Market Outlook of the week: Nifty to challenge life highs and head towards 19,300 in July

• Global markets relatively outperformed the domestic benchmark. Broader market continued to outshine as Nifty midcap index (up 2.7%) and small cap up (2.8%).
• We expect Nifty to challenge life highs of 18,887 and gradually head towards 19,300 in July. Key support is placed at 18,400.
• Temporary breather in broader market cannot be ruled out after >20% rally seen over past 12 weeks.
• Healthy consolidation from hereon would pave the way for subsequent 25% rally in Midcap index over next 12 months.
• Nifty pharma index: resuming up trend after 2 years of underperformance.
• We remain positive on Sun pharma, Divis Labs, Ajanta Pharma among others. 

FIIs poured another $ 1.1 Billion in Indian Equities

• Indian equities have been only next to Taiwan in terms of flows recently and both these markets have significantly outperformed peers.
• Dollar weakness, languishing crude prices and continued FII flows have helped Rupee to appreciate below 82 levels once again.

Lower domestic inflow not worrisome

• Inflows into equity mutual funds have declined sharply in last two months.
• Inflows in March 2023 was at Rs 16,700 crore which declined to Rs 4,900 crore in April 2023 and further declined to Rs 3,100 crore in May 2023.
• The lower inflows is not concerns as it is a stablished trend since last 3-4 years. Inflows are lower when the markets move up sharply higher and vice versa.
• The reassuring fact however remain the SIP flows, which has been the mainstay of retail participation getting stronger. In May 2023, SIP flows came at all-time high at Rs 14,749 crore as compared to an average of Rs 14,000 crore during the March and April 2023.

HDFC twins merger likely to conclude by July 2023

• Tentative date for closure of merger is estimated at 12 July 2023.
• SEBI is unlikely to provide any dispensation to MF in lieu of maximum permitted holding of 10%.
• Post-merger of HDFC twins, excess holding above 10%, together stands at ~ Rs 4,200 crore.  
• With current combined market capitalization of ~Rs 13-14 lakh crore, shift of Rs 4,200 crore (i.e 0.3% of total Mcap) is not substantial and would not have major impact on the stock.
• Post merger, loan book of combined entity is expected at Rs 22 lakh crore (second largest after SBI) with anticipated RoA to continue at ~2% ahead.

Chinese central bank rate cuts prop up metal stock

• China’s central bank has lowered both the short-term interest rate (seven-day reverse repo rate by 10 basis points to 1.90% from 2.00%.) and medium-term lending facility rate (the interest rate for one-year loans to financial institution was lowered by 10 bps to 2.65%).
• These policy measures are expected to support the tepid economic recovery. It also had a positive rub-off on stock prices of metal companies.
• Steps taken to revive the Chinese economy augurs well for the global metal sector as Chinese economic recovery in Chinese economy would aid in supporting global metal prices.
• Stock Preferred – Graphite India

Real Estate: Rate hike cycle pause drives recovery in stock performance

• Real Estate has been among the top performing sector with last 3 months return of ~36% and one month return of ~10% in Nifty Realty Index.
• This was led by RBI rate pause bringing the much-needed relief on home loan rates trajectory.
• The sales volumes numbers of residential real estate have been resilient. Q4FY23 remained quite healthy with 1,13,770 units sold in the period, up ~14% YoY. Top players like Godrej Properties (saw 25% sales value growth in Q1), Sobha (~26% pre sales value growth), DLF (reported strong sales value of 8,558 crore in Q4, up 210% YoY).
• Overall demand-supply scenario construct remains decent with decadal high absorption and decadal low inventory (20 months).
• Even in terms of pricing, All India pricing went up by ~8% in Q4. NCR region saw 16% pricing growth in Q4, followed by Kolkata, Bengaluru at 15% and 14%, respectively.
• Top developers 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.
• Brigade Enterprises (CMP: Rs 585, TP: Rs 650), Sobha (CMP: Rs 555 TP: Rs 680) and Phoenix Mills (a play on malls) (CMP: Rs 1,560, TP: Rs 1,705) are our BUY in the coverage.

