Share market outlook of the week: Pre-election rally on anvil

• Nifty and Bank Nifty gained (>1%) in tandem with global indices while commodities undergone profit taking after recent sharp rally. Broader markets outperformed as Nifty Midcap and small cap indices hit new highs (up 4% each).
• Indian equities remain on strong footing and we reiterate positive stance with Nifty target of 23,400 by General election outcome with strong support at 21,700.
• In the coming truncated week, expect Nifty to challenge life highs of 22,800. Intra week dips would be buying opportunity with strong support at 22,200.
• Bank Nifty to lead: Bank Nifty/Nifty relative performance chart indicates strong outperformance from Bank Nifty over next 3-4 months. Since GFC of 2008, in all six instances where relative ration line turned up from cycle low, BN outperformed by at least 5% over three-month period.
• Breadth continue to improve as percentage of stocks above 50-day ema strengthened from 55% to 83%.
• BFSI, PSU, Oil&gas, Power, Metals are expected to relatively outperform.
• Strong domestic flows, structural uptrend in global equities, would act as tailwind.

Axis Bank (CMP - Rs 1,132, Mcap - Rs 3,49,589 crore, Buy) – Delivered overall strong performance

• Axis Bank delivered robust performance on all parameters with 14% YoY and 4% QoQ growth in advances (Rs 9,65,068 crore), deposit accretion at 13% QoQ & 6% QoQ, improvement of 5 bps in margins at 4.06% and improvement in GNPA by 15 bps QoQ to 1.43%.
• Improvement in LDR (Loan Deposit ratio) from ~93% to 90%, uptick in LCR (Liquidity Coverage Ratio) at 120% vs 118% bodes well in terms quality of franchise.
• Management targets 300-400 bps higher than industry growth in advances and deposits to follow credit growth. With back book repricing getting over in 1HFY25 and alteration in asset mix, bank is well poised to maintain margin trajectory. Steady fee to asset ratio at 1.25-1.35% and opex to asset ratio is expected to remain steady with focus on RoE to be maintained at 17-18% ahead.
• At current price, the stock is trading at 1.7x FY26E BV. Sustained performance across parameters with focus on business growth provides further upside on valuations.

IndusInd Bank (CMP - Rs 1,468, Mcap - Rs 1,14,257 crore, Buy) – Steady performance with guidance to maintain trajectory

• IndusInd Bank has reported steady performance in Q4FY24. Advances growth came at 18% YoY to Rs 3.4 lakh crore, led by growth across verticals with focus on retail segment. Deposit accretion was at 14% YoY to Rs 3.8 lakh crore, with CASA being at 38%. Focus on asset mix and liabilities accretion supported margins which dipped 3 bps QoQ to 4.26%. Investment in distribution kept opex elevated while GNPA remained flat at 1.92%.
• Strategy to focus on new business segments including merchant financing, home loans and affordable home loans is expected to support yields while focus on liabilities accretion at competitive pricing is seen to aid business growth ahead.
• Guidance to continue steady performance with credit growth at 18-22%, margin at 4.2-4.3%, credit cost at 110-130 bps and RoA at 1.8-2.2% bodes well. Strategy to invest in expanding distribution is to remain underway.
• At current price, the stock is trading at ~1.4x FY26E BV which remains an attractive valuation.

Bajaj Finance (CMP - Rs 6,743, Mcap - Rs 4,17,389 crore) – Regulatory ban, higher cost of funds impacting performance

• Bajaj Finance posted mixed Q4FY24. While AUM growth remained healthy at 34% YoY to Rs 3.3 lakh crore, moderation in margins, slower customer acquisition amid regulatory forbearance and signs of asset quality concerns in rural B-C segment remains a dampener. Increase in cost of borrowings impacted margins thereby resulting in slower growth in NII at 18% YoY, while higher provision kept PAT growth at 21% YoY to Rs 3,825 crore.
• Guidance remains steady with customer acquisition expected at ~1.2-1.4 crore, driving AUM growth at 26-28% in FY25. New segment including new car and tractor finance is expected to support growth. However, margins pressure is expected to continue with moderation of 30-40 bps anticipated in 1HFY25, though RoA target stays at 4.6-4.8% (moderation compared to RoA in 9MFY24).
• While business growth is expected to remain healthy amid entry in new segments, moderation in margins and asset quality in rural B-C segment remains dampener. Further, delay in lifting on regulatory forbearance could impact pace of customer acquisition. Thus, at current market valuation, stock is expected to remain volatile in near term.

