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Share market outlook of the week: New highs conquered; Nifty headed for 22,700

ICICIdirect 22 Mins 23 Feb 2024
  • Nifty gained 1% to hit fresh life high, in tandem with global peers. US, Japan indices hit new highs.
  • Nifty has given a strong breakout from five-week consolidation, supported by faster retracement, signalling end of corrective phase and acceleration of uptrend.
  • We expect Nifty to head towards 22,700 over next few weeks, while last weeks low at 20-day ema of 21,800 remains immediate support. Any dips should be used as incremental buying opportunity.
  • Key observation: Heavyweight Banking space (commanding >35% weight) has resolved out of five weeks of base formation and expected to meaningfully contribute to Nifty’s uptrend, along with IT, Oil&Gas, Pharma, Capital goods.
  • Supportive factors: Strong market breadth, consistent DII flows, strong global setups corroborate our bullish stance.

Vodafone Idea fund raise

Vodafone Idea board to deliberate on fundraising proposals, via a rights issue, a further public offer, private placement including a preferential allotment, a QIP or any other permissible mode or a combination there off. KM Birla, emphasizing the Aditya Birla Group’s commitment, has expressed openness to new investors.

  • Airtel and Jio well ahead on 5G launch: We highlight that both Jio and Airtel have taken the first mover advantage in 5G with Pan India rollout. They now have 9+ crore and 7 crore 5G customers, respectively. Vodafone on the other hand continues to lose subscribers with annual loss run rate now close to 2.5 crore. Thus, a fund raise and a quick launch of 5G in major cities is needed to retain their high paying and postpaid customer base.
  • Government a major beneficiary if Vodafone Idea revives: Vodafone Idea’s gross debt as of December end, stood at Rs 2.15 lakh crore, of which Government dues are Rs 2.07 lakh crore comprising deferred spectrum payment obligations of Rs 1.38 lakh crore, AGR liability of Rs 69,020 crore due to the government, dues of Rs 6,050 crore towards banks and financial institutions, and optionally convertible debentures amounting to Rs 1,660 crore (for American Towers).
  • Indus Tower another beneficiary if Vi house gets in order: Vodafone Idea was not paying Indus Towers on time, leading to receivables at one point rising to Rs 5,500 crore. However, over the last six to nine months, the company has been paying full against monthly invoice. Any tariff hike or fund raise by the telecom operator will improve cashflow and dues from Vodafone Idea.

We believe while the overall competitiveness return is far-fetched for Vodafone Idea, mere survival is what fund raise can extend. Moreover, the benefit of fund raise will accrue to Government as well its vendors including Indus Towers.

Hindalco Ltd : Overseas subsidiary i.e. Novelis Inc files paper for IPO in US

  • Hindalco wholly-owned American subsidiary, Novelis Inc., has filled papers for an initial public offering (IPO) to the US.
  • It will be an OFS, hence the proceeds of the IPO will go to Hindalco, and Novelis will not receive any proceeds from the sale of common shares.
  • We believe, this is sentimentally positive for the company, however its impact on Hindalco’s share price is purely determinant of valuations at which Novelis gets listed on US stock exchanges.
  • Novelis is broadly valued at ~6-7x EV/EBITDA by the analyst community on forward basis to drive ~Rs 600 as target price for Hindalco. Hence any listed valuations less than this is negative and any premium to such levels is positive for Hindalco. We shall closely monitor further developments on this space.
  • Novelis is expected clock sales volume of ~4 MT in FY26E and is likely to report EBITDA/tonne of US$ 550 with potential EBITDA pegged at ~$2.2 billion. This implies potential equity valuation of Novelis at ~$ 9-10 billion i.e. Rs 70k-80k crore vs. the current Hindalco’s MCap of Rs 1.17 lakh crore.

ABB's good Q4CY24 performance

  • ABB reported good operational performance in Q4CY23 as revenues for the quarter grew by 14% YoY at Rs 2,757 crore.
  • Order inflows grew by 35% to Rs 3,147 crore. The order backlog was also up 30% at Rs 8,404 crore.
  • Better execution and operating leverage led to margin expansion to 14.8% vs. 12.4% in Q4CY22.
  • PAT grew by 14% YoY to Rs 345 crore.
  • From a segmental perspective electrification, process automation and robotics perm goes well in terms of revenue and order booking.
  • Strong backlog growth of 30% will ensure good growth viability for ABB in the medium term. The ongoing capex cycle across Industries will put ABB in a sweet spot given the product 

View - Strong backlog growth of 30% will ensure good growth viability for ABB in the medium term. The ongoing capex cycle across Industries will put ABB in a sweet spot given the product portfolio it commands. However valuations continue to remain rich. Any sharp correction in the stock should be bought into from a 3-5 year perspective.

