Share market outlook of the week: Nifty to head towards 22,700 in coming weeks

Nifty regained upward momentum after two week’s breather above 50 days EMA and sustained above immediate hurdle of 22,200. Midcap and small cap staged a decent bounce from oversold condition gaining ~1.5%, respectively.
Empirically, in General election year, Nifty has a tendency to bottom out in Feb-Mar, followed by rally (minimum 14% from lows) in seven instances over past three decades. In current scenario, we expect index to maintain the same rhythm (as index has underwent corrective phase over past three months) and head towards 22,700 in coming weeks. Meanwhile, 21,900 would act as immediate support which we expect to hold.
Following observations corroborates our positive bias :

Bank Nifty: The robust price structure of heavy weight banking constituents signifies inherent strength that bodes well for leadership of BFSI in next leg of up move.
Seasonality: In an election year, April has been positive on 5 out of 7 occasions over past three decades with an average gain of 3.8%.
Firm Global Cues: Buoyancy in global market confirms strength in equities as US, UK markets are trading at life highs.
Strong FII/DII flows: FII’s have turned positive after two months hiatus coupled with strong DII’s inflow of 53,600 cr (highest monthly flow since March 2020).

Sectorally, we remain constructive on BFSI, Capital goods, Auto, Metal, Pharma.

Government’s H1 borrowing calender is soothing for the markets

Government announced H1 borrowing calendar with amount to be raised being lower than market expectation at Rs 7.5 lakh crore. In 2023 and 2022, comparable H1 borrowing was Rs 8.9 lakh crore and Rs 8.3 lakh crore. Bond yields also trend lower with 10-Yr G-Sec yield down by ~3bps to 7.04% post this announcement. Overall, from a total borrowing perspective, FY25 borrowing amount is 1.3 lakh crore less than FY24 at Rs 14.1 lakh crore vs Rs 15.4 lakh crore.
Overall, Indian debt market is far better placed than ever. From June 2024, inflows due to inclusion in JP Morgan Bond index will start (USD 25billion in 10 months) and from January 2025, inflows due to inclusion in Bloomberg EM Local Currency Government indices. Next big inflows could be likely inclusion in Bloomberg Global Aggregate Index(Global Agg) which manages around USD 2.5 trillion (inflows could be USD 15-20 bn).
Apart from above, FTSE World Government Bond Index which manages around USD 1.5 trillion is also considering Indian Government Bond inclusion in their indices.

Monsoons - La-Lina effect to result in plentiful rainfall in 2024

As per international weather monitoring agencies India is likely to witness a healthy rainfall in the upcoming Monsoon season 2024 amidst potential development of La-Lina weather conditions in the Pacific Ocean.
This comes as a sign of relief for Domestic rural economy amidst deficient rainfall last year (at 94% of Long Period Averages i.e. a deficiency of 6%) and scenario of water shortages across key regions of the country with potential water cuts. Monsoons accounts for ~70% of total rainfall received annually in India.
Deficient rainfall in 2023 was post 4 consecutive years of normal to positive monsoons (2019-2022).
On the water reservoir front the situation is a bit concerning wherein present water levels are lower than both last year as well as last 10-year averages. Present water level in reservoirs domestically is pegged at ~84% of last year and ~93% of last 10-year averages.
Normal to positive rainfall can support rural consumption which is witnessing divergent trends. On one hand commentary from Auto OEMs has been very healthy and positive with respect to rural demand (in some cases it is even seen surpassing urban demand) while on the other hand, FMCG and consumer durable players hinted at muted rural demand prospects.
Abundant rainfall is positive for entire rural consumption play which includes FMCG, consumer durables and automobile (especially tractor and 2W segments). It will rainfed the upcoming Kharif crop while at the same time fill reservoirs which will be eventually used for Rabi crop thereafter.
Key monitorable going forward would be IMD’s initial forecast of monsoon for 2024 season, sometime in mid-April.
Our top beneficiary of healthy monsoons would be Mahindra and Mahindra which is the leader in the tractor space (market share at 40%+) and LCV segment. We have a buy rating on the stock with a target price of Rs. 2,225. This is our top pick in the Auto OEM space.