Kotak Mahindra Bank – Regulatory forbearance to impact growth as well as margins

• RBI has issued direction to Kotak Mahindra bank to cease onboarding of new clients through online and mobile banking channel and desist issuing new credit cards from immediate effect. This action has been initiated owing to deficiency in IT inventory management, data security and data leak prevention strategy and others.
• As of Dec 2023, credit card contributes ~3.9% of net advances. Kotak Mahindra Bank has been focusing on digital distribution in last couple of fiscals with relatively slower physical expansion. ~70% of business on liabilities and unsecured loans has been sourced through digital channel.
• With the ban on digital onboarding of new customers, non-digital (physical) mode should continue unaltered. However, regulatory ban is expected to eminent concerns on business growth and particularly impact anticipated growth in unsecured segment thereby impacting valuation. 

Tier II technology companies offer respite on performance

Cyient – Soft Performance; Guidance implies growth moderation ahead

• Q4 Performance: Cyient at group level reported revenue of US$ 224 mn, up 2.4% QoQ & 5.2% YoY (5.3% in CC terms). In DET (IT) business the company reported revenue of US 179.3 mn, up 0.1% QoQ (down 0.5% QoQ in CC terms).  The company in DET business reported flat EBIT margin of 16% while at Group level EBIT margin improved by 10bps QoQ to 14.4%. The company in Q4 reported PAT of INR 173.5 crore with a PAT margin of 11.7% in DET business. The company in Q4 reported order intake of US$ 227.8 mn, down 23.4% QoQ & up 7.1% YoY.
• For FY24 the DET business reported revenue of US$ 714 mn, up 12.9 % (12.6% in CC terms). The company reported normalized EBIT margin of 16.1%, up 240 bps in DET business while normalized PAT margin came at 11.7%.
• Outlook and valuation: The company achieved the EBIT margin range but couldn’t meet even the lower end of revenue guidance (13-13.5%) indicating that the demand environment is further weakening. The company for FY25 is guiding for revenue growth in high single digit & EBIT margin in the range of 16% in DET business. The revenue guidance is expected with recovery in second half implying that near term pain remains and there is a risk that the guidance could be revised further as the year progresses. On the valuations front, the company is trading at 20x FY26 P/E, which is reasonable. However, lower than historical growth traction in IT business and margins in narrow band to keep upsides limited.

Tech M: lays down ambitious yet comprehensive growth road map for FY27

• Performance: Tech M in Q4FY24 reported revenue of US$ 1,548 mn, down 1.6% QoQ (0.8% QoQ in CC terms). For FY24 the company reported revenue of US$ 6.3 bn, down 5% (4.7% in CC terms) and in rupee terms the revenue declined by 2.4%. EBIT margin of the company increased by 200 bps QoQ to 7.4%, (grew 40 bps compared to adjusted margins of Q3).
• Deal Wins: The company during the quarter won TCV of US$ 500 mn, up 31.2% QoQ but still below the earlier guided range of 700-1,000 mn.
• Vision 2027: New CEO has given roadmap for FY2027 wherein: i) topline growth more than peer average, ii) improve EBIT margin to 15% (with incremental savings of ~US$ 250mn/ year to fund investments for improving growth and margins), iii) RoCE>30 & iv) return >85% to shareholders in payouts.
• Outlook and Valuation: We believe that Tech M turnaround measures provided a strong tailwind for growth ahead. Tech M is currently trading at 2-year forward multiple of 20x, a discount of ~3% to last 5-year average multiples. We turn constructive and have a BUY rating with a target price of Rs 1,550/share (valuing at target P/E 24x on FY26 basis).

LTIMindtree: Weak performance impacted by cancellation of 2 projects

• Performance: LTIM reported revenue of US$ 1,069.4 mn, down 1.3% QoQ in CC terms. The revenue decline was mainly due to cancellation of 2 projects which had an impact of 80 bps. For FY24 the company revenue grew by 4.2% in CC terms. EBIT margin of the company declined by 70 bps QoQ due to the headwinds of -80 bps impact of cancellation of 2 projects & -60 bps impact of higher depreciation mitigated by the tailwinds of +70 bps of reversal of furloughs & lower pass-through income.
• Deal Wins: The company during the quarter won TCV of US$ 1.4 bn, down 6.7% QoQ. For FY24 company won TCV of US$ 5.6 bn, up 15.7%.
• Margin Outlook: The company reiterated that medium term aspiration of margin expansion to 17-18% is pushed forward as revenue growth is key factor to achieve the same. We expect margins to remain range bound in the near term and pick up gradually as demand picks up.
• Valuation: LTIMindtree is currently trading at 2-year forward multiple of ~23x. On of the key thesis of LTIM post-merger was synergy benefits driving higher growth and margins expansion. The same has not played out and thus, we believe rerating would follow only post traction in the same.