Defense ministry approves projects worth Rs 84,560 crore

The defense ministry cleared procurement of projects worth Rs 84,560 crore including:

1) medium range maritime reconnaissance and multi-mission maritime aircrafts for Indian Navy and Indian Coast Guard

2) new-generation anti-tank mines,

3) Air defense tactical control radar,

4) heavy weight torpedoes for Indian Navy,

5) Flight refueller aircraft for Indian Air Force

6) software defined radios for Indian coast guard

7) Canister Launched Anti-Armor Loiter Munition System

8) Active Towed Array Sonar

9) sustainment support through Follow On Support (FOS) and Repair Replenishment support through Follow On Supply Support (FOSS) for 24 MH60R aircrafts

With the approvals in place, procurement process will start for these projects which includes issuing of RFIs (request for information) and RFPs (request for proposals), tendering, negotiations etc.

  • We believe actual flow of contracts for these platforms may take about 9-12 months.
  • In maritime aircrafts (total 15 no. expected with cost of Rs 29,000 crore), C-295 aircrafts from Tata Advanced Systems-Airbus is expected to be procured with key electronic systems from Bharat Electronics (BEL).
  • Hindustan Aeronautics (HAL) is expected to be the primary beneficiary for flight refueller aircrafts (with Israel aerospace Industries as foreign partner) and support & repair of MH-60 aircrafts.
  • BEL (along with Astra Microwave or Data Patterns) are also likely to be the beneficiaries in control radars, sonar and software defined radio.
  • Bharat Dynamics (BDL) is likely to be the get heavy weight torpedoes project while Bharat Forge is expected to get anti-tank mines project.
  • In case of loitering munitions, Solar Industries is expected to be one of the participants in RFP along with Premier Explosives for supplying propellants.
  • Midhani will be involved in supplying of superalloys, titanium alloys in some of the platforms.

Govt approves amendment in FDI policy in Space sector

The government has approved the amendment in foreign direct investment (FDI) policy in the space sector. Now, 100% FDI has now been permitted to manufacture components and systems/sub-systems for satellites, ground segment and user segment. For satellite manufacturing & operation, satellite data products and ground segment & user segment, FDI up to 74% is allowed under the automatic route, beyond which government route will be applicable. Sub-sector comprising launch Vehicles and associated systems or sub-systems, the Creation of Spaceports for launching and receiving Spacecraft can get 49% FDI through automatic routes, beyond which govt approval is required. As per the previous FDI policy, FDI was permitted in establishment and operation of Satellites through the Government approval route only.

  • This is a significant move for the Indian space industry as the private players would be able to achieve global scale of operations and would increase their share in the global space economy.
  • Players like Data Patterns, Astra Microwave (which have entered into manufacturing of satellites and space electronics) would benefit the most from this development.
  • MTAR Tech (which manufactures critical components of launch vehicles) and Premier Explosives (which manufactures propellants for launch vehicles) would also benefit significantly.

Kotak Mahindra Bank (CMP - Rs 1,725, Mcap - Rs 3,42,820 crore)

Kotak Mahindra Bank has announced rejig in leadership appointing KV Manian as Joint MD and Shanti Ekambram as Deputy MD. Devand Gheewalla will take over as Group CFO after tenure of Jaimin Bhatt is over in March 2024. Putting an end to rumours of likely exit from leadership team, this strategy will ensure retention of senior members, thus continuing focus on sustained performance.

Fundamental performance continues to remain healthy with focus on retail segment and specifically in unsecured category. Given continued intense competition on liquidity, margins pressure seems likely in near term. However, overall performance on asset quality, business growth and earnings remain healthy. At current valuation of ~2x FY26 ABV (standalone bank), the bank seems to be adequately valued and thus remains a bet with long term investment perspective.

Union Bank of India (CMP - Rs 147, Mcap - Rs 1,09,185 crore)

Union Bank of India has undertaken capital raising through QIP to the tune of Rs 3,000 crore. Floor price for the issue has been set at Rs 142.78 per share, however, indicative price suggests issue price at Rs 135.65 per share. This issuance of equity is in line with plan to raise remaining portion of board approved limit. At the indicative price, the issue will be marginally accretive to book value and will aid future balance sheet growth. The stock is currently trading at ~1x FY25E BV seems factoring industry in-line business growth and gradual improvement in RoA at ~1%. Treasury gains and recovery from stressed pool could act as positive surprise to drive valuation.

