Share market outlook of the week: Nifty to consolidate near life highs; March quarter earnings to drive sentiments

• Indian equities relatively outperformed global peers, even as US rate cut expectations were pushed back with recent inflation data.
• Nifty gained 0.7% while Nifty small cap index outperformed with 1.7% gain. S&P 500 was flat for the week while Nikkei advanced 1.5%.
• Nifty is expected to undergo a consolidation in the 22,400-23,000 range amid stock specific action as earnings will kick-start next week. Technically such consolidation would be a higher base formation after 1,000 points rally and would set stage for next up move. Use buy on dips strategy.
• Sectorally, IT will remain in focus amid earnings while BFSI, Metal, Power are expected to perform well.
• Key risks: Oil prices will be key monitorable amid geo-political events shaping up. A spike in oil prices could spoil sentiments and have bearing on inflation expectations.
• Key trends in bullion and industrial commodities: Gold, Silver, copper, aluminum prices are coming out of long consolidation bases. Proxies across sectors like gold loan companies, metal stocks could benefit as tactical plays.

Domestic fund flows - larger trend of rising domestic inflows remains intact

• Inflows into equity schemes of mutual fund came in lower at Rs 22,600 crore as compared to Rs 26,900 crore. However, ex-NFOs, inflows were higher at Rs 19,600 crore vs Rs 18,200 crore.
• The month of March witnessed the reversal of trend in category wise flows. Confidence in smallcaps would have hit as March was the first month of major correction in smallcaps while inflows in Largecap rebound at Rs 2,100 crore Vs Rs 300 crore. Smallcap funds saw marginal outflows at Rs 94 crore, first monthly outflow since September 2021. Prior to March, inflow run-rate in smallcap was Rs 3,000 crore per month. However since smallcap index has recovered almost all of its losses and the fall in Feb/March was temporary and short lived, sentiments will improve again and accordingly flows will also recover.
• Overall, the larger trend of rising domestic inflows remain:
• Ex-NFO, inflow run-rate in the first 3 months of the year 2024 (January to March) is at Rs 19,500 crore as compared to average of Rs 10,400 crore in 2023. Similar run-rate was Rs 11,000 crore in 2022 and less than Rs 6,000 crore in 2021.
• Higher inflows are driven by consistently rising SIP flows. SIP inflows in March 2024/March 2023/March 2022/March 2021 was Rs 19,270/14,300/ 12,300/9,200 crore. SIP run-rate more than 2X in last 3 years. 

Rising gold prices remains a catalyst for gold loan lenders

• Gold price has touched a new high of Rs 72,500 (10 grams) witnessing an increase of 14% over YTD (Jan – April 2024). Amid such run-up in gold price, gold financier looks an attractive opportunity.
• While gold financiers have been witnessing healthy business growth in recent quarters, recent run-up in gold prices is expected to further benefit lenders engaged in gold financing given.

1) value of collateral rises which leads to increase in ticket size and thus business growth,

2) central banks caution on unsecured credit growth remains favorable for lenders with fixed collateral – gold in this case, and

3) recent increased scrutiny of gold finance business provides opportunity to gain market share. 

• After witnessing pressure on margins amid rising cost of borrowing, gold financier now seems to be well placed with ability to pass on any subsequent increase in funding cost, thereby safeguarding margins. Further, operational efficiency is poised to improve gradually with anticipated sustained healthy business momentum, thereby driving RoA ahead. Thus, recommend Muthoot Finance (2.4x FY25E BV), Manappuram Finance (~1.2x FY25E BV) and CSB Bank (1.6x F25E BV), amid anticipation of continued healthy business growth and improvement in RoA. 

TCS result preview – All eyes on demand environment

• Preview: TCS is expected to report revenue growth of 1.2% QoQ in Q4 on the back of ramp up of large deals. On the margins front, we expect TCS margins to improve by 20 bps QoQ due to the tailwinds of higher utilization & lower sub con costs. We expect TCS to provide better results compared to its large peers which are expected to report muted growth or decline in revenue QoQ amid extended impact of furlough and muted demand outlook.
• Key factors to watch out: Comments on demand environment in US region, BFSI & Retail sector. Also comments on the client IT budgets in CY24 compared to CY23 will be the key monitorable.
• Valuations: On the valuations front, TCS is reasonably valued and currently trading at 2-year forward PE multiple of 26x which is only 4% premium to 5 years PE multiple average.

