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Share market outlook of the week: Seasonality favours buying dips in July 2024

ICICIdirect 21 Mins 28 Jun 2024
  • Nifty posted strongest gain of CY24 in June, up 7%, to record new All-time high. Nifty Midcap and small cap indices gained 8% and 9% each indicating broad based rally.
  • In July 2024, markets will look for further direction from Union Budget announcements, progression of Monsoon and inflation expectations and Q1FY25 earnings.
  • Our view continues to remain positive for July with 24,700 target, while strategy should be buying the dips as after recent sharp run up expect retracements of rally. We expect Nifty to hold its strong support of 23,600.
  • Seasonality for July: July has produced positive returns in 80% occasions over past two decades and similar probability of positive returns is observed even in past five election years spanning two decades wherein budget related expectations tend to weigh on sentiments. Average returns for July has been >2%.
  • US inflation and trajectory of rate cut expectations would be key monitorable from global perspective. US broader indices performed well last week indicating early signs of equity rally broadening out.

Big macro tailwind: Inclusion of Indian bonds in global index

  • This week marks a historic week for Indian Debt market as from Friday India will be added in JP Morgan Global Bond Index. The index manages an AUM of more than USD 200 bn and India weight will be at 10%, in line with weight of China. USD 20-25 bn will flow in India over the next 10 months. The process of including Indian Government Bonds will start with a 1% weight on June 28, 2024 and will increase by one percentage point each month to reach 10% cap by March 31, 2025.
  • At USD 25 bn or Rs 2 lakh crore, this constitutes around 14% of total FY25 G-Sec supply of Rs 14 Lakh crore. Active money has already started to flow-in with FPI inflows into eligible FAR (Freely accessible route) since the announcement in Sep 2023 at more than Rs 80,000 crore.
  • The index inclusion related heavy flows is likely to boost demand for Indian government securities. While this augurs well for keeping yields down, it could also induce some bouts of volatility. Higher inflows will help India manage its external finances and boost foreign exchange reserves and the rupee. 
  • The index has more weight to higher maturity papers like 10-Year, 13-Year and 40-Year paper. Yield curve is likely to remain flat with better demand-supply outlook for long dates securities.
  • Apart from JP Morgans GBI-EM-GD index, Bloomberg Global Aggregate Index(Global Agg) is also likely to include Indian bonds in its index. It has an estimated AUM of USD 2.5 trillion and with 0.6%-0.8% weight, additional potential inflows could USD 15-20 bn.
  • Such inflows coinciding with global rate-cut cycle is likely to push bond yields lower resulting into lower cost of funds for Indian corporates. We expect RBI to cut Repo rate by 75bps in next rate-cut cycle, The historical spread of 10-Year over Repo rate is 75 bps. With expectation of terminal Repo rate at 5.75% (current Repo: 6.5%), 10-Year bond yield could drift towards 6.50%.
  • Historically, we have seen that the rally in Government bonds precedes the actual Repo rate cut by RBI which may start from Oct-Dec 2024 and therefore the rally in bond market (50 bps rally from 7% to 6.5%) could happen over the next 6-months.

RBI Study highlights that Indian banks are well positioned on asset quality and capital adequacy

  • As per RBI financial stability report, Indian banks are well positioned to absorb any asset quality shocks amid healthy capital adequacy at 16.7%.
  • Improvement in asset quality continue with GNPA & NNPA declining at multi-year low of 2.8% & 0.6%. Structural improvement in asset quality continued for PSU banks with GNPA declining at 3.7% while private banks continue to deliver on efficiency under-writing with GNPA at 1.8%. As per RBI, GNPA is estimated to decline further by 30 bps to 2.5% in FY25. In severe stress scenario, GNPA could increase to 3.4%.
  • With provision coverage above ~80% and capital adequacy at 16.7%, banks seem to be well positioned to absorb any asset quality shocks, thereby aiding momentum of in profitability (RoA at 1.3% and RoE at 13.8% in FY24).
  • Overall, banks and financial institutions, amid improved balance sheets, are poised to support economic activity through sustained credit expansion. RBI has cautioned banks against higher credit growth (18% or above) amid deposit accretion lagging behind and risk of accretion of stressed assets. However, current run-rate of advance growth at ~14-16% seems to be within the comfort zone of the regulator. Further, the central bank has expressed concern over sharp increase in small ticket unsecured loans, listed banks have limited exposure in this segment.
  • While all PSU banks are expected to benefit from decline in yields, SBI seems to be well positioned among peers given sustained balance sheet growth (13-15%), strong core operating performance and asset quality aiding RoA at ~1% in FY25-26E. Our target price is Rs 1,000, valuing the bank at ~1.6x FY26E BV and subsidiaries at ~Rs 184/share.

