PL Strategy Report: India Strategy - Taking headwinds in stride

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

Taking headwinds in stride

NIFTY has been flattish in past 6 weeks and gave just 1.6% return in past one quarter as strong DII flows neutralized FII outflows. Market has been taking all headwinds in its stride and the action has been very stock specific as Mid/small caps continue to outperform large caps. Sectoral rotation is clearly visible as Realty, Metals, Power and Healthcare have joined the party.

Festival season has seen high single digit growth in sales of 2W/PV, 40-50% growth for online platforms, robust sales of Jewellery (despite high prices) and economic boost coming from cricket world cup (Alas, Bharat could win the title). However, demand trends in December are critical as FY23 had seen sharp deterioration in demand post Diwali. Capex recovery is on track with strong performance from Capital Goods/ Infra segments and strong outlook while bank balance sheets remain healthy.

Odds are evenly balanced as headwinds emanating from firm US interest rates, El Nino impact on crops and inflation, volatile crude and geopolitical uncertainty still abound. NIFTY is not in a bubble zone as it is trading at 17.2% discount to 10-year average which provides comfort. India is on the verge of “Mother of all Elections” after having a stable Govt from past decade, however state election results will dictate market momentum in run upto Lok Sabha elections next year. We remain positive on Auto (PV), Banks, Capital goods, Hospitals, Discretionary consumption.

§ PL coverage universe 2Q24 aggregate sales, EBIDTA and PBT grew by 0.7%, 36.6% and 73.9% YoY respectively as margins expanded 540bps YoY and 340bps QoQ. Auto (strong volumes and benign inputs), Capital Goods (Strong sales, lower inputs and operating leverage), Pharma (Strong sales and benefit of gRrevlimid for select players), banks (lower provisions), travel (Aviation led by strong Yield and higher decline in fuel costs) reported strong sales, EBIDTA and PAT. Specialty Chemicals (Poor pricing and demand), Agri chemicals (poor demand and pricing) reported lower EBIDTA as margins remained under pressure. Ex BFSI sales, EBIDTA and PBT grew -0.2%, 49.8% and 79%. Ex Oil and Gas sales, EBIDTA and PBT grew 10.5%, 20.3% and 48.3%.

§ Auto, Capital Goods, BFSI, Pharma, Hospitals and metals have positive outlook. Agro chemicals, Specialty chemicals have tepid outlook. Consumer Durables, consumer discretionary and staples depends upon festive and post festive demand sustenance on a relatively low base.

§ Major Target Price Increase – Maruti, Ceat, Aarti, AXIS/ ICICI Bank, Supreme Inds, Voltamp, RR Kabel, Fortis/Max/NH Hospitals, JSL, IPCA, Lupin

§ Major Target Price Cuts – UPL, Sumitomo, Greenpanel, Guj Fluro, IGL, Bajaj Electricals, Westlife Food world, Reliance Inds

§ Global commodities remain volatile across both agri and crude linked segments. Sugar prices are up 17.4% since April and wheat prices are up 23% since harvest season despite open market auctioned sale by GOI. Similarly, SMP prices are firming up while spices have seen sharp jump in past few months. We would keenly watch out for Palmoil prices post January harvest in Malaysia. Israel and Russia/ Ukraine war is likely to prevent any meaningful let up in crude prices with sustained volatility.

§ NIFTY EEPS has seen a change of 0.5/-1.1/-1.0% for FY24/25/26 with 17.2% EPS CAGR over FY23-26 with FY24/25/26 EPS of Rs1086/1218/1387. Our EPS estimates are different from Bloomberg consensus by 3.1/0.6/-0.5% in FY24/25/26. Post FY24 we are factoring in 13% PAT CAGR.

§ NIFTY is currently trading at 16.9x 1-year forward EPS, which is at 17.2 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 1302 and arrive at 12-month target of 22584 (22819 based on 17.3x Sept 25 EPS of Rs1316 earlier). Bull Case: we value NIFTY at 7.5% discount to 10-year average and arrive at bull case target of 24573 (24833 earlier). Bear Case: Bear case Nifty can trade at 25% discount to LPA (25% earlier) with a target of 19927 (20135 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 Maruti, Cipla, Max Healthcare, Siemens, Titan Company, Avenue Supermarts while we cut weights on HDFC Bank, ICICI Bank, Ashok Leyland and Britannia Inds.

§ High Conviction Picks: We are adding Max Healthcare, Hindalco, Eris Life, Suntek Realty to conviction picks. We add Kajaria ceramics and Restaurant Brands Asia as contra picks. We remove SBI, Carborandum, Chalet and Crompton Consumer.

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