Share market outlook of the week: Markets to consolidate; with eyes set on General election outcome

• Domestic indices gained 1.5% last week overcoming selling by foreign investors while Global markets remain in strong uptrend hitting new highs.
• In the coming weeks, expectations related with General election outcome would have bearing on market direction and would lead to elevated volatility. Technically, we expect Index to consolidate in 21,900-22,800 levels with positive bias.
• 5% correction done: Nifty has historically corrected 6% during polling phase in past four elections and three times hit new highs around election outcome.
• Bottom-up model supports bullish stance: Over 70% of Nifty constituents indicate further upsides at current juncture. Banking, capital goods, Oil&Gas, Power, Auto and FMCG heavyweights are indicating bullish undertone.
• Global setup steady: Most major indices globally are at life highs. Although in the short term our markets are ignoring those cues, once General election related anxiety settles down, strong global setups would act as tailwind for further market direction.

Election jitters triggered FIIs sell-off

• FIIs have been in the selling spree since mid-April and the selling pressure got aggravated in the first half of May series. Seems like, election jitters have triggered the panic selling in Indian equities as they have been net buyers in the rest of the emerging market space.
• Since April, FIIs have sold nearly 50k crores in secondary markets which has been largely absorbed by domestic funds. However, due to this sharp sell-off, Nifty has significantly underperformed broader markets.
• Thus, in case they want to come back post elections, focus should be back into index heavyweights from IT and Banking which has relatively underperformed recently.

Inflation remains unchanged

• CPI inflation remained largely unchanged and was in line with market expectations at 4.83% in April 2024. Core inflation remained at same level like last month at 3.2% YoY.
• Within food overall, vegetable inflation remains a major contributor of food inflation with prices rising at 27.8%, as against 28.3% last month.
• Base effect will turn positive for Vegetables and Pulses from July and this along with normal monsoon should help bring prices.
• The trend of lower core inflation and higher food inflation continues.
• Overall the base effect is turning marginally unfavourable for Apr-June while turning favourable from July. Effectively, from an India inflation perspective, RBI may easily justify rate cut (core inflation below 4% since last 5 months) and therefore whenever it gets a comfort from global rate cut trajectory, RBI may also cut rates.

Trend reversal in bond yields

• The U.S. 10-Year bond yields has declined by 12bps from 4.5% to 4.38% in last week. In last one month, the yield has fallen by more than 30 bps from 4.7% (last week of April).
• Earlier U.S. bond yields had witnessed a sharp sell-off in the month of March and April with 10-year bond yield rising by more than 50 bps to around 4.7%. The same coincided with fall in global equity market as well. Now, that apprehension of a delay in start of the rate-cut cycle seems to have settled down.
• Tracking U.S. bond yields, Indian 10-Year bond yield after having moved up to 7.2% levels has fallen back to 7.1% levels. In last few months, Indian bond yields have been far more stable when compared to U.S. bond yields.

Credit momentum continue to remain robust, competition in short term deposit could intensify

• As per RBI data, credit growth for banking industry continued to remain robust at 15.9% YoY to Rs 161 lakh crore (for fortnight ended 3 May 2024). Deposit mobilization came in healthy at 13% YoY to Rs 208 lakh crore, amid higher accretion from term deposit from both retail and wholesale sources.
• Recently, SBI has announced raising of interest rates to the tune of 25-75 bps across buckets with tenure of less than a year. Owing to outflows, liquidity has witnessed some tightening, however, the bank has not revised rates for primary buckets (1-3 years) which provides comfort on competition on liabilities side of business. Thus, lenders could keep margins broadly stable in FY25E.

