Share market outlook of the week: Nifty shifting gears; 25,200 in sight

• Nifty gave a breakout from 10 weeks consolidation, after recouping election related volatility, as stable government at center reignites expectations on reforms agenda, budgetary allocations and earnings.
• Our composite model carrying equal weight on a) General election cycle b) classical chart studies c) US election impact on US and Indian equities, projects Nifty target of 25,200 by December 2024 with strong support at 22,200 levels.
• Empirically, in past five election years, Nifty gained median 21% post-election outcome till end of the year.
• Chart projection: Since June 2022, each ~10% correction in Nifty is followed by 20% rally over subsequent six months. Similar projection from election day low, provides target of 25,200 by end of December 2024.
• Robust global setup: Global equity markets are in steady up trend. Empirically, US markets have rallied average 9% between June-December period of election year. In similar timeframe, Nifty has gained average 20%, barring 2008. Steady global markets would act as tailwind for domestic equities.
• Fundflow: robust domestic flows continue while, return of FII flow in H2CY24 with prospects of rate cuts in US, would be incremental positive from liquidity perspective.
• Breadth: Our multiple breadth indicator readings corroborate our positive view on markets.
• Midcap and Small caps: In ongoing bull market from COVID lows, both indices have peculiar behavior of rallying 20% after 10% intermediate corrections. Hence, intermediate corrections should be used as buying opportunity as both indices are expected to gain >15% by end of the year.

Monsoon: Slow start to the season, long runway lies ahead

• The monsoon had a thundering start to the season with onset on 30^th May 2024, two days before its usual onset date of 1^st June 2024.
• The rainfall activity however lost momentum with current seasonal rainfall as on date at 18% below long period averages.
• In a recent press release, IMD has also downgraded its rainfall forecast for the month of June to below normal at <92% of LPA from normal forecast earlier.
• All weather monitoring agencies domestically and globally have forecasted normal to positive Monsoon season for India in 2024.
• With July accounting for bulk of rains received domestically in a monsoon season at ~33%, we expect the rainfall activity to pick up pace as we move forward.
• This coupled with recently approved the Minimum Support Price (MSP) for upcoming kharif Crops in the range of ~5-7% bodes well for domestic farm income and in turn rural consumption.

Order Boost for defence stocks

• Ministry of Defence (MoD) has issued an Request for Proposal (RFP) to Hindustan Aeronautics (HAL) for procurement of 156 Light Combat Helicopters – Prachand (90 for Indian Army and 66 for Indian Air Force). The initial 15 LCH contract (received in Mar-22) has already been executed by HAL.
• Once the negotiation process gets completed by MoD with HAL regarding pricing, the contract will be placed with HAL. Estimated value of 156 LCH is Rs 45,000-50,000 crore.
• Bharat Electronics (BEL) will also play a key role in this contract as it will be supplying key electronic systems for these helicopters. Other companies would also be involved in the value chain - Bharat Dynamics (for Helina/Dhruvastra missiles), Data Patterns (for electronic sub-systems) and Midhani (alloys for Shakti engines).
• HAL's order backlog (~Rs 94,000 crore at 3.1x FY24 revenue) and order pipeline remains robust. Management has guided for order inflows worth Rs 1.6-1.7 lakh crores in the next 2-3 years (platforms where the govt has given approvals). This includes this 156 LCH, additional 97 LCA Tejas MK1A, 12 additional Su-30, aero-engines for existing Su-30 aircrafts upgradation, Dornier aircrafts and other utility helicopters (LUH & ALH).
• Additionally, there are number of large-scale contracts under consideration, which will be given to HAL (like Tejas MK2, AMCA, multi-role helicopters, Deck based fighter jets & helicopters for Indian Navy, aero-engines, civil aircrafts, unmanned ariel vehicles etc). This kind of pipeline of projects gives longer term visibility.
• Outlook for HAL remains strong considering the strong backlog, pick-up in execution of key existing manufacturing contracts (like 83 LCA MK1A) and robust pipeline. Company guides for double digit revenue growth for the next few years with sustainable EBITDA margins of 26-27%.
• We have a target price of 5,700 on HAL and 330 on BEL.

