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Share market outlook of the week: Nifty set for 23,400 with banking in driver's seat

ICICIdirect 25 Mins 03 May 2024
  • Indian equity indices gained 1.5% for the week, outpacing western peers. Within EM basket, Hangseng gained 5% with renewed optimism about Chinese growth. Bank Nifty outperforms with 2% gains.
  • We expect Nifty to break past 22,800, and accelerate rally towards 23,400 in May 2024 in run up to General elections. Strong support is placed at 22,200 levels. Buy any intermediate dips.
  • Bank Nifty leading: Bank Nifty index has given a breakout from 3 ½ month consolidation indicating acceleration of upmove towards 51,000. On relative front, Bank Nifty is expected to outperform Nifty.
  • Seasonality: Contrary to adage of sell in May and go away, Indian equities have delivered positive returns in May month during General election years in four out of past five instances since CY1999. Minimum returns were 1.5% while average was 14%.
  • Sectors like BFSI, Oil & Gas, power, metals, PSU expected to outperform.
  • Brent (84): Brent prices have given breakdown from five month rising channel indicating that upsides are capped around $92. Further declines towards 75-78 likely in coming month.
  • Breadth: remains strong led by Mid and small caps’ strong performance in April.
  • Large FII selling being absorbed by DII flows anchoring downsides.

US Policy rates remain unchanged, markets expecting just 1 cut in 24 now

US Fed opted to keep the rates unchanged in its policy meet but highlighted concerns over ongoing challenge of inflation. They cited lack of further progress on the inflation issue. The Fed is trying to maintain the stability amid economic uncertainties. Also, Fed chairman ruled out any immediate hike in policy rates and even suggested some smoothening in the ongoing process of balance sheet tightening.

The US yields and Dollar Index cooled off marginally from highs and provided some cushion to the risk assets. Also, it seems like market is now expecting just 1 rate cut instead of 3 cuts expected during the current year.

Coal India: Reports healthy performance in Q4FY24, volume led growth to prevail

  • Total operating income for the quarter came in at Rs 37,410 crore (down 2% YoY) with coal sales volume of 202 million tonne (up 8% YoY).
  • The quarter saw a significant uptick in sales volume, marking it as the highest quarterly sales volume recorded by the company in its history till date. E-auction sales volume for the quarter came in at 23 MT (at ~11% of total volumes v. 8% in Q3FY24).
  • On the realisations front, FSA realisations were steady at Rs 1,536/tonne (flat QoQ) while e-auction realisations came in higher than anticipated at Rs 2,545/tonne i.e. 66% premium to FSA realisation vs. management commentary of it dropping to 40-50% premium.
  • Reported EBITDA for the quarter came in at Rs 11,338 crore with corresponding EBITDA margins at 30.3% (up ~584 bps YoY). EBITDA/tonne for Q4FY24 came in at Rs 562/tonne vs. Rs 498/tonne in Q4FY23 vs Rs 680/tonne in Q3FY24.
  • PAT in Q4FY24 stood at Rs 8,640 crore (up 26% YoY).
  • The company declared last interim dividend of Rs 5 per share with total dividend declared for FY24 pegged at Rs 25.5/share.
  • Going forward, we remain positive on stock, buoyed by the company’s ambitious target of achieving 1 billion of coal production by FY26, investments in the new technology domains such as coal gasification, inexpensive valuation (<7x P/E and <4x EV/EBITDA on FY26E basis), and healthy dividend yield (~6%).
  • We have a BUY rating on the stock with target price of Rs 550, offering a healthy potential upside of 22%.

