Share market outlook of the week: Nifty to extend consolidation amid stock specific action

• Nifty declined 2.5% amid profit taking near life highs while Mid/Small cap indices declined >6% for the week.
• We expect Nifty to consolidate in 21,500-22,200 amid stock specific action in the coming week as prices work out of overbought readings.
• Going forward, we expect large caps to continue their relative outperformance from medium term perspective as we expect Nifty to form higher base over next few weeks that will set stage for next up move towards 22,700 in April 2024.
• Mid/Small cap price correction approaching maturity: Empirically over two decades, bull market corrections in Nifty Midcap and small cap indices tend to be average 12% -15% respectively. In current context these indices have corrected 9% and 15% already. We believe much of price correction is behind us and expect these indices to undergo a base formation over next few weeks.

Stock market during election years

• Indian equity markets have given positive returns in nine out of past eleven General election years. Historically, over four decades, Nifty returns in General Election Year has been 17% (median value). In past four elections (2004-2019), each of the respective year has been positive for Nifty with median returns of 22%. However, one should note that such gains are accompanied with large bouts of volatility.
• Key take away for investors, in our view, is that election year volatility should be embraced as buying opportunity going by historical inference. Further, Nifty has a tendency to bottom out by March in General Election year, followed by a pre-election rally. We therefore expect Nifty to head toward 23,400 by June 2024 with strong support at 21,500 levels.

India growth Inflation dynamics well placed

• India’s macro remain well placed on the growth-inflation dynamics with inflation for the month of February 2024 coming in at 4-month low of 5.09%.
• The prices of Petrol and Diesel has been by Rs 2 and Rs 1 per litre respectively. While the impact is not significant (direct impact of 0.04%), indirect impact could be higher. Also it will have a sentimental impact which could help lower inflation expectation in RBI survey (RBI does household inflation expectation survey in every two month to gauge inflation expectations).
• February CPI data:
• In February, Food inflation was up 30 bps to 8.66% while Core inflation was down 30 bps to 3.3% resulting in no major change in CPI in February.
• Within Food; Vegetables (base effect), Eggs (base effect) witnessed higher YoY print.
• Within Core inflation; no major movement in prices in both Mom and YoY.
• Overall the base effect is turning marginally unfavourable for next 3 months (Mar-May 2023 Average at 4.9%  vs last 1-Year Average of 6.7%. However, sequential decline in most food prices is comforting.

Institutional activity

• March month has seen some significant selling activities from promoters. We have seen promoters /strategic investors selling stakes in stocks like ITC, M&M, Indigo and Bharti. Overall during the month so far, FIIs have bought more than 36,000 crores and most of the money is through these block deals only. Due to these actions, the free float for these companies will increase which will result in higher weightage in indices.
• ITC was the major deal where BAT (Strategic investor) has sold nearly 4.5% stake from the company worth 17,500 Crores.  
• Indigo which is part of NiftyJr and NSE100 index, saw promoters reducing their stake by nearly 6%. It should also witness increase in weight in the NSE100.
• M&M may also see marginal increase in weightage.
• Weight rebalancing exercise will happen on the month end (Friday, 28^th March) and we expect these stock to witness some positive move in the anticipation of the same.

Banks – Credit growth steady, deposit momentum falters for fortnight ended 23 Feb 2024

• As per RBI, credit growth of banking system remained steady at 20.5% YoY to Rs 159.3 lakh crore (including the merger of HDFC Bank merger) for the fortnight ended 23 Feb 2024, while deposit growth came down at 10.5% YoY to Rs 202 lakh crore. 
• While credit growth momentum continues to remain steady in the busy season of the fiscal, moderation in deposit growth is expected to impact near term credit growth and margins for the banking industry. Thus, expect valuation to remain in a broad range in near term.

