there is a high likelihood of the legislation passing due to the bipartisan support the bill has gathered.

Opportunities for Indian players

• Global pharma companies have already started taking action, despite the legislation not yet even a law. The proposed act if becomes law can provide China re-balancing (not necessarily China + 1) opportunities for other global CRAMs players including Indian players. 
• As per F&S report, India CRAMs Industry is currently at USD 7 Billion and is poised to expand at a CAGR of 14% til FY2028 which will be highest amongst other regions. Possible enactment of Biosecure Act could only strengthen the growth prospects of the Indian players. 
• Most of the players have undergone significant capex expansion in recent years with the combined capex figure for Divi’s, Syngene, Hikal and Piramal Pharma stood at Rs 9,100 crore during FY21-24. Suffice to say that they are well prepared to cater to the incremental opportunities stemming from Biosecure Act.

Cement Sector: Price hikes by Rs 10-20/bag announced

• As per the discussions with some cement dealers, cement prices have increased by Rs 10-20/bag across the regions from start of this week. In south & East regions, there is an increase of Rs 20/bag while other regions (like North, Central and West) have seen an increase of Rs 10-15/bag. As per the dealers, there will be further price hikes announcements across regions (in the same range of Rs 10-20/bag) in next week or Sept first week.
• But, there is some uncertainty also about the sustainability of these price hikes as the dealers showing concerns on continues volumes push by larger players. There was some announcements on price hikes during March/April 2024 also, but not actually implemented in the markets.
• However, in recent earnings calls, management of most of the companies were optimistic about cement price hikes from Sept 2024 onwards. They highlighted that overall industry scenario will improve from Sept onwards led by substantial pick-up in demand post monsoon (mainly led by infra and individual & commercial housing) which will lead to sustainable price hikes. If these prices increase gets absorbed in the markets, this will be the first increase after almost a year as cement prices were continuously declining from Sept/Oct 2023 onwards. Current all India average price of Rs 345-350 is about Rs 50/bag lower than the peak of Rs 400/bag in Oct 2023.
• In terms of costs for cement companies, overall cost structure remains benign for cement companies on account of lower pet-coke & fuel prices (on YoY basis), increase in green power usage. Average total cost/ton for top-10 cement companies reduced by Rs 150/ton YoY in FY24.
• Going ahead, we believe that overall profitability of cement companies is expected to increase on account of healthy volume growth (industry growth expected at 8-9% YoY CAGR) and average ~Rs 200/ton improvement in EBITDA (over the next 2 years) considering the continuous focus on cost efficiencies (like increasing usage of green power & fuel, freight cost and raw material cost optimization) and positive operating leverage. 

Hidden Gem

Steel Strips Wheel Ltd (MCap: Rs 3,620 crore; Rating: BUY; Target Price: Rs 330; Upside Potential: 44%)

• Steel Strips Wheels Ltd. (SSWL), is an auto ancillary company involved in designing and manufacturing of automotive wheels - both steel and alloy wheels. It currently has five plants in India with total production capacity of ~2.4 crore wheels per annum, including ~0.36 crore of alloy wheels. As of FY24, it realised 28% of its sales from Alloy wheels while Steel wheels constituted the rest 72% of sales.
• SSWL counts all major domestic OEMs as its clients across vehicle categories namely CV, PV, 2-W, Tractors, etc.
• SSWL operates in an oligopolist industry structure and is a sound proxy of underlying volume growth in the domestic auto space as well as greater export play amidst China+1 trend. Demand prospects are steady in the steel wheel business while robust in the alloy wheel segment amid increasing penetration of SUVs and premiumisation trend underway in PV space.
• SSWL is presently executing a brownfield expansion in the alloy wheel space which will augment its capacity from 36 lakh units per annum to 48 lakh units per annum with full ramp up of the same expected in 2-3 years. It has in the recent past also acquired AACL from NCLT, having steel wheel capacity of ~70 lakh units. Thus, total installed capacity at SSWL is set to increase from ~2.4 crore units to ~3.2 crore units by FY25E.
• Going forward sensing steady demand prospects in steel wheel segment, greater exports thrust and premiumisation play in alloy wheel space we have built in sales volume CAGR of 7% over FY24- 26E. Also supporting topline growth at the company is venturing into new segments such as Aluminium knuckles. Management in the recent Concall also shared its vision for US$ 1 billion sales by FY30E.
• SSWL is a capital efficient company realising ~11% EBITDA margins and ~14- 17% return ratios profile. On the debt side amidst brownfield expansion in alloy wheels, knuckles and AACL acquisition its current gross debt has increased to ~Rs 1,050 crore as of FY24 end. With peak capex behind us, debt is expected to retire at SSWL with gross debt expected at ~Rs 780 crore by FY26E.
• We have a positive view on SSWL amid powertrain agnostic product profile (no EV risk), healthy volume growth visibility, increasing share of exports & alloy wheel in overall sales mix, consequent rise in margins & return rations. We also drive comfort from its inexpensive valuations (~12x PE, ~7x EV/EBITDA on FY26E) and healthy b/s (0.4x debt: equity: FY26).
• We have a BUY rating on SSWL with target price of Rs 330 wherein we have valued the company at 18x PE on FY26E.