Share market outlook of the week: Markets to turn stock specific amid onset of Q1FY25 earnings and global cues

• Indian benchmarks gained in tandem with global cues. Nifty small cap index outperformed (+3%) while Nifty gained 1% for the week.
• Focus on stock specific action in coming week: Weekly small bull candle indicates slow down in momentum after four weeks of rally leading prices in overbought zone. Nifty is expected to consolidate in the 23,700-24,500 band wherein we recommend to follow buy on dips strategy to ride current uptrend.
• Commodity prices looking up: Silver and Copper prices have given six week falling channel breakout. Further, elevated expectations about US rate cut and China stimulus would keep Metal stocks in focus.
• Sectorally, IT, Oil & Gas, Metal, PSU banks, Chemicals and Auto ancillary are expected to do well.
• Global set up continues to remain strong footing and barring minor retracements does not flag bigger volatility.

FII have turned net buyers after almost 6 months

• After remaining net sellers for almost 6 months in Indian equities, FIIs have finally turned buyers after the union election verdict. In the second half of the June, they bought nearly 30k in the market. Major chunk of the flows came into Financials and FIIs have poured more than 8k crores in this space. Sharp rise in HDFC Bank share prices last month can be largely attributed to the resumption of flows in the banking domain. Apart from Banking, Telecom and Capital Goods spaces were the next major gainers which saw inflows of nearly 6k and 3k crore respectively. On the other hand, Power and Metal names saw marginal profit booking.
• FIIs seem to have missed out the nearly 10% move in Indian markets during the Calander year so far. At the same time, domestic funds continue to remain strong. Thus with resumption in FIIs flows, we may see further outperformance of Indian equities.

IT Preview - Q1FY25 - some growth recovery - outlook commentary key ahead

• Among the bigger companies , Infosys will lead the revenues growth with ~2.2% QoQ constant currency growth. TCS will follow with 1.6% QoQ growth. HCL Tech, on the other hand is likely to report 2% QoQ decline in revenues, impacted by productivity gain sharing in one of its large deals. Wipro will report flattish revenues QoQ.
• Among the tier 2, Persistent will lead the growth ~4.7% QoQ growth driven by healthy deal flow in the healthcare/BFSI verticals. LTIM growth of 1.7% will be aided by favourable base, as Q4 had seen a project cancellation impact. Tech M is likely to report flattish revenues QoQ.
• On the margins front, quarter will witness some impact of higher visa costs, leading to margins decline for number of players QoQ, while wage hike impact will lead to 150 bps QoQ decline in TCS margin at 24.5%. On the positive side, margins expansion of 80 bps for Infosys (base quarter - Q has salary hike impact) - up 80 bps to 20.1% , Tech M – up 60 bps QoQ to 8% (driven by turnaround measures) and Wipro – up 70 bps to 15.9% driven by consulting business benefits.
• Going ahead, key monitorable would-be a) Growth outlook commentary – on discretionary demand, BFSI segment; b)Order ramp up status and c) ramp up in Gen Ai offering and potential.

Banking industry is expected to deliver mixed performance in Q1FY25

• Banking industry is expected to deliver mixed performance in Q1FY25 with margins to witness some pressure amid continued challenge on liabilities front, however, moderation in opex could offset the impact keeping return ratio steady.
• While advances growth is expected at 16% YoY, led by continued traction in retail & SME segment, deposits accretion is seen lagging behind at ~13% YoY. Seasonal decline in current account and continued gradual shift of saving deposit is seen to impart pressure on margins to the extent of 5-15 bps in Q1FY25.
• Anticipated slower traction in NII is expected to be offset by moderation in opex and steady credit cost which is seen to keep return ratios flattish on sequential basis.
• Private banks are expected to witness some pressure on margins offset by lower opex resulting in flattish RoA. PSBs, on the other hand, are expected to deliver relatively better performance owing to increase in CD ratio (which will support margins trajectory). Anticipate treasury gains for PSBs, though quantum to be lower owing to recent regulations on investments.