Coforge: Steady Performance; Acquisition of Cigniti to have its own challenges

  • Q4FY24 Performance: Coforge reported revenue of US$ 286.8 mn, up 1.9% QoQ in CC terms. Vertical wise growth was led by BFS (33.7% of mix) which grew by 6.4% QoQ, while other verticals Insurance and Travel were flat sequentially. Geography wise Americas (47.4% of mix) and EMEA (40.1% of mix) expanded by 4.1% and 2% QoQ while RoW (12.2% of mix) contracted by 7.4% QoQ. Adj. EBITDA excl. ESOP margin increased by ~102 bps QoQ to 19% aided by better utilisation and ramp-up in its offshore revenue. The company’s fresh order intake grew by 119% QoQ & 157% YoY to US$ 774 mn in Q4.
  • FY24 Performance:  For FY24, the company reported revenue of US$ 1.12 bn, up 11.7% (13.3% in CC terms). On the margins front, the company’s Adj. EBITDA margins stood at 17.6% (-64 bps) amid higher sales & marketing expense. The company’s fresh order intake for the full FY24 was US$ 1.97 bn (up 56%) and the executable order over 12 months book stood at US$ 1.02 bn (up 17.3%).
  • Outlook ahead: The management has indicated for some growth moderation in tandem with executable order book growth trajectory and flattish EBITDA margins in FY25 owing to the impact of the new ESOP scheme being rolled out, wage hikes and broader macro-economic environment conditions and expects a step-jump in margins (increase of 150-250 bps) in FY26 only.
  • Acquisition: Coforge to acquire “Cigniti Technologies” (54% stake at a per share price of Rs 1,415/share. The management highlighted the following three key reasons for acquiring Cigniti – i) Addition of three new scaled-up industry verticals namely - Retail, Hi-Tech and Healthcare to Coforge; ii) Coforge will expand and scale up its presence across the South-west, Midwest and West US (currently only on east coast); and iii) Help Coforge to address the significant opportunities that the proliferation of AI is creating for specialized Assurance services. It believes that the synergy benefits of this deal would propel the company to become a US$ 2bn firm by FY27 and that the acquisition shall lead to a 150-200 bps improvement in operating margins of the company by the same period. Deal is likely to be consummated by Q2FY25.
  • Acquisition valuation and our view: The deal values Cigniti at Rs 3,863 crore, 3.1% above the last closing price. It implies valuations of 2.1x on FY23 Price/Sales and 23.3x on FY23 earnings. While deal valuations are reasonable, Cigniti is largely into digital assurance and testing which maybe the biggest impacted segment (cannibalise its own revenue) amid GenAi adoption, going ahead. Key ahead would be Coforge ability to push its services to Cigniti accounts.

Auto Volumes – April 2024: Two-Wheeler continues to shine, CV recovers on a low base

  • Auto OEM wholesale sales volume for the month of April 2024 came in broadly flat to positive with volumes growing healthy double digit on YoY basis in the 2-W space, while it remained steady with single digit growth in the PV domain. Volumes in CV space reported optical recovery on a low base while Tractors remained broadly flat.
  • M&M and Hero MotoCorp outperformed their peers in their respective segments.
  • In 2-W pack, for April 2024 market leader Hero MotoCorp outperformed its peers with healthy volume growth of 34.7% YoY at 5.3 lakh units. Royal Enfield brand at Eicher Motors witnessed recovery, reporting volume of 82k units, up 12% YoY.
  • In PV space, M&M continue to outperform its peers with only PV player reporting double-digit volume growth of 18% YoY at 41k units. Maruti Suzuki sales volume for the month were up 4.6% YoY at 1.66 lakh units, while Tata Motors volumes were broadly flat at 48k units.
  • In CV segment, market leader Tata Motors reported volumes of 29.5k units up 31% YoY. While Ashok Leyland reported a volume growth of 10% YoY at 14k units. CV space is expected to report tangible volume recovery in H2FY25E.
  • In tractor segment, volumes were broadly flattish at both the listed tractor players with M&M reporting volumes of 37k units while same at Escorts stood at 7.5k units. Interestingly, Tractors exports witnessed double digit YoY growth at both M&M and Escorts. Key monitorable for this space would be impending monsoon distribution with forecast of healthy monsoons in India for 2024.
  • For FY25E, we expect growth trajectory to be led by the 2-W space with high base and impending elections limiting growth in the PV and CV categories.