Continued healthy premium accretion witnessed in general insurance

• General insurance industry witnessed an increase of 14.9% YoY in gross direct premium for the month of May 2024, and 15.4% YoY is reported for April-May 2024. Within segment, motor segment remained healthy with growth at 15.4% YoY (₹14035 crore) while health insurance accretion remained strong at 16.9% YoY (Rs 20,881 crore). Strong traction in health segment is contributed by both retail business which increased by 20% YoY (Rs 6,437 crore) and 19.3% YoY growth in group health business at Rs 12,915 crore for 2MFY25.
• ICICI Lombard reported strong momentum in premium accretion at 22.3% YoY in 2MFY25, driven by traction across segments. Motor segment witnessed 30.9% YoY growth while health segment premium increased 28.8% YoY (driven by 31.1% YoY growth in group health business). Apart from these, liability segment also reported steady business momentum.
• Star Health reported 19.2% YoY growth in premium accretion at Rs 2,173 crore, wherein retail health premium has risen by 17.1% YoY (Rs 1,942 crore) while group business witnessed an increase of 47.9% YoY (Rs 206 crore). Repricing in 2 products forming ~10% of business is expected in coming months which might contribute to premium growth ahead.
• Healthy traction in premium accretion in general insurance remains encouraging; expect growth momentum to continue ahead. Anticipating continued healthy traction in business and better guidance on combined ratio (101.5% in Q4FY25 vs earlier 102%) makes the stock attractive bet.
• Health insurance association are demanding cut in GST on health insurance citing importance of health insurance, weak penetration and increase in premium post covid. Average renewal of retail health policies remains lower at 65-75%. Thus, with government’s focus on increasing insurance penetration, cut in GST rates on health insurance could be on cards which will act as a catalyst for the industry.

Private banks further consolidate their market share amid retail & MSME loans

• Private banks continue to gain market share which stood at 42% in terms of advances in FY24 compared to 35% in FY20, led by rising share of retail & MSME segment. Along with advances, market share in deposits also inched up from 30% in FY20 to 35% in FY24.
• Large private banks remained primary beneficiaries of recovery in credit demand from retail & MSME which has led to gain in market share. Axis Bank witnessed ~50 bps gain in market share in FY20-24, followed by Kotak Bank gaining ~20 bps. HDFC Bank witnessed highest gain in market share in FY20-23, post which merger with HDFC Ltd led to balance sheet accretion.
• Mid-sized private banks followed suit with ~10-20 bps gain in market share while public sector continued to shrink in market share. Exceptions among PSBs are SBI and Bank of Baroda with broadly steady market share at 23.4% and 6.6% respectively.
• Given recent under-performance in stock price coupled with healthy business growth, steady profitability and prudent asset quality, private banks remain attractive. Preferred picks – HDFC Bank and IndusInd Bank.

Vodafone Idea - Indus stake sale not to have any impact, Tariff hike key monitorable ahead

• Vodafone Plc sold an 18% stake in the Indus Towers for 1.7 billion euros (about Rs 15,300 crore). The shares were sold at an average price of Rs 311.4. Vodafone Plc is likely to use the major portion of the proceeds to pay off debts, which were secured against its assets in India. Thus, there is likely to be no infusion by the promoters (Vodafone PLC) from the said fund raise. Vodafone Idea also has over Rs 10,000+ crore of payables from suppliers, the payment of which could entail either some share issues as seen recently or partially out of the fund raise amount.
• Vodafone Idea continues to look to debt raise of ~Rs 25,000 crore of incremental debt raise. This, along with Rs 18,000 crore of FPO and Rs 2,075 crore of promoter fund infusion, is likely to be used to expand 4G coverage (where it lags peers) and launch 5G. We highlight that churn continues to be high for Vodafone Idea with company losing 1.3 mn 4G subscribers in April, 2024.
• Another key monitorable for Vodafone Idea would-be quantum and timing of Tariff hike by the Telcos. We expect telcos to take tariff hike of ~15-20% in near term as elections are over. 
• Indus Towers, on the other hand , has gotten out of share sale supply overhang. Key for the company would be quantum of tower demand from Vodafone Idea as well as recovery of dues from them.