Q3FY25 business performance

• Indian banking industry witnessed continued robust traction in credit growth at ~16% YoY, led by strong retail credit demand & working capital across lenders.
• Competitive intensity on deposits remains elevated with repricing of term deposit rates driving accretion. Thus, majority of the lenders witnessed continued decline in CASA ratio.
• PSBs to benefit from increase in CD ratio, while private banks to depend on change in asset mix to support margins. SFBs continue with their growth momentum, though NPA accretion remains a concern.

Auto Volumes June 2024: 2-W and PV space outshine, report healthy volume prints

• Wholesale volume prints for the month of June 2024 was broadly positive with PV and 2-W segments reporting healthy volume prints, while commercial vehicle & tractor domains posted a steady show.
• Key outperformers within key segments were Hero MotoCorp in the 2W space while M&M outperformed in PV & tractor domain. VECV arm of Eicher Motor outperformed its peers in the CV space.
• In 2-W pack, for June 2024, Market leader Hero MotoCorp outperformed its peer reporting healthy volume growth of 15% YoY to 5 lakh units. TVS Motors and Bajaj Auto reported steady volume prints, reporting growth of 5.8% and 3.4% YoY, respectively. Royal Enfield brand at Eicher Motors reported muted performance with volumes at 73k units, down 5% YoY.
• Notably, exports declined MoM across all players except Bajaj Auto.
• In PV space, Market leader Maruti Suzuki surprised positively with sales volume up by 12.8% YoY at 1.76 lakh units. Tata Motors volumes came in muted, down by 8% YoY at ~44k units with EV volumes declining by 33.7% YoY to 4.7k units amidst drop in fleet sales due to Fame-2 ending on Mar’24. M&M continues to outperform its peers with volume growth of 23% YoY at 40k units owing to healthy orderbook & capacity expansion. 
• In CV segment, market leader Tata Motors reported volumes of 32k units, down 6.8% YoY. Volumes at Ashok Leyland also de-grew by 1.8% YoY to 15k units. While VECV arm of Eicher Motors witnessed growth of 10.6% YoY at 7.4k units. In M&HCV space, buses sub-segment continues to perform ahead of trucks. With growth-oriented policy continuity at the centre, we expect industry volumes to fare well in H2FY25.
• In Tractor segment, M&M reported volumes of 47k units, up by 6.4% YoY while Escorts declined by 3% YoY at 9.6k units. Notably, the recent pick up in rainfall activity across the country bodes well for domestic tractor space amidst the broader forecast of normal to positive monsoon season’24.
• For FY25E, we expect growth trajectory to be led by the 2-W space with high base limiting growth in PV and CV categories.

Hidden Gem

Va Tech WABAG (CMP: Rs 1,316; Target: Rs 1,550; Market Capitalisation: Rs 8,210 crore; Upside: 18%)

• VA Tech Wabag (Wabag) leader in the total water management industry, ranked 3rd globally, caters a complete portfolio of water solutions with technological (~83.5% of revenue) and operational expertise (~16.5% of revenue).
• Wabag delivers tailored water solutions such as desalination, drinking & municipal water treatment, sludge treatment, industrial water & wastewater treatment etc.
• As of FY24, the company commands a reasonable order backlog of Rs 11,400 crore, which provides decent revenue visibility in the medium term. The company has participated in projects worth $1 billion in the international markets which we believe will drive order inflows in FY25E given domestic ordering in H1FY25 might be tepid on account of the general elections. The management will continue to focus on the E&P projects rather than EPC projects.
• The company reported ROCE of 19% in FY24 and Free cash flow of Rs 168 crore which clearly indicates the strong focus of the management on being an asset light model. The target of taking O&M revenues to be 20% of overall revenues will also further augment cash flow cycle.
• Company’s operational and financial performance to improve significantly in the coming period. We estimate revenue, EBITDA and PAT to grow at ~14%, ~22% and ~25% CAGR respectively over FY24-26E. ROCE to be at 21.3% in FY26E from 19% in FY24
• Focus on improving return ratios and asset light model can lead to rerating. We value the company at Rs 1,550 i.e. 25x FY26E EPS.