Exide Industries: charged up post Hyundai Motor and Kia Forge Strategic Partnership

• Exide Energy Solutions Limited ("EESL"), the wholly owned subsidiary of Exide Industries Limited, has signed a non-binding MOU with Hyundai Motor Company ("Hyundai Motors") and Kia Corporation ("Kia") for strategic co-operation in India's EV market. According to this MOU, both the parties will work together for development, production and supply of battery cells (LFP chemistry) for Hyundai Motor's electric vehicles dedicated to the Indian market.
• We view this as an important milestone for the company and validates its ambitious plans in the new energy space. The company is setting up a 12 GWh Li-On cell manufacturing plant at a total capex outlay of Rs 6,000 crore with phase 1 i.e. 6 GWh (at a capex outlay of ~Rs 4,000 crore) due to commissioning in CY25.
• We have had a positive view on Exide Industries and been recommending buying since Rs 260 levels. We still have our Shubh Nivesh call open with a target price of Rs 400.
• Our key investment thesis is based upon margin expansion at its base lead acid battery business and sizeable capex foray into new energy Li-On cell space (~Rs 2,000 crore invested till date).
• The company is potentially the first Indian company to set up EV cell manufacturing plant in India and has guided for healthy margins and return ratios profile in this domain.
• We still remain positive on the stock and shall upgrade our target price post Q4FY24 results.

Tesla Entry into India imminent

• Media sources suggest Mr. Elon Musk, head of Tesla Inc. meeting the government by the end of Month with hopes set for firm announcement on its maiden EV car plant in the country.
• This is in response to government’s new EV policy which has allowed import of EV cars at a concessional import duty rate for players willing to set up shop in India.
• As per media sources, in the recent past, Tesla was also seen scouting for sites for setting up EV manufacturing unit in India at an investment of US$ 2-3 billion.
• This is positive for the domestic EV ecosystem with potential beneficiaries on the ancillary side seen as Sansera Engineering, Mayur Uniquoters and Uno Minda in our coverage universe and Sona BLW Precision Forgings, Motherson Group, Suprajit Engineering, among others outside our coverage universe.

Domestically Steel demand seen healthy, capacity addition now pegged at 500 MT by 2047

• As per World Steel Association, India’s steel demand is expected to grow at 8% over CY2024 and CY2025, driven by continued growth in all steel using sectors, particularly strong growth anticipated in the infrastructure space. This is on the back of 12% growth witnessed in CY23 wherein crude steel production is pegged at ~140 MT.
• As per media sources, government is targeting 500 million tonnes (MT) of steel capacity in India by 2047 vs. the initial plans to augment it to 300 MT by 2023 as per national steel policy.
• This is against current domestic steel capacity pegged at ~160 MT in FY23. Government is also aiming for significant reduction in carbon emissions.
• Capex envisaged for capacity increase from 160 to 300 MT was pegged at ~10 lakh crore, hence from 160 to 500 MT the total capex envisaged is >20 lakh crore over the next 20-25 years.
• In our view, with emphasis on increasing manufacturing footprint domestically, ambitious targets for steel making is positive for domestic iron ore mining companies such as NMDC. With aim to also reduce carbon emissions, we foresee government promoting EAF route of steel making which is positive for graphite electrode players namely HEG in our coverage universe.

Coal India: Government enabling framework, value addition to propel company in new orbit

• As per media sources, the government intends to get 20 new mines operational by year-end, with 10 such mines allocated to Coal India. It expects coal output of 100 MT from these 20 mines. This move is aimed at meeting the country’s rising power demand and reducing coal imports.  
• Furthermore, coking coal washeries will be the next big agenda for the government after the 2024 elections. This move aligns with the government’s aim of reducing imports of coking coal used in steel making process as currently, India largely depends on imports for its coking coal requirement due to the high ash content in the coal produced indigenously. 
• The government has also launched National coal gasification mission with the aim of achieving 100 MT of coal gasification by 2030. As a leader in coal production, Coal India is also committed to clean energy domain and is approaching this space through JV’s & MoU’s in new technology space.
• Thrust from the ministry in operationalising new coal mines as well as new initiatives undertaken at the company on the washeries output, coking coal domain and new energy space including coal gasification is positive for Coal India.
• We remain positive on the stock given the strong offtake volume driven by robust demand from the power sector, inexpensive valuation, and healthy dividend yield.  
• We have a BUY rating on the stock with a target price of Rs 550 wherein we have valued the company at 5x EV/EBITDA on FY26E.

