PL Strategy Report: India Strategy - Risk reward evenly balanced

India Strategy - Amnish Aggarwal - Head of Research, Prabhudas Lilladher Pvt Ltd.

Risk reward evenly balanced

NIFTY has given just 1.2% return over the past 6 weeks post our cautious stance led by El Nino impact on crops and inflation, low chances of interest rate cut in India, expected increase in interest rates in USA and impending political uncertainty ahead of Lok Sabha elections in India. We believe that the headwinds have increased with recent spike in crude oil prices and rise in Geopolitical uncertainty due to conflict in Israel. Domestic economy is witnessing a clear demarcation with premium and luxury goods witnessing strong demand while basic demand being it due to high inflation. We believe all eyes rest on festive demand in coming couple of months for the market to sustain momentum. We remain positive on Auto, Banks, Capital goods, Hospitals, Discretionary consumption. Risk rewards seem evenly balanced with NIFTY PE discount at 16.7% to LPA while impending El Nino impact and 2024 elections are a key risk. We believe Stable Govt. post elections and continuation of economic policies can take markets to new heights.

We estimate 10.6% sales growth, 33.5% growth in EBIDTA and 44.7% growth in PBT of coverage universe. Ex oil & Gas we estimate 24.7% growth in EBIDTA and 25.9% in PBT. Auto, Oil and Gas, Metals, Building Material, Consumer durables and Hospitals will lead growth.

§ 2Q24 will show impact of volatile monsoons, flash floods in July and delayed recovery in rural and consumer demand in a few segments. Demand scenario is mixed with strong demand from upper and upper middle class while lower class seems to be under some pressure. Volatile weather conditions and higher food inflation during the quarter has also impacted the sentiments. Discretionary spending on travel, tourism, Jewellery has been good while QSR, apparel, 2W have been impacted. PV continue to report strong numbers.

§ Global commodities remain volatile across both agri and crude linked segments. Commodities in general seems to have bottomed out and impact of poor spatial distribution and El Nino is likely to impact the prices of several agri commodities including Palmoil in the coming months. Similarly, middle east fiasco is likely to increase volatility in oil prices in the coming periods.

§ Travel, Auto, Media, Durables and capital goods will report strong growth in both sales and profitability. Agri, building materials and staples will show tepid growth. Oil and Gas and metals will show sharp improvement in profitability due to low base. Overall margin outlook remains positive with 310bps margin expansion, Agri, chemicals and Banks will report pressure on margins.

§ NIFTY EEPS has seen an increase of 6.7/8.2% for FY24/25 with 19.4% EPS CAGR over FY23-25 with FY24/25 EPS of Rs1081/1231. Our EPS estimates are 0.7% higher for FY24 but lower by 1.2% in FY25 than Bloomberg consensus EPS estimates. We are also introducing FY26 Nifty EPS estimates at 1400.7 which shows 13.8% EPS growth.

§ NIFTY is currently trading at 17x 1-year forward EPS, which is at 16.7 discount to 10-year average of 20.4x.

§ Base Case: we value NIFTY at 15% discount (17.3x) to 10-year average PE (20.4x) with Sept 25 EPS of 1316 and arrive at 12-month target of 22819 (20735 based on 18.2x March 25 EPS of Rs1138 earlier). Bull Case, we value NIFTY at 7.5% discount to 10-year average and arrive at bull case target of 24833 (23563 at LPA PE). Bear Case: Bear case Nifty can trade at 25% discount to LPA (25% earlier) with a target of 20135 (17672 earlier).

§ Model Portfolio: We remain overweight on Auto, Banks, IT services, capital Goods and Healthcare. We are Underweight on Metals, Cement, Consumer, Oil & Gas and Diversified Financials. Our Model portfolio has outperformed NIFTY by 929bps since inception, 181bps since April and 4bps since last 6 weeks. We are increasing weight on HDFC Bank, M&M, BAF while we are cutting weight on Britannia Inds. We are introducing Nestle India and JSPL in our model portfolio.

§ High Conviction Picks: We are adding HDFC Bank, RR Kabel, Canfin Home, Navin Fluorine and ABB to conviction picks. We remove Safari Inds, Titan, Greenpanel and Gujarat Gas from high conviction picks. We are positive on Safari and TTAN in the long term, however the stocks offer limited scope of further re-rating.

(Click on the Link for Detailed Report)