Market Outlook: Sustenance above 17,200 to keep pullback options open
Key developments last week
- Midcaps outperformed benchmark with 0.4% gain for the week despite global volatility led to 1% decline in Nifty
- From global context, Indian equities have relatively outperformed US indices which are down around 3%
- Industrial commodities like Aluminium, Copper are down around 2%-3% during the week, while Aluminium is down 7% over past month. Brent continues to trade below $90 mark. From inflationary expectations perspective this could be a relief for the industries like Auto, consumer discretionary going ahead
- Indian Rupee stayed around 82 mark despite dollar strength overseas and no significant selling from foreign investors was observed
What to expect in coming eventful week
- Nifty continues to trade in a range of 17,200-17,800 since early February while discounting expectations of higher interest rates ahead of next week’s CPI numbers. Any positive surprise on this front would be key positive going ahead
- Amid current volatility, we expect 17,200 to act as key support whereas key monitorable would-be sustainability above 17,800 which would set the further positive tone and acceleration towards 18,100 in couple of weeks
- Current chart setup has glaring similarities with that of CY13, CY16 and CY18. In each of these instances, indices formed a higher base over a period of three to four months, followed by indices rallying back to highs in subsequent quarter
- We have already witnessed ~45% retracement over past three months and with maturity of price/time correction, we expect indices to bottom out in the 16,800-17,200 range and rally back to life highs over next three to four months
Our technical studies and statistical inference from previous bull cycles of 2003-2007 and 2013-2017 both indicate that sectors like BFSI, Capital goods & Infra, Auto, PSU & Energy are expected to outperform in CY23 and lead index towards life highs
Key sectoral picks
- BFSI: HDFC Bank, Axis Bank, SBI, Bank of Baroda
- IT: TCS, Infosys, Persistent Systems, LTIM, Newgen Software
- Capital goods and Infra: L&T, Siemens, Ultratech Cement, Ambuja cements, Adani Ports, Techno Electric
- Auto: Tata Motors, Maruti Suzuki, Balkrishna Industries, Mahindra CIE, Bosch
- PSU: NTPC, HAL, ONGC, PFC, IOC, BEL
- Energy: Reliance Industries, IGL
Textile stock in focus amid improved availability of cotton crop
- Cotton crop domestically is likely to be better than last year at 321 lakh bales (170 kg each), up 5% YoY (previous cotton year: 305 lakh bales). Consequently, cotton prices are down 23% YoY at Rs 170-175/kg.
- Though the cultivated cotton area has increased from 11.9 million hectares last year to 12.5 million hectares in current year, but as per our calculation the yield per hectare for the cotton crop has remained flattish at 435 kgs per hectare YoY (global average: 700kg). The government has started targeting the core problem of lower cotton yield and the recent initiatives indicate that improving the yield per hectare would be the focus area of research.
Nitin Spinners (CMP: Rs 216, TP: Rs 290, upside: 34%)
- Nitin Spinners (NSL) has graduated from a small pure spinning company to a company with a sizeable presence in India’s yarn market (3 lakh+ spindles).
- Forward integration into knitted and finished woven fabrics (~ 25% of revenues) in its product portfolio, which yields more superior margins than spinning has fortified its presence across the textile value chain.
- Capacity expansion across segments to drive revenue growth. NSL’s planned capex of Rs 900 crore can generate incremental revenue of ~ Rs 1,100 crore (peak revenue of Rs 3,500 crore). We expect NSL to generate superior RoCE of ~16% in FY25E (vs. average RoCE: 10-12%).
Vardhman Textiles (CMP: Rs 310, TP: Rs 345, upside: 11%)
- Vardhman Textiles is among few textile companies that have been able to maintain a debt equity ratio below one despite continuous capacity addition. Vardhman has one of the largest spindle capacity in India (~12 lakh spindles) in a fragmented industry and has further forward integrated into fabric processing with a capacity of 180 million metres.
- VTL continued to outperform with 90%+ capacity utilisation. Yarn demand has improved with China starting imports of cotton yarn from India post opening up after Covid induced lockdowns in China.
- Elevated domestic cotton prices and weak spreads had negatively impacted the performance of VTL over the last few quarters. We believe the worst is over for the company and expect a gradual improvement in profitability.
Sugar industry in focus amid four-year low inventory; expectation of higher domestic prices (up by Rs 2-3 / kg) to sweeten gains for investors
- Sugar production is estimated to be below 33.5 Million Tonnes (MT) in 2022-23 season compared to earlier estimate of 36 MT. Sugar mills in Maharashtra & Karnataka are experiencing lower sugarcane yields in current season & most of the mills would end crushing by March-2023. With consumption levels of 27.5 MT & export of 6.1 MT, sugar inventories would come down by at-least 0.5 MT by the end of 2022-23 season. We believe this would lead to increase in domestic sugar prices by Rs 2-3 / kg.
- Also, probability of El Nino in 2023 may result in further decline in sugarcane area & yields in 2023-24 season specifically in Maharashtra & Karnataka. In past El Nino events (2009 & 2016), sugar production in India dipped by 33% & 25% respectively. With likelihood of El Nino in 2023, Sugar prices not only can inch up to Rs 37-38 / kg level but can also remain firm for next one year.
- UP based sugar mills are experiencing mixed trend in sugar recovery. On one hand, players like Dhampur Sugar, Dalmia Bharat sugar & Balrampur chini are witnessing better trend in recovery, other sugar mills would see flat to lower recovery in 2022-23 season.
- We believe Dhampur Sugar & Dalmia Bharat Sugar would get double benefit of higher sugar realisation as well as lower cost of production. We remain positive on these stocks with Buy recommendation (Dhampur Sugar target price: Rs 270 / share & Dalmia Bharat Sugar target price : Rs 490 / share).
