Share market outlook of the week: Global volatility subsides, Stock specific action to prevail amid consolidation

• Indian benchmarks retreated for second week led by global volatility amid concerns over liquidity. Nifty and broader market indices corrected 1.5% each.
• Way ahead: Expect consolidation in Nifty in upcoming truncated week in the 23,800-24,400 band, while sustainability above 24,400 would trigger extended upsides towards 24,700 levels.
• Markets would look for direction from global markets, India and US inflation print.
• Structure: Nifty has corrected 5% (this has been norm in CY24) and relatively outperformed global markets. Globally, Nikkei and US indices have also bounced from oversold readings and expected to consolidate.
• India VIX: This is key monitorable from risk perspective. VIX has cooled down significantly from resistance zone of 23-30 indicating that participants are not expecting higher risk in short term.
• Sectorally, Oil & Gas, IT, Pharma and Chemicals are expected to perform better.

RBI Policy – On expected lines a non-event

• The monetary policy meeting was largely a non-event on expected lines with no change in benchmark repo rate (6.5%) and liquidity stance (withdrawal of accommodation). It is the 9^th consecutive meeting with no change in rates. 
• Bond yields were absolutely unchanged. 10-year yield is hovering at 6.87%.  
• GDP forecast remain unchanged at 7.2%.
• Inflation for FY25 as a whole remain unchanged at 4.5%. Q1FY26 inflation is projected at 4.4%.  
• The probability of a rate cut in October has reduced with RBI maintaining its liquidity stance as “withdrawal of liquidity” as ideally the change in stance should precede the actual rate cut.
• Incrementally, since last MPC meeting, most major factors have turned favourable (US Fed almost certain to cut rates in September, progress of monsoon, decline in commodity prices including crude oil and gold). All these factors support dovishness, however, RBI currently may be lowering the market expectation in terms of rate cut.

PSU banks continue steady performance

SBI (CMP - Rs 810, Mcap - Rs 7,23,251 crore, Buy, Target - Rs 1,000) - Steady quarter across

• SBI delivered another steady quarter with earnings remaining flat YoY due to higher provision and accounting norms on investment. Growth in advances came at 15.4% YoY to Rs 38.1 lakh crore, backed by growth across portfolio. Within retail segment, auto (16.6%) and personal loans (20.5%) witnessed healthy traction, while pace in Xpress credit saw marginal moderation.
• Deposit accretion came at 8.2% YoY, with CASA at 40.7%. Asset quality remained steady with 3 bps QoQ improvement in GNPA at 2.21%, while slippages remained a tad higher at 84 bps, led by ageing and temporary slippages from unsecured book.
• Operationally, NII increased 5.7% YoY, amid decline in margins (-6 bps QoQ) at 3.22%, other income was impacted due to accounting norms on treasury. Thus, operating profit increased 4.5% YoY, however, higher provisions kept earnings flat at Rs 17,035 crore.
• SBI has demonstrated its strength in the last few quarters both on core operating performance and asset quality. Management remains confident on growth, maintenance of margins and improvement in RoA. Sustained balance sheet growth (13-15%), strong liabilities franchise and prudent asset quality is expected to aid RoA at ~1% in FY25-26E.

Bank of India (CMP - Rs 120, Buy, Target - Rs 165) –steady performance with unchanged guidance

• BOI reported steady performance in Q1FY25. Advances growth remained healthy at 15.8% YoY to ~Rs 6 lakh crore, backed by growth across segment. Within segments, retail growth continued to remain robust at 20.5% YoY, backed by home and auto loans while personal loan growth came strong at 47% YoY.
• Deposit accretion remained in-line with peers at 9.74% YoY with CASA ratio at 42.68%. Increase in CD ratio led to 15 bps YoY and 4 bps QoQ improvement in margins at 3.03%.
• NII growth looks optically lower at 6% YoY due to income tax refund of Rs 450 crore in Q1FY24. Lower other non-interest income kept operating profit flat, while lower tax led to 10% YoY growth in earnings at Rs 1,703 crore.
• Asset quality continued to remain prudent with 18 bps YoY decline in slippages (non-annualised) and 35 bps QoQ improvement in GNPA at 4.63%.
• Guidance maintained at 13-14% growth in advance and 11-12% growth in deposits for FY25E. Operational performance remained optically muted. Relatively better business growth coupled with improvement in asset quality is seen to aid valuation. Better recovery through continued focus could act as catalyst.