Persistent: Margins to remain range bound in FY25

• Performance: Persistent Systems in Q4FY24 reported revenue of US$ 310.9 mn, up 3.4% QoQ & 13.2% YoY. For FY24 the company reported revenue of US$ 1.2 bn, up 14.5% while in rupee terms the revenue grew by 17.6%. EBIT margin was flat sequentially at 14.5% and for FY24 the company reported an EBIT margin of 14.4% down 50 bps.
• Deal Wins: The company won TCV of US$ 444.7 mn, down 14.1% QoQ/up 6.2% YoY during Q4 and for FY24 the company won TCV of US$1.8 bn, up 13% YoY.
• Outlook: The company’s objective over the next 12 months is to sustain top-quartile growth amidst a challenging macro environment. The company said that it aims to improve margins by 200-300 basis points over the next two to three years but margins will remain at similar levels of FY24.
• Valuation: Persistent has outperformed most IT stocks with ~55% run up in last 1 years. It is currently trading at 2-year forward multiple of ~32x which is ~18% premium to TCS forward multiple. With most of growth led rerating done, we believe margin expansion will key to further upsides.

FMCG – Slower recovery in volumes keeping top-line growth muted

• Major players in FMCG players have reported muted volume growth which is impacting top-line performance. While premiumization is gaining strength in urban areas, muted rural recovery continues to pose a challenge for the sector.
• Anticipation of good monsoon do provide hopes of revival in rural segment, however, currently a wide gap exists between urban and rural markets.
• While most of the players are ploughing gains from decline in input prices on ad-spends, marketing and distribution, EBITDA margins remain at healthy level. However, uncertainty on recovery in top-line growth has kept valuation in a narrow range.

Green Shoots visible in Pharma CRAMS

• After a prolonged hiatus recovery in Indian Pharmaceutical CRAMS space seems to be round the corner as indicated by the recent comments from the managements of CRAMs companies.
• Recently Divi’s Laboratories announced a planned capacity addition of Rs 650-700 core for a long-term supply agreement with an unnamed customer.  This is a first of its kind disclosure by the company of work undertaken for a dedicated customer with specific capex quantification.
• Syngene reported weak Q4 numbers but has indicated visible recovery in the Discovery research and CDMO business from H2FY25 on the back of improving funding scenario in the US biotech space for single-product innovators. The company also revealed incremental clients visits and signing of RFQs in the last few weeks. 
• Laurus’s CRAMs business grew ~11% sequentially in Q4. The company is incrementally getting new inquiries across value chains in the CRAMs. The portfolio currently consists of 70 active projects across value chain.
• Glenmark Life Sciences expects 2 new customer additions by H2FY25 taking total CRAMs customers to 5.
• The incremental global client inquiries are also stemming from the implications of the proposed Biosecure Act in the US which proposes stringent norms in securing contracts from Chinese CRAMs / CDMO players.  This is likely to open up new avenues for Indian CRAMs players. Already Novartis has decided to actively review relationships with Chinese contractors amid US biosecurity crackdown.
• Opportunities are expected from the fastest growing Diabetology / Obesity drugs from global innovators who are facing shortage of raw materials (APIs) as the demand is outpacing supplies due to limited global capacities.

