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Share market outlook of the week: Index to consolidate near life highs amid sectoral churn

ICICIdirect 25 Mins 07 Mar 2024
  • Indian benchmarks performed in tandem with global peers. Nifty small cap index corrected 3% amid profit taking while Nifty relatively outperformed with 0.3% decline.
  • Most global indices edged down around 1.5% each. Nikkei stands out (1% up) to record new 40-year highs.
  • We expect Nifty to consolidate near life highs amid positive bias and gradually head towards 22,700 over next few weeks. Buy the dips as we expect index to hold strong support of 21,800.
  • Large caps to outshine small/mid: Mid/small cap indices are subject to profit taking after good run up over preceding 3-4 months while large caps across Energy, Banks, IT, Metal, Pharma are expected to relatively outperform over short term.
  • Market breadth weak: In the short term , market breadth is declining which is a sign of mean reversion in mid/small cap stocks from over bought trajectory. Mid and small cap indices have rallied ~35% since October 2023. Intermediate corrections to the tune of average 12% in Mid and small caps have been a bull market norm. At present 8% correction is behind us.
  • Firm global cues and steady fund flow: From directional view, uptrending global equities with steady domestic and foreign flow would act as tailwind for domestic equities.
  • Chart in focus: International Gold prices are breaking out of 43 month consolidation phase indicating potential upside of 15% over next one year.

Market Wrap: Bloomberg Bond Index inclusion

  • Inclusion of India FAR bonds in the Bloomberg EM Local Currency Indices is to be phased in over a 10-month period from January till October 2025. India's inclusion in the index would result in inflows of USD 2-3 billion. 
  • While as of now Bloomberg has not included India in its Bloomberg Global Aggregate Index (BGAI), it is only a matter of time before that also happens. Inclusion in future could result in inflows of USD 15 -20 bn apart from USD 25 billion which is already slated to come through JP Morgan Global Bond indices inclusion.
  • Active money has already started flowing-in with FPI inflows in Debt market crossing Rs 80,000 crore (Sep 2023- Feb 2024) post announcement of JP Morgan bond index inclusion in September 2023.

Bond yields

  • One leg of rally has already happened in debt market with Bond yields declining from 7.38% in October 2023 to 7.05% in February 2024. Since then, yields are range bound in last 1-month.
  • Long duration funds (like HDFC Long duration fund) have delivered 6% absolute return in last 3 months.
  • We have been highlighting since last few months that Indian debt market is attractively placed to deliver double digit returns due to multiple factors like 1) higher absolute level of yields (10-Year in Oct was 7.35%), 2) rate cut expectations and 3) global bond index inclusion.
  • News flows on global bond index inclusion has already panned out. Impact of rate cut is still not fully priced-in as hawkish comments from U.S. Fed members and RBI Governors is keeping investors on the watch. Once clarity emerges, the rate cut discounting will bring down yields further. There is still a scope of 50-75 decline in yields from current levels.

Auto Volumes- February 2024: 2-W’s & PVs continue to shine; exports stage recovery

  • Auto OEM sales volume for the Feb 2024 month came in broadly positive with volumes growing healthy double digit on YoY basis across the 2-W (~20%+) and PV (15%+) segments while declined across the CV (low single digit) & Tractor (double digit) domains.
  • Exports volumes improved (up YoY & MoM) for OEM’s, particularly in the 2-W space. In the CV space the major decline was witnessed in the M&HCV truck segment while Buses continued to do well.
  • In 2-W pack, market leader Hero Moto reported healthy volume growth of 18.7% YoY at 4.68 lakh units, whereas volumes at TVS Motors were at 3.57 lakh units up 34% YoY. Royal Enfield brand at Eicher Motors underperformed its peers with volumes at 75.9k units, up 6%. Product mix however improved at Royal Enfield. Exports staged a healthy recovery (both YoY & MoM) across the players.
  • In PV space, Maruti Suzuki (MSIL) sales volume for the month were up 15% YoY at 1.94 lakh units. Tata Motors volumes were up by 19% at 51,321 units, while volumes at M&M were up healthy 39.7% YoY at 42,401 units.  M&M was the clear outlier and have continue to maintain its robust growth trajectory amidst healthy order book and capacity expansions.
  • In CV segment, Market leader Tata Motors reported volumes of 35,085 units down 4% YoY. While Ashok Leyland reported a volume decline of 6% YoY at 17,464 units.
  • In tractor segment, M&M reported a volume decline of 16% YoY at 21,672 units while Escorts reported volumes decline of 17% YoY at 6,481 units.
  • For FY24E, we expect industry to clock high single digit volume growth with growth charge led by the 2-W and PV segments. CV & Tractors are likely to witness a single digit decline on YoY basis.

Tata Motors: Announces de-merger of CV & PV (India, EV, JLR, etc.) business; looks less of a value unlocking event, more intangibles at play!!