Tata Technologies IPO - Value Unlocking Event at Tata Motors
- Tata Technologies, a subsidiary (74.4% stake) of Tata Motors has filed a DHRP with SEBI for an IPO by way of an offer for sale of up to 9.57 crore shares, representing 23.60% of its equity capital.
- The IPO comprises of an offer for sale of up to 8.1 crore shares (~20%) by Tata Motors.
- Comparing the applicable peers in the listed space i.e., KPIT Technologies as well as Tata Elxsi Ltd, conservatively, we ascribe a fair value of ~Rs 20,000 crore for Tata Technologies.
- Resultant value accruing to Tata Motors will be ~Rs 15,000 crore for 74.4% stake and potential addition of Rs 40/share to our target price calculation.
- The proceeds from OFS i.e., approx. Rs 4,000 crore will also help the company reduce debt on its balance sheet and gels well under the broader vision of going net automotive debt free over next few years
- Presently we have a BUY rating on the stock with a target price of Rs 530/share, offering a healthy potential upside of 20%.
Tata Technologies is an E&RD firm working in the domain of electrification, autonomous, connected system etc. in the automobile, heavy industrial machinery and aerospace domain
NHAI ordering to pick up pace: Road construction players in a sweet spot
- The overall road project award figure has been relatively muted at 7,263 km during 9MFY23 vs. the overall target to award ~12,000 km of road projects during FY23. The road EPC companies have also faced competition from smaller players (amid relaxed bidding norms by NHAI) and have stayed away from bidding aggressively to protect margins.
- We highlight that currently the order book (OB) position for majority of EPC companies under coverage remains decent (overall OB/TTM revenue at ~2-2.5x). Nonetheless, order inflows are key for growth visibility, especially in FY25 and beyond.
- Note that NHAI has lined up over 100 projects of ~Rs 1.1 lakh crore for ordering over March/April 2023. We have already seen 10 odd projects being awarded in past couple of weeks. There is high likelihood that most of the road construction players would witness a decent order inflow traction ahead, given the huge awarding pipeline.
- Another near-term trigger for Road companies will be asset monetisation, which will expand bidding potential.
- Within the Infra sectors, Roads (a key element in overall focus on logistics with capex CAGR of 25% in last 5 years) is likely to be in sweet spot with likely high double digit growth going forward. We continue to prefer EPC players with strong order book visibility, healthy execution record and robust balance sheet like PNC Infra (CMP: Rs 293, TP: Rs 410, ~38% Upside), HG Infra (CMP: Rs 790, TP: Rs 915, ~16% Upside), and GR Infra (CMP: Rs 1,042, TP: Rs 1,400, ~34% Upside).
Real Estate: Challenging time ahead for some; Opportunity for others
- Real estate stocks have underperformed (Nifty Realty down by ~6% in last 1 yr vs ~5% return for Nifty) owing to various concerns such as home loan rates (up 200 bps over the past 12 months as there was central bank led repo rate hike by ~250 bps), stamp duty normalisation in Maharashtra and increased supply across markets.
- The sales volumes numbers so far, however, have been resilient. As per Anarock, the housing sales rose ~54% in CY22 to 3.65 lakh units as against 2.37 lakh units in 2021 across the seven cities. Q4CY22 remained quite healthy with 92,160 units sold in the period, up 4.5% QoQ and 1.5% YoY.
- Nonetheless, in terms of housing sales, some moderation signs have been seen in Mumbai. The Registration of properties in Mumbai city fell ~11% YoY in February, 2023 to 9,268 units, signifying some impact of rate hikes.
- Even on the luxury housing front, The Budget 2023 has now capped the deduction on capital gains on investment in residential property at Rs 10 crore. Thus, there could be some moderation in ultra-luxury transaction under the capital gain savings intent from FY24 onwards.
- While, the overall demand-supply scenario construct remains decent with decadal high absorption and decadal low inventory (21 months), we expect smaller/unbranded developers with weak execution record, balance sheet challenges (and lower access to capital) to face challenges ahead.
- We expect the top developers to continue taking market share given their superior balance sheet, execution record and brand. Most of the top developers in this cycle are sitting on lean balance sheet (net debt to equity ranging for 0.1x to 0.7x) which is among life time best levels. RERA has also led to superior trust factor on historically efficient players. The players in high end user markets such as Bengaluru, Pune, Hyderabad etc. are better placed in our view. Brigade Enterprises (CMP: Rs 464, TP: Rs 620 , ~34% upside is our top bet in this space)
KSB Ltd: Firing on all cylinders!
(CMP: Rs 2,080 , Target Rs 2,395, MCAP: Rs 7,262 crore, Upside: 15%)
- KSB Ltd manufactures a range of standard industrial end suction and high-pressure multistage pumps, submersible motor pumps and monoblock pumps and other value-added parts. Its client portfolio includes Bhel, Thermax, ISGEC, Patil Engineering, RK Engineering, L&T, Pooja Engineering, NTPC and ThyssenKrupp.
- Standard pumps contribute 45-48% to total turnover while engineered pumps contributes 25% to the turnover. Valves contribution is 18-20% while spare & services segment is ~10% of sales
- The company is witnessing strong traction from nuclear, petrochemical, railways (Vande Bharat and locomotives) and mechanical seal segment. Also, it is focusing on increasing share in services & spares through Bharat pumps.
- The company has maintained CY23 revenue guidance at Rs 2,200 crore with some improvement in margins. Revenue, EBITDA and PAT expected to grow at 18.1%, 22.1% and 21.6% CAGR over CY22-24E led by strong execution.
- Hence, we continue to remain positive and retain our BUY rating on the stock valuing it as 30x PE on CY24E EPS
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