Bank of Baroda (CMP - Rs 262, Mcap - Rs1,35,541 crore, Target – Rs 300, BUY)

• Bank of Baroda reported mixed performance delivering on growth and margins, however, faltering on slippages. Slippages came elevated at ~1.1% of advances, led by two accounts – one aviation account (exposure of Rs 1,750 crore) and one international borrower (exposure of Rs 500 crore). The bank made provision of Rs 550 crore in Q4FY24 which led to higher credit cost thereby impacting earnings which reported 2.3% YoY growth. GNPA ratio/ NNPA ratio declined sequentially by 16/ 2 bps to 2.92%/ 0.68%.
• Growth in balance sheet remained steady with ~12.5% YoY uptick in advances, driven by retail loans, while liabilities grew 10.2% YoY with increased dependence on bulk deposit. Margin increased 17 bps QoQ to 3.27%, owing to control on rise in cost of borrowing. While core fee income grew 11.8% YoY, treasury gains and refund of Rs 313 crore, led to 20.9% YoY in other income. Employee expense remains elevated amid Rs 800 crore of wage settlement provision for retiree (including discount due to fall in yields).
• With partial government guarantee and 100% provisioning on stressed aviation account, management remains confident of substantial recovery. Guidance remains steady with advances growth expected at 12-14%, while margins stable at ~3.15% and RoA at ~1.1%. At current price, the stock is trading at ~1x FY26E ABV, which provides opportunity for further upside.

Mahindra & Mahindra - guided for aggressive capex spend and product launches till 2030

• At M&M, on standalone basis, topline for the quarter came in at Rs 25,109 crore (up 11% YoY) with automotive segment volumes growing 14% YoY at 2.16 lakh units and tractor sales volume at 0.72 lakh units (down 20% YoY). EBITDA in Q4FY24 came in at Rs 3,240 crore with corresponding EBITDA margins at 12.9% (up 10 bps QoQ). Resultant PAT for the quarter stood at Rs 2,038 crore (up 32% YoY).
• Automotive segment EBIT margins improved further to 8.8% (up 50 bps QoQ) while Farm Equipment segment margins improved to 15.8% (up 30 bps QoQ).
• It generated healthy CFO to the tune of ~Rs 11,500 crore in FY24 with capex spend pegged at ~Rs 5,000 crore. It also declared a dividend of Rs 21/share for FY24.  
• Margin performance at M&M surprised positively despite lower share of tractor sales in the overall mix for the quarter. On the SUV side its orderbook stands healthy at 220k units (including 50k units of XUV 3XO) with aspiration to grow mid to high teens in FY25E amidst domestic PV industry growth pegged at <5%. In the SUV space its present booking run rate is still ahead of monthly billings.
• Interestingly, the company has outlined an aggressive capex spend of ~Rs 31,000 crore over FY25-27E over auto and farm segments primarily aimed at product development and capacity expansions. It also includes Rs 12,000 crore marked for the PV-Electric Vehicle space (one of the highest in domestic space).
• M&M has also guided for aggressive product launch pipeline wherein it is aiming to launch 23 new vehicle models by 2030. This includes 9 new ICE SUVs, within which there are 3 Mid cycle enhancements (incl. the recently launched XUV3XO). Additionally, it will also launch 7 new Battery Electric Vehicles models and 7 new LCV models including 5 ICE and 2 Electric Vehicle variants.
• We have a positive view on the stock and retained our BUY rating amidst its convincing revenue market leadership in SUV & Tractor space, impressive new product launches outlook and persistent focus on capital efficiency (RoE>=18%). We now value M&M at SOTP-based target price of Rs 2,915 (15x FY26E standalone EV/EBITDA; 20% hold co. discount to investments, Rs 300/share for its Electric PV arm).