  • Tata Motors announced demerger into two separate listed companies 1) the Commercial Vehicles business and its related investments and 2) the Passenger Vehicles businesses including PV, EV, JLR and its related investments.
  • All shareholders of TML shall continue to have the identical shareholding and it is expected to be completed in 12-15 months.
  • We view this as sentimentally positive for the company as in the long run it will give investors the choice of ownership in business segments i.e. one can either own cyclical CV business or more growth enduring PV business.
  • Another long-term positive of having a separate listed CV entity is that this business can approach capital markets for incremental capital needs (to support Electric bus business). A potential value unlocking event post this separation of businesses could also be listing of its Electric PV business wherein it has dominant market share, improving profitability & group support though battery plant.
  • There is a scope of minor re-rating at its India PV business amidst improving profitability. we raise our India business EV/EBITDA multiple to 12x from 10x earlier, with our SoTP based target price now revised to Rs 1,085.
  • In our view, Tata Motors CV business is likely to do an EBITDA of ~Rs 10,000 crore in FY26E which should fetch them a market cap of ~Rs 1-1.2 lakh crore and ~Rs 265-320 as price per share.

Coal based plants back in flavor again

  • Power demand expected to grow at 8% CAGR over the next 5 years, accordingly the demand for construction of new coal-based plants is back in news again.
  • Power Ministry has also acknowledged that 80 gigawatts (GW) of coal-based plants needs to be constructed till 2030 to meet the demand. NTPC also recently announced that the company will order out 10 GW of coal-based capacity till FY25 coupled with 11GW of plants already under-construction.
  • On other hand, Private Indian firms have expressed interest in building at least 10 GW of coal-fired power capacity over a decade, ending a six-year drought in significant private involvement in the sector. Adani Power, JSW Group & Essar Power are keen to expand old plants or develop stalled projects facing financial stress.
  • Simultaneously, the announcements are also getting converted into equipment ordering as the largest EPC player BHEL, has received orders for setting up coal-based plants over last 3 months to the tune of Rs 30,000 crore for aggregate capacity of 4,800 MW or 4.8 GW.

Disney India - Vicom18 to create a media behemoth

  • Star India announced merger with Reliance Industries (RIL) subsidiary Viacom18 with combined entity valued at about $8.5 billion. The merger will create a media giant with a combined topline of Rs 25,000 crore. The JV will also dominate sports with all the key cricket media rights.
  • RIL will inject Rs 11,500 crore ($1.4 billion) cash into the JV for its growth strategy. On a post-money basis, the thus combined entity will be valued at Rs 70,352 crore ($8.5 billion) which 2.8x FY23 Price to Sales. RIL, Viacom18, and Disney will own 16.34%, 46.82%, and 36.84% of the venture, respectively. Viacom18's stake is valued at approximately $4 billion, while that of Star is $3.1 billion.
  • It will have over 750 million viewers across the platforms. We believe with media reported Ad market share of over ~40% and viewership market share of ~35%, the combined entity will by far lead the TV and OTT space, going ahead both in the GEC and Sports genre (almost 4 out of 5 major sports properties broadcast rights in India would lie with the entity).
  • On TV18 level, the current market cap of Rs 8.7k crore, Rs 4,500 crore is for Entertainment business and remaining is for News segment, implying valuations are fair/rich at that entity. On RIL Levels, on direct and indirect (through holding of Network18), it will hold ~49.6% & will contribute Rs 34.5/share (net of cash infusion).

Defence Sector

  • Govt awarded defence contracts worth about Rs 39,125 crores. Major contracts included Rs 5,250 crore order to Hindustan Aeronautics for aero-engines for Mig-29 aircrafts. There is also a sizable contract of Rs 20,500 crore for procurement of Brahmos missiles ; key beneficiaries would be Data Patterns, Midhani, Astra Microwave. Lastly, L&T has received Rs 13,400 crore contracts for high power radars and close-in weapon systems.
  • Orders inflows remains healthy from defence ministry to defence companies considering the govt’s strong focus on procuring indigenized platforms. In the last 6 months, orders worth about Rs 67,000 crore have been placed with defence PSUs and private players.
  • Approval process from govt has also been accelerated in the last 2 years. Govt has accorded Acceptance of Necessity (AoN) worth Rs 6.25 lakh crore in FY23 & FY24.
  • We believe that BDL is strongly placed to benefit from increasing outlay for indigenized missiles, torpedoes & counter measure dispensing systems. Order backlog at Rs 20,070 crore (8.7x TTM revenues) already gives strong earnings growth visibility. We estimate revenue CAGR of 29% over FY23-26E (as against flattish growth in the last two years). PAT is expected to grow at 47% CAGR over the same period. Valuation at 29x P/E on FY26E basis looks attractive given strong growth and multiple sectoral tailwinds. We have a target price of Rs 2,010 on BDL.