Bharti Airtel: Steady Performance; Eyes on tariff hike flow through ahead

• Consolidated topline at Rs 38,506 crore, was up 2.4% QoQ and up 2.8% YoY. India wireless revenues were up 2.1% QoQ (up 10.5% YoY) at Rs 22,527 crore, with overall subscriber addition of 2.3 mn during the quarter. The Average Revenues per User (ARPU) came at Rs 211, up 0.8% QoQ and ~5.4% YoY, tad better than Jio which had flat ARPU. It witnessed healthy 4G Net adds of 6.7mn during the quarter, with 4G data sub base at 259.4 mn (75% of the overall). The post-paid subscriber base also saw robust addition of ~814k subscribers at 23.9 mn.
• Consolidated EBITDA came in at Rs 19,708 crore, with margins of 51.2%, down 32 bps QoQ as Africa Margins at 45.3% was down 127 bps QoQ. India wireless margins at 55.6% was up 50 bps QoQ. The net debt (excl. lease liabilities) at Rs 1.35 lakh crore was down by Rs 5,845 crore QoQ, clearly reflecting healthy cash flow generation.
• The management has guided for complete pass through of tariff hike in the next two quarters. We expect 13% CAGR over FY24-26 in ARPU to Rs 260. Overall EBITDA margins are likely to expand to 55.5% in FY26 vs. 52.2% in FY24. We have a BUY rating on Airtel with TP of Rs 1,630 and will come out with an update soon.

Infra Results: Healthy performance; ordering to kick in

• Infra EPC companies in our coverage reported a strong performance in Q1FY25. While NCC saw 23% growth in topline, HG Infra saw 18% YoY topline growth. Margins were largely stable for the companies at 9.3% and 16%, respectively.
• Both these companies have guided for strong topline guidance of 15% and 18-20%, respectively in FY25. While NCC alluded to Rs 2 lakh crore of bid potential, NHAI ordering is also likely to kick in with government aiming to award Rs 3 lakh crore of road orders in FY25, which will boost road players like HG Infra.
• Furthermore, rate cut in H2FY25 will also boost overall EPC players bringing down their interest costs. We have a BUY on both NCC and HG infra for a target price of Rs 400 and Rs 1,885, respectively.

ABB (CMP: Rs 8,100, Market Cap: Rs 1,72,000 crore) Record quarter

• ABB reported strong set of Q2CY24 results wherein company performed well across all parameters. Revenues grew by 13% YoY to Rs 2,831 crore. The growth in revenues was mainly driven by all the segments electrification division which grew by 11% YoY and process automation, up 18% YoY. Order inflows grew by 13% YoY at Rs 3435 crore, which mainly came in from the emerging (Data Centres, renewables, electronics, metro) and core sectors as well. Order backlog grew by 23% YoY at Rs 9,517 crore. Strong execution and operating leverage led to EBITDA coming in at 19.2% vs. 18.3% in Q1CY24 and 13.9% Q2CY23 YoY. Consequently, PAT came in at Rs 443 crore, up 50% YoY.
• Q2CY24 turned out to be record quarters for ABB and given the growth in backlog and capex environment, we expect the company to report strong performance over the next 3-5 years. Any significant correction in the stock should be used as a buying opportunity.