Regulatory ban Federal Bank & South Indian Bank on issuance of co-branded cards

• RBI has asked Federal Bank & South Indian Bank to stop issuance of co-branded cards owing to deficiency in adherence to recent regulatory guidelines. Both the banks will continue to issue non-branded cards while existing co-branded customer will be serviced as normal.
• As per regulation, co-branded partner needs to indicate that the card is issued under co-branded arrangement with no access allowed to any information privy to customer. Thus, banks are in the process of rectifying the deficiencies and undertake regulators approval in lieu of co-branded cards. Such regulatory scrutiny on co-branded card arrangement is expected to impact fee-based income for issuers including banks and NBFCs. 

Higher regulatory scrutiny on gold loan portfolio across lenders

• Post bank on gold loans by IIFL Finance, Department of Financial Services (DFS) has issued a letter to PSBs to review gold loans given after Jan 2022 for ensuring adherence to regulations on collateral value of gold loan, collection charges etc. Given recent run up in gold loans (~17% YoY to Rs 1.01 lakh crore) and instances of non-compliance regarding gold loan portfolio in terms of collateral and charges levied, the ministry has issued the directive.
• RBI has asked information from banks on gold loan portfolio, details of frauds and measures undertaken for recovery. In addition, RBI has directed banks to review process for gold loans to ensure adherence with the regulations.
• Increased scrutiny of gold loan portfolio is expected to result in moderation in growth momentum, though select private banks and gold NBFCs could remain beneficiaries. 

Cement Sector witnessing softness in prices

• Cement prices across all the regions have been on a declining trend from the last 4-5 months. South, East and North regions have seen more correction in prices as compared to central and west regions. This price weakness is mainly because of some moderation in demand and increased competitive intensity (supply increased as 60-65 million tonnes of new capacities added in the last 2 years). The average price of Q4FY24 is estimated to be 5-6% lower than the Q3FY24 average.
• Although softer prices will impact revenue growth, we expect the cement companies will continue to see cost benefit in terms of lower fuel costs (pet-coke and imported coal prices are lower by 25-30% on YoY basis).
• We believe that, cement sector outlook for long term remains strong as the demand is expected to pick-up given the strong capex scenario across infra and housing sectors.
• Cement industry will continue to see more consolidation in the coming periods.
• Star Cement is well positioned to witness strong earnings growth in the next 2 years. Company’s cement capacity has increased to 7.7 million tonnes after the recent commissioning of 2 mtpa grinding unit in Assam. The capacity will be increased further to 9.7 mt by FY26E after another 2 mt expansion in Assam which will be completed by Q2FY26. These expansions along with pick-up in demand in north-east region, would help company to grow it's volumes in double digits (~12% CAGR) over the next 2 years. Moreover, company targets to improve its market share in north-east region to 30-32% (from 24-25% at present). Company aims to double its capacity further to 20 mtpa by 2030.
• Company’s profitability remains superior (EBITDA/ton at Rs 1,244/ton in 9MFY24), primarily led by better pricing in NE region. We estimate company’s EBITDA/ton to improve to Rs 1,489/ton by FY26E (from Rs 1,168/ton in FY23), leading to 22% EBITDA CAGR over FY23-26E. Valuation at 9x EV/EBITDA on FY26E basis looks attractive considering the company’s strong growth ahead with further strengthening its market position in NE. Our target price is 240 on Star Cement.

Order Inflows have begun for the construction companies

• Order Inflows have begun for the construction companies after a lull, especially In the Roads space.
• We highlight that most road specific players have struggled with muted ordering by NHAI. Among the road focussed players, we have seen conscious effort to diversify their order book. HG Infra has clearly led with Rs 1,936 crore of railways division orders recently. KNR has also diversified into sewerage projects.
• We believe that going ahead, most of these construction players with leaner balance sheet, relatively controlled working capital cycle of closer to 2 months are well placed to benefit from improved visibility if the order inflows momentum sustain.
• We continue to like players such HG Infra (already monetised HAM assets, clearly diversifying order book), PNC Infra (recently monetised HAM assets and well placed for growth), Ahluwalia Contracts (strong 25% growth CAGR ahead amid order book visibility) and NCC (strong order book visibility, improving balance sheet and margins triggers).

Recent Order Inflows