Mahindra and Mahindra: Future Ready, exciting product launches lie ahead

• To maintain its revenue market leadership position in SUV through aggressive product launches.
• Its revenue market share in SUV space stood at 20.4% as of FY24 (largest) while volume market share stood at 18.2% (second largest).
• M&M plans to launch 9-ICE SUV’s (6 new ICE models, 3 refreshes incl. XUV 3XO).
• To become a top player in the compact SUVs segment with the recent launch of XUV 3XO.
• It aims to increase its Battery Electric Vehicle portfolio to 20%-30% of its SUV models by 2027.
• It will introduce 7 new Battery Electric Vehicles under the new Born Electric platform by 2030 with some models expected to launch by 2025.
• It plans to invest ~Rs 27,000 crore of capex in auto segment between FY25 to FY27.
• It plans to launch 7 new LCV models (< 3.5 T) by 2030, including 5 ICE & 2 EV variants.
• In total, 23 product launches are expected from M&M till FY2030.

Farm Equipment business

• To retain its leadership position in tractor segment with a market share of 41.6% as of FY24.
• It sees a big potential upside in Farm Mechanization, given that in India it stands at 47%, the lowest compared to Brazil (75%) and China (60%).
• M&M tractor market share globally (ex-China) is 5% and plans to expand internationally by launching the OJA series tractors (<110 HP segment) in ASEAN & Western Europe.
• With forecast of above normal monsoons, we expect domestic tractor industry to resume its long-term volume CAGR trend of 5-7% starting FY25.

Views

The event highlighted the company’s capabilities across various business including autos, tractors, e-rickshaw, technology, real estate and finance. In terms of EV pipeline, the product showcased were very impressive with cutting edge design and technology. In the farm equipment segment, increase in cropping intensity and farm mechanization present significant opportunities for M&M. With strong focus on capital efficiency (RoE at ~20% in FY24), impressive product launch slate and capacity expansion in the offering, the company is well positioned for profitable growth going forward.

We maintain a positive view on the stock and have further upgraded it with a revised target price of Rs 3,420, retaining our BUY rating on the stock.

Hyundai Motors - Set to launch the largest IPO in the history of Indian capital markets

• Hyundai Motors India Ltd (HMIL), the second largest auto OEM in the Indian passenger vehicle market has filled DHRP with SEBI for its upcoming IPO.
• HMIL is a part of the Hyundai Motor Group, which is the third largest auto OEM in the world based on passenger vehicle sales in CY2023.
• As per the DRHP, HMIL claims to be the top three contributors to Hyundai Motor global sales volumes, with its contribution increasing from 15.5% in CY18 to 18.2% in CY23.
• The upcoming IPO is purely offer of sales for up to 14.2 crore shares i.e. divestment of up to 17.5% of promoters stake.
• While it has not specified the amount its promoters plan to raise, media sources indicate that it aims to raise ~US$3 billion (Rs 25,000 crore), at a valuation of close to US$17 billion (~Rs 1.4 lakh crore).
• HMIL’s portfolio includes 13 passenger vehicle models across major passenger vehicle segments including Grand i10, Aura, Verna, Exter, Venue, and Creta etc.
• In FY24, HMIL’s total sales volume stood at 7.8 lakh units, a growth of 8% YoY. It includes domestic & export sales volume of 6.14 lakh units and 1.63 lakh units respectively.
• Its domestic market share is pegged at 14.6%.
• Notably, SUVs accounted for 63% of HMIL sales volume domestically compared to 60% for the domestic PV industry.
• Looking ahead, Hyundai aims to launch four EV models, including the Creta EV, which is expected to be launched by Q4FY25.
• For 9MFY24, it reported a revenue of Rs 52,158 crore, EBITDA of Rs 6,611 crores (EBITDA Margin of 12.7%) and PAT of Rs 4,383 crores (PAT Margin of 8.4%) with RoE pegged at ~22%.
• In our view Hyundai Motors India could command a valuation of ~US$ 22-28 billion (~3x P/S on trailing basis and 25x P/E on FY26E) taking Maruti Suzuki as a pure play benchmark and is substantially ahead of media quoted implied valuation of US$ 17 billion. We shall closely monitor developments in this space.