Cement companies banking on volumes for growth as pricing yet to support

ACC performance was better than expectations, Buy – Target Price: Rs 3,325)

• ACC’s operational performance was better than expectations, mainly led by better-than-expected volume growth and lower than expected total cost.
• Revenue growth of ~13% YoY in Q4FY24 was mainly led by cement volume growth of ~22% YoY which partially negated the impact of lower realization (-8% YoY).
• The strong volume growth is possibly led by increase in share of volumes from Sanghi Industries under master supply agreement which was signed by Ambuja & ACC with Sanghi to purchase its volumes.
• Company’s EBITDA was up ~80% YoY during the quarter as EBITDA/ton has improved sharply YoY to Rs 805/ton (+ Rs 256/ton YoY), led by significant reduction in total cost by Rs 702/ton YoY.
• The sharp reduction in total cost/ton is led by lower fuel prices, operational efficiency measures (increase in green power share, cost optimisation on logistical & raw material front) and positive operating leverage.
• With ~20% YoY volume growth witnessed in FY24, we expect company’s volume growth to remain healthy over FY25-26E led by ramp-up of recent capacity additions in central region, upcoming expansion of 4 mtpa (at central & east) and improvement in utilisation of Sanghi Industries units.
• Moreover, EBITDA/ton is expected to improve further to Rs 950/ton by FY26E (from Rs 830/ton in FY24) led by additional operational efficiencies (like increasing renewable power share and other logistic/RM cost optimisation through Adani group companies).
• Valuation at 10x EV/EBITDA on FY26E basis looks attractive considering the strong tailwinds. We have a target price of Rs 3,325 on ACC. 

Dalmia Bharat muted pricing pulling down performance

• Dalmia Bharat’s operational performance was below estimates, mainly because of lower-than-expected realisations.
• Revenue growth of ~10% YoY was mainly led by ~19% YoY volume growth which was partially negated by ~8% YoY lower realisations.
• EBITDA declined by ~8% YoY as EBITDA/ton contracted significantly YoY to Rs 743/ton (vs Rs 955/ton in Q4FY23) due to lower realizations. Power & fuel cost remained lower YoY (on lower pet-coke prices and increase in green power share) which led to overall decline in total cost/ton. However, lower costs were negated completely by lower realisations and led to fall in EBITDA/ton.
• However, outlook remains strong for the company considering that the volume growth to remain healthy led by aggressive capacity additions (~9 mtpa capacity added in last 2 years and further increase by 5 mtpa by FY25E to reach 49.5 mtpa).
• Moreover, lower fuel prices, focus on increasing share of green power & alternative fuels and positive operating leverage would help company in improving margins in coming periods.

Hidden Gem

Hindalco (CMP: Rs 649, Target Price: Rs 780, Mk Cap: Rs 1.46 lakh crore; potential upside: 20%)

• Hindalco is the India’s largest fully integrated aluminium manufacturer with primary metal capacity of 1.3 million tonnes per annum. It also operates one of the largest custom copper smelters at a single location in Asia. Its US based wholly owned subsidiary i.e. Novelis is the world’s largest aluminium flat-rolled products (FRP) producer and recycler.
• In terms of consolidated revenue mix, for FY23, Novelis contributed 65%, followed by Indian copper business at 19% and Indian aluminium business at 16%.
• In terms of consolidated EBITDA, for FY23, Novelis contributed 56%, followed by Indian aluminium at 35%, and Indian copper at 9%.
• In Indian business, Hindalco has embarked upon an ambitious capex spend of US$1.13 billion, primarily in the value-added space such as Aluminium Battery Enclosures for Electric Vehicles, Aluminium Trailers for Light weighting of commercial vehicles, Aluminium railway freight wagons and passenger coaches, building solutions (doors & windows), speciality alumina, Inner Grooved Copper Tube facility catering to air conditioning & refrigeration among others. This is amidst healthy domestic demand for aluminium which is expected to double from 4.5 million tonne (MT) in FY23 to 9 MT by FY33. 
• In international markets, Hindalco is present through its wholly owned subsidiary i.e. Novelis and is the largest supplier of beverage can sheet with ~40% global market share (Ex-China). With strong demand in the beverage can and automotive segments in North American region, it is presently executing a capex spend of US$4.1 billion to construct aluminium recycling and rolling facility with a capacity of 600 KT. With favourable market dynamics, capacity expansion and increase in share of recycling content, Novelis has guided for US$600/tonne as EBITDA per ton for medium-term period.
• We have a positive view on Hindalco driven by its strategic capacity expansion at Novelis and Indian operations, structural drivers in place for healthy demand of Aluminium metal (lightweighting in case of automobile, increasing application in Electric Vehicles and renewables) and controlled leverage on B/S (Debt: Equity at ~0.5x).

We assign BUY rating on the stock with target price at Rs 780 wherein we have valued it at 7.5x EV/EBITDA on FY26E.

Source: ICICIdirect Research