Bearing Sector: Strong Industrial demand and green shoots in exports

  • Bearing companies look well poised to see notable recovery in the coming period, led by healthy growth in domestic industrial segments with recovery in domestic mobility and exports.
  • Domestic industrial segments including railways are already doing well, led by strong capex across railways and process industries like cement, steel, power, mining etc. We expect bearings demand from domestic automotive market to also pick-up further led by electric mobility.
  • We expect the export segment for these companies to also recover in the coming period. We have seen recovery in exports for Schaeffler also which reported strong 20% growth on sequential basis in its exports revenue in recent quarterly results, led by significant improvement from Europe and Asia pacific markets.
  • Companies are also focusing on increasing localization of products including after-market products, which would further benefit companies in terms of improving margins considering that increasing localization would help companies in reducing import from parent companies.
  • For Timken India, we estimate revenue to grow at ~15% CAGR over FY24-26E after a flattish FY24. This will be mainly led by strong domestic growth, increasing domestic capacity  and recovery in exports which is about ~25% of total revenue. EBITDA and PAT are expected to grow at ~22% and ~23% CAGR respectively over the same period as the margins are also expected to improve. We have a target price of Rs 3,950 on Timken.
  • For SKF India, we estimate revenue CAGR at ~10% over FY24-26E led by healthy growth in industrials + railways segments (which is 55% of total revenue), decent auto sales volume and increasing share of after-market segment. EBITDA and PAT CAGR at ~16% and ~17% respectively over this period. We have a target price of 6060 on SKF India.

Kotak Mahindra Bank - Exit of Joint MD, post regulatory ban, acts as a negative surprise

  • KVS Manian, Joint MD of Kotak Mahindra Bank, has resigned from immediate effect. Further, Manian is planning to pursue opportunities in financial services. Manian had a pivotal role in various businesses of Kotak Mahindra Bank including retail asset and liabilities business.
  • Exit of senior leadership at current juncture when regulator has imposed ban on new customer sourcing digitally could keep pressure on valuations in near term.

Shriram Finance (CMP - Rs 2,579, Mcap - Rs 96,919 crore, Buy) – Revival in AUM growth coupled with sustained operational performance

  • Shriram Finance has delivered healthy performance depicting successful merger. AUM growth healthy at 21.1% YoY and ~5% QoQ to Rs 2,24,862 crore, led by uptick across segment, except personal loans. Asset quality remained prudent with 21 bps QoQ decline in gross stage 3 at 5.45%.
  • Operationally Shriram Finance delivered across metrics with healthy growth in NII at 20% YoY, robust increase of 151% in other income, 9.9% YoY growth in opex and 6.5% YoY uptick in credit cost led to 48.7% YoY and 7% QoQ growth in PAT at ₹1946 crore. Margins remained steady at 9%.
  • Housing loans subsidiary witnessed AUM growth at 71% YoY and 14.4% QoQ, however, 64 bps QoQ decline in margins impacted earnings keeping it flat at Rs 83.8 crore. 
  • Focus on steady business growth with non-CV segment increasing at 20%, steady margins at ~9% (given anticipation of peaking of borrowing cost and growing high yield book at faster pace) and credit cost at ~2% is seen to aid return ratio at 16-18%. At current valuation, Shriram Finance trades at ~1.4x FY26E BV, which remains attractive.