Electric Vehicles at inflection point, falling battery prices to accelerate adoption

  • Electrification is steadily gaining pace domestically with penetration in the 2-W space now pegged at ~5% (new EV sales as a % of total vehicle sales) while the same in PV space is at ~2%.
  • Interestingly, battery prices are on the downward trajectory with average Lithium Battery pack prices down from US$ 161 in 2022 to US$ 139 in 2023. Even China Lithium Carbonate Prices are down from US$ 81,425/tonne in Nov 22 to US$ 13,281/tonne in Feb 24, the levels last seen in Mar 21.
  • Consequently, Domestic OEM’s have resorted to aggressive price cuts with certain EV vehicles now largely at par with their ICE models. Breakeven levels have greatly reduced.

Case in point being: 1: Tata Motors

  • Nexon Normal Range EV is priced at ~Rs 15 lakh on road; cheaper than Diesel Automatic variant at ~Rs 16 lakh and dearer to petrol variant priced at ~Rs 14 lakh.
  • For an average 12,000 km annual run, Nexon EV saves Rs 9-1=Rs 8/km for its owner with total savings in a year pegged at ~Rs 1 lakh & is breakeven in the very first year of run.

We see this as path breaking which coupled with rising charging infrastructure is expected to result in a J curve for EV penetration domestically in the near term.

Case point being: 2: Ola Electric

  • Entry level Electric 2-W in the branded space is offered by Ola Electric i.e. OLA S1x+ which after recent price cut is offered at ~Rs 91,000/unit on road vs. Honda Active 6G selling at ~Rs 93,000/unit.
  • Performance Electric 2-W’s (Ola S1 Air, Pro; Bajaj Chetak, Ather) however are still priced higher than scooters in the ICE space.

With increasing scale and further reduction in battery prices we expect them to gain price parity in times to come.

CIE Automotive: Reports a tad muted performance in Q4CY23

  • Consolidated revenue from continuing operations came in at Rs 2,240 crores, flat YoY & QoQ. EBITDA for Q4CY23 stood at Rs 327.4 crores with corresponding EBITDA margins at 14.6% down 60 bps QoQ.
  • On the standalone basis, topline for the quarter came in at Rs 1,138 crore, up 2.4% YoY. EBITDA stood at Rs 174 crore with EBITDA margins at 15.3%, down 30 bps QoQ.
  • On the cash flow front, the company generated healthy CFO to the tune of ~Rs 1,400 crore (8% CFO yield) with FCF pegged at ~Rs 900 crore (5% FCF yield).
  • Company’s topline performance came in below our expectations with marginal decline in margins on sequential basis both across Indian as well as European operations. Management guided for some delay in ramp up at its Indian facilities and expects to make good for it in coming quarters.
  • From a longer degree perspective, we have a positive view on the company primarily tracking healthy growth prospects at its Indian operations, efficiencies at bay at its European business, improving margins and return ratios profile and consistent healthy cash flow generation. From the valuation standpoint, the company trades inexpensive at ~22x PE & ~12x EV/EBITDA on trailing i.e. CY23 basis.
  • We retain our BUY rating on the stock with a target price of Rs 625 valuing the company at 22x PE on CY24E EPS. It offers a healthy 30% potential upside.

Hidden Gem

Sudarshan Chemical Industries- CMP: Rs 600; TP: Rs 705

  • Sudarshan Chemical is a leading player in the Indian colour pigment industry with ~35% market share and is also the third largest player globally.
  • Pigments account for ~92% of the business. It owns a wide portfolio of 4,000+ varieties of products.
  • Among end users, paint (Coating) industries contribute highest followed by plastics, inks, cosmetics and other applications.
  • Domestic Pigments (~50% of Pigment sales) continue to ride on volumes growth in Paint industry, with 10-12% trending growth rate.
  • Visible green shoots in the exports market especially the US which is expected to do better from Q1FY25 onwards and opportunities brewing from global consolidations and exits of larger players.
  • We expect better margins trajectory on the back of improving operating leverage to be driven by continued momentum in the domestic sales and revival in exports.
  • Sustained focus on margin accretive Specialty pigments (2/3rd of the portfolio and improving) for which the company has incurred significant capex in the last 3-4 years.
  • Recovery expected in the ROCE on the back of improved profitability and Asset Turnover.

We value Sudarshan at 22x FY26E EPS of Rs 32 with a target price of Rs 705 / share.

Source: ICICIdirect Research

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