Eicher Motors: Reports stable performance in Q1FY25, guides for pick in volumes in 9MFY25

• On the consolidated basis, Total operating income for the quarter came in at Rs 4,393 crore (up 10% YoY) amid flattish Royal Enfield sales volume at 2.26 lakh units.
• EBITDA in Q1FY25 came in at Rs 1,165 crore with corresponding EBITDA margins at 26.5% (flat QoQ). Resultant PAT for the quarter stood at Rs 1,102 crore (up 20% YoY).
• Share of profits from the VECV arm stood at Rs 175 crore for the quarter (includes tax credit as well). EBITDA margins at VECV arm came in at 7.7% (down 10 QoQ).
• Margin performance on the standalone basis (Royal Enfield franchise) was satisfactory at 27.9% (up 30 bps QoQ) amidst ~50 bps expansion in gross margin profile. Margins for the quarter were supported by benign commodity prices as well as better product mix with share of >350cc segment increasing from 11% in Q1FY24 to 14% in Q1FY25.
• Management expects mid-weight premium motorcycle segment to grow high single digit in FY25E. Moreover, the recent successful launches like Guerilla 450, Himalayan 450 & Shotgun 650, are expected to drive revenue growth and margin appreciation in the coming quarters.
• With the rebasing of margins and healthy growth prospects, valuations are reasonable at Eicher Motors at 2-year forward PE of ~25x vs its long period average of ~30x. Consequently, we maintain a positive outlook on the company.

Cochin Shipyard – Execution remains strong in both ship-building and ship-repair segments

• Overall performance has improved significantly on YoY basis as execution picked up sharply in both the segments (ship-building and ship-repair). Revenue increased by 62% YoY as ship-building segment revenue (68% of total) increased by 62% YoY and ship-repair segment revenue (32% of total) grew by 63% YoY. The sharp growth is also on account of low base as the execution was muted during the period Q1FY23 to Q1FY24, due to some design changes and supply chain issues in one defence contract of anti-submarine corvettes.
• With positive operating leverage and better gross margins, EBITDA margin has also improved substantially by 645 bps YoY (+57 bps QoQ) to 23.0%. EBIT margin of ship-building remained largely in the range of 17-19% while it has improved sharply for ship-repair segment to 43% (+1,872 bps YoY).
• Over the last 3 quarters, ship-repair segment margin has been high at 42-43%, possibly because of some high margin orders executable over the short term.
• Full year margin guidance by the management was given at 17-19% in last earnings call as they guided sustainable EBIT margins of 22-23% in ship-repair.
• Company’s order backlog is estimated to be at ~Rs 21,500 crore (5.4x TTM revenues) provides strong revenue growth visibility over the next 2-3 years.
• Commissioning of new dry-dock and ISRF (International Ship Repair Facility) projects would further expand manufacturing capacities and orders intake capabilities.
• Order pipeline remains strong across defence & commercial ships/vessels (domestic and exports) and ship-repair. As per the management, ~Rs 10,000 crore worth of ship-building contracts are in pipeline and tenders expected to be floated in medium term. Apart from these, ~Rs 50,000 crore worth of projects are in RFI (request for information) stage as per the management.

Apollo Tyres: Gross margins dent performance, no respite in near term

• Total operating income on consolidated basis in Q1FY25 stood at Rs 6,335 crores, up 1.4% YoY.
• At its Indian operations, it witnessed healthy double digit volume growth in exports and TBR (Tyre bus radial) & PCR (passenger car radial) aftermarket segments while OEM volumes came in muted.
• EBITDA for the quarter stood at Rs 909 crore with EBITDA margins at 14.4%, down 200 bps QoQ. Consequent consolidated PAT for Q1FY25 came in at Rs 302 crores, down 24% on YoY basis.
• On standalone basis it reported an EBITDA margin of 13.8%, down 180 bps QoQ. Gross margins declined by 250 bps on QoQ basis.
• With unprecedented rise in natural rubber prices, the margin decline has not bottomed out with other industry players indicating further muted show in next quarter i.e. Q2FY25.