Federal Bank (CMP - Rs 168, Mcap - Rs 40,926 crore, Buy)

  • Federal Bank continued to deliver healthy performance on business growth as well as asset quality, however, earnings got marred due to one-time wage revision provision.
  • Sustained growth in advances at 20% YoY (Rs 2,09,403 crore) with focus on high yield segments led to 2 bps QoQ increase in margins at 3.21%. Deposit growth continued to remain healthy at 18% YoY (Rs 2,52,534 crore) with focus on term deposit.
  • Lower non-core income kept overall other income growth at 3% YoY, though core fee income grew 14% YoY. Operating expense remained elevated at Rs 1,839 crore; up 41% YoY, led by one-time wage provision of Rs 162 crore and investment in distribution. Asset quality improved with GNPA ratio down 16 bps at 2.13% and slippages down from 0.96% to 0.68% which led to provision reversal of Rs 94.6 crore.
  • Focus on high yield segment (CV, credit card, gold loans, MSME) bodes well for growth as well as yields. Guidance on growth remains steady at 18-20%. While steady fundamental performance (RoA expected at 1.2-1.3%) is expected to support valuation (stock trades at ~1.1-1.2x FY26E BV), clarity on new leadership could drive stock price in near term.

Exide Industries : Margins -a key surprise, OEM tie-up validates EV play – Target Price raised to Rs 550

  • Exide Ind (EIL) reported healthy performance in Q4FY24. Topline for the quarter came in at Rs 4,009 crore, up 13.2% YoY. EBITDA for Q4FY24 came in at Rs 516 crore, highest ever, with EBITDA margins at 12.9% (up 140 bps QoQ), largely led by 150 bps expansion in gross margins. PAT in Q4FY24 stood at Rs 284 crore (up 37% YoY).
  • The company generated healthy CFO in FY24 and continues remain debt free despite aggressive capex spending in the Li-On cell domain. Automotive division witnessed uptick across OEM and replacement market while it continues to witness healthy demand prospects in the industrial domain. Exports recovery was gradual in nature.
  • EIL is the early one to take tangible steps in new age Li-On battery business. It had first ventured into EV battery assembly operations (capacity 1.5 GWH). Additionally, it is venturing into manufacturing of Li-On cells with capex outlay of Rs 6,000 crore for 12 GWH capacity with 1st phase of 6 GWH slated to be operational in CY25E at a capex outlay of Rs 4,000 crore (~Rs 2,000+ crore invested till date).
  • Interestingly, in recent past, it has signed a non-binding MOU with Hyundai Motor Co. ("Hyundai Motors") & Kia Corp. ("Kia") for strategic co-operation in India's EV market. As per this MOU, both the parties will work together for development, production & supply of battery cells (LFP chemistry) for Hyundai's electric vehicles dedicated to Indian market. This validates EIL’s ambitious plans in new energy space and gives us more confidence of EIL success in this domain with guidance of healthy margins & RoCE’s matrix.
  • We retain our positive stance on Exide Industries. We assign BUY rating on the stock and now value it at SOTP-based target price of Rs 550 vs earlier target price of Rs 400.

Hidden Gem -Glenmark Life Sciences

  • Glenmark Life Sciences Limited (GLS) is pure play API manufacturer, where 93% of the revenue comes from API segment, rest 7% comes from CDMO services which it offers to specialty pharmaceutical companies.
  • With 20+ years of experience in catering to leading global generic players, GLS has established good relationship especially in the areas of Cardiovascular, CNS, Pain management and Anti-diabetics. The company is also developing niche, oncology focused high potency APIs.
  • Recently Nirma Acquired around 75% stake in GLS from Glenmark Pharma which we believe can provide more autonomy in terms of growth capex. We expect capex spend of ~Rs 575-600 crore during FY25E and FY26E.
  • The company plans to nearly double its reactor capacity to 2405KL by FY26, some of which is also earmarked for backward integration. Besides increasing the sales bandwidth, this is likely to maintain its robust margin profile (EBITDA Margins range – 29-31% during FY24-26E).
  • In CDMO, the company has around 3 CDMO projects in hand, while two more projects are expected in FY25E. The management aspires to double its CDMO business by 2027 via leveraging its existing partnerships and adding new projects.

Besides strong execution pedigree, we believe the change of ownership could be beneficial especially on the expansion front. We value Glenmark Life Science at 21x FY26E EPS of Rs 49.5 with a target price of Rs 1,040/ share.

Source: ICICIdirect Research

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