Hindustan Aeronautics – Strong performance with outlook being equally strong

• Revenue growth of ~11% in FY24 to Rs 29,832 crore (adjusted for additional revenue recognition of Rs 550 crore pertaining to change of value of an old contract) was in-line with the provisional revenue reported by the company
• However, the EBITDA margin of 27.3% for FY24 improved 250 bps up YoY (even after adjusting reversal of provisions of Rs 1033 crore). Margin was better than expectations and management’s guidance of 23-24%, possibly led by higher share of revenue from MRO (maintenance, repair & overhaul) segment, which generally is a better-margin segment. Also, there has been employee cost optimization during the year (in-line with management’s strategy), which has led to improvement in margins.
• Going ahead, company’s revenue growth is expected to pick-up substantially over the next few years, led by pick-up in execution of major contracts like Tejas MK1A aircrafts (which remains the largest manufacturing contracts at ~35% of current order book) and other manufacturing contracts (like LCH, LUH, ALH, aero-engines etc). Execution of MRO contracts is expected to remain strong with continuous order inflows and shorter execution duration.
• Order backlog remains strong at ~Rs 94,000 crore (3x FY24 rev). Orders pipeline remains robust considering the large-scale upcoming projects in aircrafts (additional 97 Tejas MK1A, Tejas MK2, Sukhoi upgrades etc), helicopters (large scale orders of LCH, LUH), unmanned aerial vehicles, aero engines etc
• As per the estimates, ~Rs 2 lakh crore worth of contracts are expected to be placed with HAL in the coming 2-3 years. Additionally, there are number of large-scale contracts (like AMCA, deck-based fighters for Navy, multi role helicopters etc) which will be placed with HAL in the next 3-5 years. This kind of huge pipeline gives longer term visibility on the company in terms of manufacturing order inflows and thus revenue growth in the coming years.

Telecom – Tariff hike holds the key

Airtel – muted quarter

• Airtel’s consolidated topline at Rs 37,599 crore, was down 0.8% QoQ and up 5% YoY. India wireless revenues were up 2% QoQ (up 12.9% YoY) at Rs 22,066 crore, with subscriber addition of 6.7 mn during the quarter. The Average Revenues per User (ARPU) came at ₹ 209, up 0.5% QoQ and ~8% YoY, better than Jio which had flat ARPU QoQ. Muted ARPU growth QoQ was owing to lesser number of days in the quarter. It witnessed healthy 4G Net adds of 7.8 mn during the quarter, with 4G data sub base at 252.7 mn. The post-paid subscriber base also saw robust addition of ~751k subscribers at 23.1 mn. Africa Revenues at Rs 9,293.3 crore, were down 9.8% QoQ, due to currency devaluation in Nigeria.
• Consolidated EBITDA came in at Rs 19,365 crore, with margins of 51.5%, down 78 bps QoQ as Africa Margins at 46.5% was down 260 bps QoQ. India margins at 53.6%, was down 30 bps QoQ, while wireless margins at 55.1% was flat QoQ. The net debt (excl. lease liabilities) at Rs 1.41 lakh crore was down by Rs 1,386 crore QoQ, clearly reflecting stable cash flow generation.
• Airtel has reported relatively stable performance on Indian wireless business front with resilient APRU growth, sustained post-paid/4G subscribers’ addition, margins and cash flow generation. Key trigger for the company would be tariff hike. With considerable 5G coverage expansion done and SIM consolidation likely to moderate as Vi has raised funds, we expect the operators to focus on tariff correction ahead. We have baked in Tariff hike of ~20% in Q2FY25, the pass though of which will be reflected in next 2-3 quarters, thereafter. Thus, ARPU is expected to witness ~13% CAGR over FY24-26E to ₹ 261, also aided by some mix improvement. The above tariff will also drive Wireless margins improvement of 300 bps from 53.8% in FY24 to 56.8% in FY26. Airtel remain our preferred pick in the Telecom space.

Vi - Renewed capex to be key monitorable

• Vodafone Idea’s (Vi) Q4FY24 performance was muted, albeit subscriber churn saw some moderation QoQ. Reported revenues were down 0.6% QoQ to Rs 10,607 crore.  ARPU was up 0.7% QoQ to Rs 146. The subscriber base declined at ~2.6 million QoQ (vs. 4.6 mn decline in Q3), with monthly churn rate at 3.9%, down from 4.3% in Q3. 4G base saw modest addition of 0.7 mn. Reported EBITDA margins was flattish QoQ at 40.9% largely due to lower network opex and marketing expenses. The reported loss stood at Rs 7,675 crore.
• The key monitorable would be impact of renewed spends on network and relative market share loss, after the fund raise of Rs 20,750 crore (Rs 18,000 crore through FPO and remining through preferential allotment to promoters). The 5G launch, would also be key to restrict churn in high ARPU and postpaid customers.