Multiplexes: Amid lower footfall, content performance including major releases like Adipurush hold the key for future performance

• Footfall have been below the pre covid levels for multiplexes. For Example, PVR Inox footfall in FY23 was at 14 crore vs. 16.7 crore in FY20, ~17% lower.
• This was largely due to weaker than expected Hindi content performance.
• April 2023 was soft, May 2023 saw a decent performance with movies like Kerala Story.
• This week will witness a major release in the form of Adipurush. Strong content line up is there over the next 3 months such as Mission Impossible, Oppenheimer, Jawaan, Gadar 2, Animal, OMG 2, Rocky aur Rani ki Prem Kahani etc. 
• Performance of these movies will hold key for overall box office revenues recovery.
• PVR Inox has also spelt out EBITDA synergy target of Rs 225 crore over 12-24 months, led by revenue synergies (F&B, advertising, and distribution – being majority portion) along with opex synergies on scale and supply chain integration.
• Nonetheless, most revenue synergies are also directly linked to footfall traction and thus, will hinge on overall content performance and footfalls.
• Stock preferred: PVR Inox (Target Price: Rs 1,640)

2-W Industry at Loggerheads

• Domestic 2-W sales have been rebounding on the back of healthy rural demand amid upbeat farm sentiments. Domestic 2-W industry is expected to grow in double digits of ~ 13% YoY in volume terms to 1.8 crore units in FY24.
• On the exports front, however news flow is not that encouraging with one of the key export markets i.e. Nigeria witnessing massive currency de-valuation (to the tune of ~36%).
• For companies under our coverage mainly Bajaj Auto has a decent exposure to Nigerian markets wherein their motorcycle is primarily used as a bike Taxi. Company realises ~50% of its 2-W sales from Exports of which Nigeria is a major market accounting for >20% of export sales.
• Amid this contrasting demand scenario and EV transition underway, we have a neutral view on 2-W OEM majors namely Hero MotoCorp (Rating: HOLD; Target Price: Rs 2,840) and Bajaj Auto (Rating: HOLD; Target Price: Rs 4,530).  

Power Utilities: Eyeing change in DNA given strong focus on Renewables and Green Energy

• In a bid to diversify from traditional thermal/Hydro based assets, central utilities like NTPC, NLC India, SJVN and NHPC have shifted their focus in scaling non fossil fuel based assets in an aggressive manner and have set significant assets addition plans over the next decade.
• NTPC, the largest generator, plans to add 60 GW by 2032 and wants to take share of green portfolio to 45% in the overall basket. Apart from renewables, it is also working on green energy segments like Nuclear ( has entered into JV with NPCIL) and Green Hydrogen. The company has also floated a subsidiary in this regard and transferred assets to the same.
• SJVN has also floated a separate renewable subsidiary wherein the company aims to reach a capacity of 5,000 MW by FY25E and 25,000 MW by FY30E mainly skewed towards renewables.
• This change of DNA will lead to improvement in ROE given renewable projects are relatively shorter time projects and risk of feedstock and clearances are negligible which will result into faster capitalisation of CWIP into ROE generating Fixed assets.
• Stock Preferred – NTPC (Target Price: Rs 210)

Hidden Gem

PNC Infratech : Asset Monetisation in the offing; key for rerating ahead

CMP: Rs 330, TP: Rs 390 (18% upside)

• Order Book: PNC is likely to be one of the major beneficiaries of the thriving roads and water supply segment (largely Jal Jeevan Mission) is one-third of order book). Including the newly won projects, Order book was at Rs 20,530 crore, 2.9x book to TTM revenues.
• Revenue, Inflows and Margin Outlook: Going forward, the company has guided for inflows worth ~Rs. 10,000-12,000 crore, during FY24E (vs. ~Rs 4,855 crore of projects secured in FY23). The key focus would be on roads projects (70%+) while remaining is likely from non-roads segments like water, railways. Overall, the company has guided for ~15% YoY revenue growth for FY24 with operating margin at ~13-13.5%.
• Planned monetisation of HAM/annuity assets: PNC company in Q4 had indicated Eleven HAM and one BOT project are under block to monetise,  having debt of ~Rs 6,900 crore and equity of ~Rs. 1,700 crore (seven operational; rest likely by next three to four months). It indicated that it has received offers from four investors. It indicated that the definitive agreement could be signed (expected by Q3FY24 end). Recent ET article indicated that KKR’s roads Highways Infrastructure Trust is in talks to acquire the assets for an enterprise value of about Rs 9,000 crore. The indicative deal implies P/B of ~1.24x. Most importantly, the strong (pretax)  inflow of equity of ~Rs. 2,100 crore (on deal consummation) would massively increase the scale of PNCs ability to execute and scale up the revenues without any debt, ahead.