PCBL Ltd: Reports robust volume growth in Q1FY25, sticks to its guidance of aggressive expansion plan

• On the consolidated basis, at PCBL, net sales for the quarter came in at Rs 2,144 crore with carbon black sales volumes at 154 kt (up 8% QoQ, 25% YoY) and realisation at Rs 113/kg (down 2% QoQ).
• EBITDA for the quarter came in at Rs 358 crore (highest ever) with corresponding margins at 16.7%. Consequent PAT for Q1FY25 stood at Rs 118 crore, up 8% YoY.
• Speciality grade carbon black sales for the quarter came in at 15.7K tonne (~10.2% of total sales volume). Consolidated numbers also include full quarter performance of its recent acquisition i.e. Aquafarm and hence is not comparable QoQ & YoY.
• EBITDA/tonne in the carbon black space for the quarter stood at ~Rs 20,000/tonne vs. Rs 21,000 clocked Q4FY24. The company realised sales volume of ~28Kt from its new greenfield plant at Tamil Nadu for Q1FY25. Sensing robust demand prospects and favourable supply side dynamics in export markets it is already executing a brownfield expansion at its Tamil Nadu plant amounting to 90 KT and is in active lookout for a new greenfield facility thereby targeting total carbon black capacity of ~10 lakh tonne by FY26/27 vs 7.7 lakh tonne as on date.
• With organic growth on the anvil amid incremental capacities in place, increasing share of speciality grade carbon black and capital efficient business model, we remain positive on the stock.

Hospitals earnings trend- decent numbers driven by ARPOB improvement and bed additions

• Combined revenues of 5 pan-India hospitals put together have grown 14% YoY to Rs 6,416 crore. The growth was driven by 11% ARPOB growth and 3% growth in occupancy.
• 10% aggregate beds addition over the last year has also contributed to the growth.
• EBITDA growth was even higher at 17% YoY to Rs 1,355 crore during the period, driven by improving payor-mix and case-mix besides better operating leverage. EBITDA margins for the pack stood at 21%.
• Improving payor-mix (private insurance covered patients / International tourists and lower government scheme patients) has helped the companies to generate better ARPOB. The proportion of private insurance covered patients has gone up at the expense of government scheme patients.
• Similarly, better case-mix (higher number of critical surgeries such as organ transplants, complex cardiovascular surgeries, cancer treatments etc.) has helped the companies to generate better ARPOB as well as margins. Complex surgeries and procedures now account for ~15% of the overall procedures for these players as against ~12% in the last year.
• Most of the new hospital assets inducted in the last 5-7 years are turning profitable, boosting the combined average ROCE which is now trending at 19% as against 9% in FY20.
• With very less balance sheet stress and comfortable leverage position, these companies are entering into a new capex phase (+7,000 beds additions over the next 2-3 years) which is a good 40% expansion over the existing capacity.
• Our picks in the Hospital sector - Narayana Hrudayalaya- TP: Rs 1,485, Shalby- TP: Rs 350, HCG- TP: Rs 435.

Hidden Gem

Somany Ceramics: Strong Demand recovery likely from H2

• While Q1FY25 saw a flattish volume growth, with strong real estate completion cycle kicking in coupled with benign gas costs, we expect Somany to remain a one of the beneficiaries of the same.
• Company expects low double digits volume growth in FY25 vs. 5-6% growth for the industry. Overall topline is expected to grow at 10.2% CAGR over FY24-26 to Rs 3,102 crore.
• Amid benign Gas prices, mix improving to premium larger tiles and operating leverage led benefits, we expect EBITDA margins to reach ~10.8%/11.2% in FY25/FY26, respectively from 9.8% in FY24. We expect ~32% earnings CAGR over FY24-26
• We value Somany at Rs 900, at 22x FY26 P/E and have a Buy rating.