Shree Cement – volume growth stays strong

• Q4FY24 revenue increased by 6.6% YoY (+4.1% QoQ) to Rs 5,101 crore, led by ~8% YoY volume growth which partially negated the impact of lower realizations. EBITDA increased 48.7% YoY (+7.6% QoQ) to Rs 1,327.2 crore as EBITDA/ton improves sharply on lower costs.
• Overall operational performance beats expectations mainly on account of lower-than-expected raw material cost and others cost. Though volume growth of ~8% YoY was largely in-line, blended EBITDA/ton of Rs 1393/ton (+38% YoY) was better than street’s estimate of ~Rs 1,220/ton.
• For full year FY24, volume growth stood at ~12% YoY (led by timely capacity additions) with blended EBITDA/ton at Rs 1,228/ton (vs Rs 925/ton in FY23).
• Going ahead, company’s volume growth to remain strong led by continuous capacity additions & pick-up in demand. Management guides ~11% YoY volume growth in FY25. In terms of capacity expansion, company plans to increase its capacity by 9 mtpa in FY25 to reach 65.8 mtpa (with long term capacity expansion aim of 80 mtpa by FY28).
• EBITDA/ton is also expected to improve further led by continuous cost saving initiatives (like increase in share of green power, freight optimization by developing rail connectivity across all its sites, reducing fuel cost by enhancing the utilization of alternative fuel) and positive operating leverage.

Cipla Q4FY24- revenues growth a little softer but profitability better

• Revenues grew 7.4% YoY to Rs 6,163 crore on the back of ~12% growth in the US and South Africa, each. India growth was little subdued at 7%. EBITDA grew ~12% YoY to Rs 1316 crore with 90 bps margin expansion to 21.4%. PAT grew ~78% to Rs 939 crore.
• More than numbers, the key takeaway was an upbeat management commentary where the management has given aggressive EBITDA margins guidance of 24.5%-25.5% for FY25 from the current range of 22-23%.
• The guidance is based upon strong India growth, differentiated and complex launches in the US and strong South Africa momentum. Interestingly, the margin guidance is devoid of any adverse outcome of USFDA embargo and a possible delay in key US launches.
• We believe the management’s confidence is stemming from successful recent launches in the US and a long-drawn India strategy with a blend of branded Rx- Trade Generics- Consumer Health.
• The company already has plan B in place to address the launches from other sites. US launches would be mainly confined to complex areas of peptides and respiratory assets.
• Our target price is Rs 1,645 based on 25x FY26E EPS of Rs 65.2 plus NPV of₹ 14 for gRevlimid.

Hidden Gem

Kajaria Ceramics - Healthy medium-term outlook! ( CMP: Rs 1,267; TP: Rs 1,440)

• Kajaria Ceramics is the largest manufacturer of ceramic/vitrified tiles in India with current annual capacity of 86.5 mn. sq. meters (MSM) as of FY24. Kajaria has ~10% market share in domestic tiles volumes. Riding on real estate strong cycle, the management has outlined 3-year growth aspirations of 150 mn sqm tiles volume by FY27 (implying CAGR of 11.5%) and Tiles revenues CAGR of ~11% over FY24-27 to Rs 5,500 crore. It also expects non-tile portfolio to reach revenue of Rs 1,000 crore by FY27 (Rs 517 crore now), implying a CAGR of ~24.6% and contribute 15% of sales in FY27 (from 12% currently).
• For FY25, the company indicated that demand should witness recovery post the election led impact in Q1. We have baked in tiles volume and revenue CAGR over FY24-26E of 11.9% to 135 MSM and Rs 5,083 crore, respectively. Overall topline is expected to grow at 12.8% CAGR over FY24-26 to Rs 5,829 crore.
• The gas prices have eased significantly in FY24 and are likely to remain stable and at benign levels. The company has guided for margins in the range of 15-17% over FY24- 27E. we expect EBITDA margins to reach ~16%/16.5% in FY25/FY26, respectively from 15.3% in FY24. We expect ~19.5% earnings CAGR over FY23-26.
• With strong real estate completion cycle kicking in coupled with benign gas costs, we expect Kajaria to remain a key beneficiary of the same. We value Kajaria at Rs 1,440, at 38x FY26 P/E.