Real Estate: Demand Buoyancy sustains

According to Anarock report, 1.30 lakh units were sold in Q1 CY2024 across the top 7 cities, up 14% YoY. This was despite limited growth in supply as new launches across the top 7 cities witnessed a mere 1% yearly rise to over 1.11 lakh units. Notably, the inventory is at life time low of 13 months. We highlight that current healthy growth is on the base of Housing sales in the top 7 cities which created new peak in 2023, with 4.77 lakh units getting sold in 2023 up 31% YoY.
The value growth also reflected in the increased demand for homes with average prices rising by anywhere between 10% and 32% YoY, across the markets, during the quarter.
While the Nifty Realty Index has given a strong return of 58.3% in last 6 months, Last one month has been flattish for Realty Index with decent cooling down at few of the stock levels.
We highlight that with further trigger in the form of likely rate cut, the overall demand buoyancy is here to stay. Players such as Brigade Enterprises, and Mahindra Life with strong balance sheet, robust execution track record coupled with scalability plan would be the key beneficiaries and remain our preferred picks in the sector.

Maruti Suzuki India to benefit from Yen depreciation

Japanese currency i.e. Yen is on a depreciation trajectory and has depreciated ~7% in the current quarter i.e. Jan'24-Mar'24 period with present quoted price of 0.55 (1 Yen = 0.55 INR).
Maruti Suzuki India is a key auto OEM operating in the PV space and promoted by Suzuki Motors, a Japanese entity.
Maruti tends to benefits when the Yen depreciates against INR with its direct plus indirect exposure to Yen pegged at ~8% of sales. It is broadly related to auto components procurement.
In the past for ~8% depreciation of Yen against INR, Maruti has realised ~50 bps positive impact on EBITDA margins, hence with current depreciation we can expect a similar improvement in margins going forward, albeit with a quarterly lag.
This seems to be one of the reasons for stock outperformance in the recent past. It now however trades near to our fair price calculation and trades at ~24x PE on FY26E basis.
On the volumes front, recent monthly (Jan, Feb) readings of ~2 lakh units was encouraging at Maruti with similar volume prints expected for the month of March 2024, to be released early next week.

Relaxation on AIF exposure comes as a breather for select NBFCs

After tightening of norms regarding lenders exposure to AIF, which impacted a few NBFCs, the regulator has relaxed the norms which comes as a breather. According to the revised norms, lenders are allowed to invest in AIF schemes having downstream equity exposure in debtors of the lender (which was disallowed earlier). On provisioning, the regulator clarified that provisioning will be required only to the extent of investment by the lender in AIF scheme, which is invested by the fund in the debtor company.
While many banks and NBFCs had exposure to AIF schemes and has provided for their exposure in Q3FY24 adhering with the regulations. Now with relaxation of the norms, some reversal in provisioning should be witnessed in Q4FY24. Among lenders, select NBFCs are poised to remain beneficiaries of this relaxation which includes Piramal Enterprise, IIFL Finance.

Final verdict of IRDAI on surrender value norms in favour of life insurers

Putting an end to concerns on life insurance sector, IRDAI has announced retention of existing surrender value norms, thus dismissing case for higher payout on earlier exit by policyholders. Apart from this, regulator has allowed index linked insurance products, wherein NAV will be linked to a publicly available index.
In our view, retention of existing surrender puts an end to concerns of higher payout which would impact life insurers. In addition, lower surrender value will continue to act as a deterrent for the policyholders to choose early exit which will aid persistency ratio for insurer.
With respect to business, expect life insurers to clock healthy premium growth (in-line with last year premium), despite regulations impacting business growth. Thus, business fundamentals continue to remain healthy and dips could be utilized to make investment.