FY24 Pharma growth- slightly muted but qualitatively strong

• As per IQVIA data, FY24 Indian Pharma growth stood at 7.6% to Rs 2,16,092 crore. While Chronic therapies grew 10% for the year, acute therapies grew 6%. Growth break-up- price- 4%, new products- 3%, volume- 0.6%.
• Therapy wise, Cardiac (10% growth), Pain management (8%), GI (7%), CNS (9%), VMS (7%), Anti-cancer (23%), Urology (14%) were main drivers. Anti-diabetics growth stood at 6%. On the other hand, Anti-infectives (4% growth) and respiratory (2%) were laggards.
• Company wise noteworthy growth prints are as follows- Sun- 9%, Cipla- 8%, Abbott- 8%, Torrent- 8%, Lupin- 6%, DRL- 7%, Zydus- 6%, Glenmark- 9%, Ipca- 13%, Sanofi 8%, Ajanta- 9%.

Our Take-

• While full year FY24 growth of ~8% tracks the lower end of 8-12% growth guidance given by various managements, we take solace in two positive aspects- 1) 4% price hike component and 2) 10% growth in chronic therapies. Both these factors are important in quality of earnings.
• The growth was also pulled down by anti-infectives and acute respiratory categories which are acute therapies and are seasonal in nature. These therapies witnessed significant volume de-growth.
• Acute: chronic ratio is still high towards acute therapies (62:38) and hence slowdown in acute does have direct impact on overall growth.          
• We expect transformation of India Pharma market from acute heavy to chronic heavy due to lifestyle changes.
• We continue to prefer companies with strong Indian franchisee on the back of stable growth print backed by consistent pricing growth and new launches.
• Another important aspect would be increasing push via Trade Generics / Jan Aushadhi channels especially in Tier II-VI cities. These channels are growing at 20-25% p.a. and are not formally captured in growth data. Together they add 100-150 bps to the overall growth.
• We prefer chronic focused players such as Sun, Torrent, DRL, Cipla, Abbott and Ajanta from a long-term perspective.

Hidden Gem

HG Infra - Recent diversification, order inflows improve outlook(CMP: Rs 1,067; Target Price: Rs 1,250 (17% upside))

• HG Infra Engineering Ltd is a Jaipur (Rajasthan) based infrastructure company having primary focus on Roads and allied sectors. It has reported 26% revenue CAGR over FY18-23 with improved operating margin of 16%.
• Orderbook Diversification: HG has witnessed a focussed diversification to other segment such as Railways and Solar. It has added three orders from Railway post Q3 worth Rs 1,936 crore. It also won orders worth Rs 1,246 crore for 5 projects of solar projects in JV. We highlight that order book diversification was much needed amid the heavy dependence on roads, which had muted ordering in FY24.
• Recent inflows improved revenues visibility: The orderbook as of Q3FY24 stood at Rs 9,626 crore, 1.94x TTM book to bill. However, during Q4FY24, the company has won orders worth ~Rs 4,700+ crore across railways, solar and road segment. Current order inflows ensures that 17-20% topline growth guidance for FY24 and Rs 6,000 crore revenues guidance would be achievable. We have baked in ~15.5% CAGR in topline over FY23-26E to Rs 6,805 crore. Sustained margins at 15.4-15.7% would ensure, ~17.7% CAGR in earnings over FY23-26E.
• Lean Balance Sheet; internal accruals to fund HAM projects: HG enjoys a lean balance sheet with standalone gross Rs 470 crore and cash of Rs 142 crore. Furthermore, Rs 370 crore from asset sale proceed is also lying as debtor receivable from SPVs. The equity requirement of Rs 700 crore is likely to be met through internal accruals.
• Sector opportunities strong in long term: Under the National Masterplan for the development of the National Highways/ Expressways network for 2047, ~50,000 km of access-controlled highways (commonly known as expressway) is proposed to be constructed vs CY2023 levels of 3,913 km. It aims at an overall spending plan of Rs 85-90 lakh crore in the Roads space over the same period. This implies strong opportunity in the long term for the sector.