NBFCs face the heat of Regulators Scrutiny

  • Recent week has remained volatile for financial entities, especially non-banking players, given RBI has initiated ban on 2 of the institution barring them from lending in particular segment.
  • RBI announced ban on IIFL Finance from sanctioning gold loans amid regulatory concerns. The concerns observed included deviation in certification of purity of gold, breach in LTV, higher than permitted cash transactions. As gold loans contribute nearly one third of the book, embargo on gold loans is seen to impact business growth as well as profitability.  Given uncertainty on timeline of lifting off the ban, valuation multiple has declined from ~2.4x current BV to ~1.5x current BV.
  • Further, the second ban was announced barring JM Financial Products from financing of share of shares or debentures owing to violations and lapses. The company was undertaking financing of IPO and NCD against meagre margins and acting on behalf of customer using a Power of Attorney. While the company is allowed to undertake financing activity in other segments including real estate sector and the restriction will be reviewed upon completion of a special audit by RBI and rectification of deficiencies to the satisfaction of the regulator, uncertainty due to regulatory ban is expected impart pressure on valuation in near term.
  • We recommend to remain selective in investment in financial domain and avoid any bottom fishing until clarity emerges.

Hospital stocks under pressure after a Supreme Court diktat

  • Hospital stocks are under some selling pressure in the last few days after the Supreme Court warned of applying Central Government Health Scheme (CGHS) rates for treatment services at private hospitals. Stocks have fallen anywhere between 10-20%.
  • CGHS rates are 40% to 60% lower than that of private hospitals and reimbursement comes with a lag of 3-9 months.
  • Investors sentiment has turned cautious especially after the recent rally. The sector is trading at 23x FY26E EV/EBITDA, which is way above the long-term average of 18x forward.
  • The sector is also poised to incur significant capex with ~35% bed additions over the existing capacity planned in the next 3-5 years, which is critical for the next growth phase.
  • Most of the listed players already cater to CGHS and other government scheme patients which ranges from 5-20% of the payee mix.
  • We expect this healthy correction in hospitals stocks to provide a good entry point as the dust settles down. We believe the market is factoring some downward tweaking in the existing procedure rates (if not significant). We believe companies with lower ARPOB and lower valuation are best placed to play under the current circumstances. (HCG, Narayana, Shalby, KIMS).

Hidden Gem

Landmark Cars (CMP: Rs 720, Target Price: Rs 920, Market Cap: Rs 2,935 crore; potential upside: 28%)

  • Landmark Cars is a leading auto retailer for premium/luxury cars in India. Its key OEM partners in PV space include Mercedes Benz, Jeep, Honda, Volkswagen, Renault with recent additions being MG Motors, Mahindra & Mahindra and BYD. It has also partnered with Ashok Leyland in the Commercial Vehicle space. It has a network of 117 outlets in nine Indian states and across 28 cities.
  • It has presence across automotive retail value chain, including new vehicle sales, pre-owned vehicle sales, after-sales service and spare parts, etc.
  • In terms of sales mix, new vehicle sales contributed 78%, followed by after-market sales at 19%, pre-owned vehicle sales at 2%, and the finance & insurance segment accounting for the remaining 1%.
  • During 9MFY24, Landmark held the top dealer position in India for Mercedes Benz, Honda, Jeep, and Volkswagen commanding OEM sales shares of 15.9%, 5%, 23.3%, and 9.9% respectively.
  • It a play on rising penetration of Luxury cars domestically amidst growing number of HNI/UHNI’s, higher disposable income & growing consumer preference for premium products.
  • Luxury car penetration in Indian PV market stand at ~1%, one of the lowest globally, vs, ~10% across major economies of China/US. Domestic annual luxury car sales stood at ~40k units amidst total PV sales pegged at ~4 million units. Interestingly, only ~4% of Indian millionaires purchases luxury cars, vs. the global average of 60%.
  • With increase in OEM partnerships & healthy new product launch pipeline (~12 for Mercedes Benz in CY24), we built in new vehicle sales volume CAGR of 12% at Landmark over FY24E-26E.
  • Landmark also has significant presence in After-sales service segment. Gross margins in this business are healthy at ~40% with EBITDA margins at ~18% and RoCE at ~30%+. Landmark drives ~25% of its topline from this segment, the contribution of which to the total EBITDA is pegged at ~70%. Thus, with increasing car sales, the company is expected to witness a recurring & stable revenue stream from this segment thereby supporting the overall earnings & RoCE profile.
  • We have built-in 18% sales CAGR in this space over FY23-26E & margins improving to 20% by FY26.
  • We have a positive view on Landmark Cars amidst premiumisation tailwind in domestic PV space, long standing marquee OEM relationships at the company, its diversification efforts including pre-owned car business & healthy financial profile (ROCEs: ~20%+ & CFO yield: ~7% on forward basis).
  • We assign BUY rating with target price placed at Rs 920 i.e. 22x PE on FY26.
Source: ICICIdirect Research

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