Obesity management Drugs to open up new avenue for Indian Pharma companies

With nearly half of the global population is expected to turn overweight or obese by 2030, obesity management drugs are expected to witness strong traction, worldwide.
Obesity, the root cause of lifestyle diseases like diabetes, hypertension and heart ailments, is a glaring problem in India as well, with 44 million women and 26 million men are in Obese category, according to a global study.
Studies have proved that obesity management injectables can reduce weight by up to 20%, comparable to life-saving bariatric surgeries, these are now expected to be available globally including India in the next couple of years.
Two of these medications are already approved for use among diabetics and those struggling with obesity in the US. 1) Wegovy (Novo Nordisk), 2) Zepbound (Eli Lilly). Both firms are pouring billions of dollars into boosting supply by building their own capacity and teaming up with other manufacturers.
The overall size of Obesity management drugs is expected to grow from US$ 5 billion in 2022 to US$ 80 billion by 2030, at a CAGR of ~40% as per Bloomberg estimates.
Several phase 3 global trials of the main API Semaglutide, are under way in India to study the impact on diabetes management, weight loss, obesity-related heart diseases and chronic kidney disease.
In India, both branded formulation players as well as API / CRAMs players are gearing up for the opportunities. Companies like Sun, Torrent and DRL are conducting clinical trials for Semaglutide injectables. Divi’s on the other hand is building capabilities for API at its Kakinada plant.
There will be an explosion in the use of these drugs after 2026 when the patent for one of the formulations of Semaglutide expires.

We believe Obesity management as a therapeutic category is likely to remain a high growth category just like Cardio and Daibetology which have grown at a CAGR of 10-15% over the past decade.

Hidden Gem

The Ramco Cement (Target Price: Rs 1,000)

The Ramco Cement, a south based cement manufacturer, is primarily engaged in manufacturing of cement, Ready Mix Concrete & Dry Mortar Cement. As of Dec 2023, company’s cement capacity stands at 22 mtpa with 16 mtpa of clinker capacity & 218 MW of power capacity. South contributes ~75% of total sales while balance ~25% is contributed by East region (including North-East).
Timely capacity additions to drive volume growth: As on December 23, company’s cement capacity stands at 22 mtpa, & the company is in the process of expanding this to 26 mtpa by FY26E with expansion of 1 mtpa though debottlenecking exercise, 1mtpa in Odisha Unit & 2 mtpa in south unit. Going ahead, we expect volume growth of 12.61% CAGR to 21 mtpa (~14.9 mtpa in FY23) over FY23-26E on account of timely capacity additions and pick-up in demand in its selling markets like Tamil Nadu, Karnataka, Andhra Pradesh, Telangana, Orrisa, West Bengal etc. We also expect that capacity expansion majorly in southern region, where they have significance presence, will also help them to gain some market share in this region.
EBITDA/tone to improve going forward: The company has witnessed a fall in EBITDA per ton in the last two years (~Rs 800-900/ton) after seeing a peak level of Rs 1,553/ton in FY21, mainly led by rise in power & fuel cost. However, we expect EBITDA/ton to improve going ahead gradually from Rs 794/ton in FY23 to Rs 1,061/ton by FY26E, primarily led by focus on operational efficiencies and positive operating leverage. We believe that, company will continue to benefit from benign fuel prices with increasing share of renewable power (110 MW by FY26E from 85 MW). The company aims to increase its green power usage to 42% by 2025 (vs ~36% at present). Also, company’s focus on increasing share of blended cement and expanding premium product portfolio will also help company in better realizations. Moreover, strong volume growth would kick-in positive operating leverage and thus help in overall improvement in EBITDA/ton.
We believe that the company is strongly placed backed by strong volume growth (led by timely capacity additions) and considerable margin improvement over FY23-26E. We expect Revenue/EBITDA/PAT to grow at 11.6%/24%/31% over FY23 to FY26. Valuation at 10.6x EV/EBITDA on FY26E basis looks attractive considering strong capacity expansion plans and margin improvement.
We recommend BUY on The Ramco Cement with target price of Rs 1,000 per share (based on 12.5x FY26E EV/EBITDA).