Reliance Jio: Hikes tariff by 12-25% across plans, Peers likely to follow suit*

  • Reliance Jio has taken 12-25% increase in telecom tariffs across prepaid plans and 12-17% hike in postpaid plans, being the first telco to announce and w.e.f 3 July.
  • The highest increase of 25% is in one plan of 1.5 GB/day, which is most subscribed pack in prepaid, as per our understanding. The unlimited data for 5G, however, would continue for all 2 GB/day and above plans. JioBharat/JioPhone users will continue to have the existing tariffs. 
  • We highlight that the tariff hike would result in stepped up ARPU growth of ~17% on a blended basis from the current levels, as per our assumptions, assuming a 100% pass through, three fourth of the benefits will be seen in FY25. The hike is tad higher than our expectations of ~15% step up hike, which will drive ~2% /~ 4% upgrade in our ARPU and EBITDA estimates.
  • We expect the other peers to also follow suit with similar hikes. Key will be the quantum of hikes that they take.
  • Among the Telecom operators, our preferred pick is Bharti Airtel, which enjoys superior ARPU, margins and customer quality. Our target price is Rs 1,630/share.

Consolidation augurs well for cement companies

  • Ultratech Cement, India’s largest cement company, acquired 23% stake in India Cement for a consideration of Rs 1,885 crores at a valuation of Rs ~8,200 crores. India Cement’s cement capacity stands at 14.45 mtpa (excluding 1.1 mtpa of cement acquired by Ultratech in April24). On per ton basis, India Cement is valued at $90 EV/Ton. The company capacity stands at 151.6 MT (exc. Kesoram acquisition). Recently Ambuja had also acquired Penna Cements at $90/ton.
  • This acquisition is beneficial for Ultratech Cement considering the current greenfield expansion cost of $120/ton with gestation period of 1.5 to 2 years. Additionally, it is in line with recent acquisitions (Kesoram at $ 85/ton by Ultratech Cement, & Sanghi at $ 100/ton by Ambuja Cement). The Company aims to increase its capacity to 200 mtpa by FY27E through organic or inorganic route.
  • Outlook on cement sector remains positive considering that FY24 had been strong ~12% YoY volume growth for our coverage companies with ~15% YoY improvement in EBITDA/ton.
  • Going ahead, we believe that industry volume growth at 8-9%. But companies like ACC, Ambuja, Ultratech, Shree, Ramco, JK Cem, JK Lakshmi and Star would likely witness better than industry volume growth led by ongoing capacity expansions.
  • Overall profitability of cement companies is expected to improve as EBITDA/ton further over FY25-26E considering companies focusing on cost efficiencies like increasing usage of green power & fuel, freight cost and raw material cost optimization.
  • Consolidation in the sector is driven by large cement companies as they are expanding their capacity through organic and inorganic routes. Valuations remain better at $85-100/ton. UltraTech Cement has picked up 23% stake in India Cements at valuation of $90/ton.
  • Valuation at ~$90/ton is relatively lower than the current greenfield capex of $120/ton for industry. However, it is in-line with recent acquisitions (Kesoram at $85/ton by UltraTech) & Sanghi (~$ 100/ton by Ambuja).
  • Considering the acquisitions happening at $85-100/ton, valuations of mid to small sized players like Sagar Cement (trading at $ 56/ton), Orient Cement (trading at $ 75/ton), Birla Corp (trading at $ 84/ton) are also expected to see re-rating in coming periods.
  • For large cap cement companies, our target prices are 12,430 on Ultratech, 720 on Ambuja and 3,225 on ACC. In mid-cap space, we are positive on JK Cement (with target price of 5,175) and 1,000 on Ramco Cement.