Tata Motors: Steps up capex at JLR, ridding the EV way

• Tata Motors overseas luxury PV player i.e. JLR at its annual meet has raised its capex spend guidance from 15 billion pounds to 18 billion pounds over FY24-28 (5-year block).
• JLR incurred a capex of 3.3 billion pounds in FY24 with guidance of 3.5 billion pounds for FY25E.
• The step up in capex plan is primarily aimed at new product development and we don’t see any challenge in its funding.
• With turnaround in place amid low breakeven levels, the EBIT margin guidance has been retained at ~8.5% for FY25E and ~10% for FY26E with JLR well poised to be net debt free in FY25E.
• The company, however, for the first time indicated at long term EBIT margin guidance of 15% which is structurally very positive in nature. 

We hold a positive view on Tata Motors however have a HOLD rating on the stock, amidst its sharp up in last fiscal year (>100% gains in FY24), lack of near-term triggers and valuations coming in almost full. We have a HOLD rating on the stock with target price of Rs 1,120 on SOTP basis (12x, 2.2x FY26E EV/EBITDA to India, JLR; Rs 225 value to Indian E-PV & stake in Tata Tech).

Hidden Gem

Elgi Equipment (Target Price: Rs 835; Upside: 19%; Market Cap: Rs 23,000 crore)

• Elgi Equipment (Elgi) manufactures a wide range of air compressors (~92.5% of revenue) and automotive equipment (~7.5%). Elgi is the second largest player in the Indian air compressor market (~22% market share) and among the top eight players globally. Expansion in new international markets to drive long term incremental growth (rest of the world contributed ~55% in FY24).
• Volumes to grow in mid double digits over FY25E-FY26E:  FY24 saw muted volume growth on account of ERP implementation issues in US business and demand concerns in the European markets. Going ahead, with ERP issues behind in US and strong prospects in India (mining, construction, water well, after market, industrials), Middle east and recovery in Australia and S.E. Asia, the revenues are expected to grow at a CAGR of 14.5% over FY24-FY26E). The growth will be purely driven by volumes as most of the pricing has been already in place. In Europe, the company expects to maintain sales in FY25 but at the same time achieve break even on account of various cost control initiatives. At consolidated level, after sales (high margin segment) comprises 14% of overall sales while at standalone level the same is at 25-28%.
• Capex to come on stream by FY26E, will further add to growth prospects: The company has announced capacity addition in the screw compressor segment as the utilisation are at peak levels and the segments like mining, construction and industrials witnessing strong demand. This will require capex of Rs 125 crore coupled with this Elgi is also expanding its Global support centres (spares and parts) which will require another Rs 125 crore. This expansion is slated to get commissioned by FY26E.
• With increasing traction in the international markets, strong domestic demand and introduction of newer products will drive strong profitability growth. We estimate revenue, EBITDA and PAT to grow at ~14.5%, ~21% and ~25% CAGR respectively over FY24-26E. With recovery in margins and ROCE floating above 23% till FY26E and strong tailwinds across entire industrial space, the company will command premium valuations. We value it at 55x FY26E to arrive at a fair value of Rs 835 per share.