Amara Raja Energy & Mobility: Stepping up play in sunrise Lithium-Ion Battery space

  • Company’s wholly owned subsidiary i.e. Amara Raja Advanced Cell Technologies Pvt. Ltd (ARACT) has signed a technical licensing agreement with GIB EnergyX Slovakia s.r.o., a subsidiary of Gotion High-Tech Co Ltd.
  • As part of the agreement GIB EnergyX will license Gotion’s world class LFP technology for lithium-ion cells to ARACT.
  • This comprehensive agreement enables Amara Raja to manufacture world class LFP cells in both cylindrical and prismatic form factors.
  • The scope of licensing provides access to cell technology IP, support in establishing Gigafactory facilities conforming to latest generation process technologies, integration with Gotion’s global supply chain network for critical battery materials, and customer technical support for solution deployment.
  • This is a positive development for the company and such technology tie-up was keenly awaited.
  • GIB is a credible player in this space with Volkswagen China as one its large shareholder and planned Li-On cell capacity of ~300 GWh by 2025.
  • It shall help Amara Raja develop its envisaged Gigafactory. The company has in the recent past entered into MoU with Govt. of Telangana for setting up of Li-Ion Battery Gigafactory. The said facility is expected to have cell manufacturing capacity of up-to 16 GwH & assembly capacity of up to 5 GWh with overall investment pegged at ~Rs 9,500 crores over next 10 years.
  • In the first phase, it is setting up a Li-On cell plant of 2GwH capacity at capex outlay of ~Rs 1,200 crore with likely commissioning by FY26E.
  • We have been bullish on the company and initiated it as a conviction buy in November 2023 at a CMP of Rs 710 with our last target price being pegged at Rs 1,200 (dated April 16th, 2024).

Hidden Gem

Ratnaveer Precision Engineering(CMP: Rs 165 ;Target: Rs 200 ; Upside: 21% ; Market Capitalization: Rs 803 crore)

  • Ratnaveer Precision Engineering (RPEL), established in 2002, is a Gujarat based stainless steel (SS) product manufacturer focused on producing finished sheets, washers, solar roofing hooks, pipes and tubes. The company operates out of four manufacturing units in Gujarat with total manufacturing capacity stood at 30,000 tonnes as of FY24.
  • SS finishing line sheets contributed ~47% to total revenues in FY24 followed by SS washers (~23%), tubes & pipes (~17%), sheet metal components (~8%) and SS fasteners & components (~5%).
  • Demand of SS sheets has been increasing at a CAGR of ~13% over the last 5-6 years. Going ahead, demand for SS sheets is expected to remain healthy at 10-12% CAGR over the next 5 years as per industry reports, mainly driven by increasing usage in elevators, escalators, commercial kitchens, bus bodies, metro and railways coaches etc.
  • We believe that RPEL is well positioned to benefit significantly from the buoyant industrial capex cycle scenario. Company’s product portfolio of stainless steel (SS) finished sheets, washers, solar roofing hooks, pipes & tubes etc has a wide usage across large number of industries. Going ahead, company plans to incur capex of ~Rs 106 crore over the next 12 months for expanding its capacities across the key product lines and augmenting the overall product basket with new products (circlips, electro-polished and seamless tubes & pipes and nuts & bolts). With this capex, company targets to meet strong demand for its products, cater higher growth segments and increase its market share in both domestic and export markets. Company expects revenues of ~Rs 1,150 crore by FY27E as it factors in additional ~Rs 400 crore sales from this new capex of Rs 106 crore.
  • Company’s expansion into new lines of value-added products (like circlips, electro-polishing tubes & pipes, nuts & bolts) and higher-margin segments like railways, defence, energy etc would help in better volumes growth & realisations. Moreover, the backward integration of manufacturing and usage of captive solar power would help the company in achieving efficiency in the production process, reducing overall production costs and gaining competitive advantage. Hence, we expect margins to improve from 8.4% in FY24 to 11.1% in FY26E.

We estimate revenue CAGR at ~23% over the period FY24-26E. EBITDA and PAT are expected to increase by ~42% and ~44% CAGR over the same period. Strong earnings growth would also translate into improvement in return ratios for the company during the period. We recommend Buy on RPEL and assign a target price of Rs 200 (valuing it at 15x FY26 P/E).

Source: ICICIdirect Research

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