Market Outlook: Nifty sustaining above 17,200, to accelerate towards 17,500, aided by firm global cues

What has changed last week and view for coming week

• Indian equity benchmarks followed global markets higher as concerns around global financial crisis subsided leading to sharp decline in volatility
• Volatility has seen sharp decline globally and domestically as VIX has reversed gains of early March completely, indicating low risk perception from market participants
• Global indices have outperformed YTD with Nasdaq leading (+17%) while European indices are up in mid-teens. Nifty is down 4% YTD and expected to catch up from hereon
• Nifty surpassed short term hurdle of 17,200 with a gap up action, indicating acceleration in coming truncated week
• We expect Nifty to head towards 200-day ema placed at 17,500 with key support placed at 16,900. Buy dips

Indian markets at an inflection point: (Macro picture)

• Nifty corrected 11% over past four months undergoing higher base formation, while time wise it was 18^th month of correction since October 2021, in the process digesting higher interest rate cycle globally, Ukraine Russia war and more recently risk of financial crisis from global banks. Over three decades, none of the correction in Indian equities has lasted more than 18 months
• Historically, episodes of higher volatility, along with negative news flow and oversold prices has been a key ingredient for durable bottom formation
• We therefore expect Nifty to form a durable bottom in 16,600-16,800 zone and head towards 18,500 over three to four month period
• BFSI, IT, PSU, Capital goods and Infra, Auto to lead the rally

IT Q4FY23E Preview: Seasonally weak quarter; Tier II likely post better numbers 

• Q4FY23 is seasonally weak quarter for IT companies on i) extended furloughs in the month of Jan ii) less number of working days iii) some incremental weakness in macros visible
• For Tier I companies, we expect revenues growth for the quarter likely to be in the range of -0.5% to 1% in CC terms ( Wipro being at lower end while HCL Tech being at the higher end)
• In Tier II companies, except Tech M (-1.5% QoQ in CC), LTIM and Coforge are likely post revenue growth in the range of 2-3% QoQ in CC. On account of GBP and EUR appreciation against USD, we likely to see tailwinds which will help in higher dollar revenue growth
• Lower revenues likely to impact margins. Except TCS (where we are building margin expansion QoQ as per guidance), we expect margins for Tier I companies to decline in the range of 20-100 bps QoQ (Infosys and HCL Tech are implied margins for Q4 as per annual guidance)
• In Tier II, Tech M likely to see QoQ margin decline while for LTIM and Coforge likely to see margin expansion of over 100 bps QoQ (LTIM will see recovery on absence of one time integration costs while Coforge likely to see benefit from cost optimisation at its BPO business

Cement Sector: Anticipated price hikes to propel profitability further for cement players!

• As per channel checks and feedback, cement companies are likely to announce Rs 10- 30/bag price hike in April 2023
• Acceptance of price hikes by the markets would be a critical factor to watch out for in the coming weeks. Companies in mid-February had attempted a price hike of Rs 10-15/bag, however the same was fully rolled back in March through higher discounting. For Q4FY23, cement prices are expected to remain flattish on a QoQ basis
• Underlying cement demand is expected to remain healthy in the medium term (8-9% growth) owing to boost in government spending on infra projects and upcoming general elections in 2024. Commentary from most of the companies remain buoyant with capacities operating at 85%+ utilization levels in Q4FY23
• Cost tailwinds (imported south African coal price down 30% QoQ) would entail positive profitability momentum (~ Rs 200-250/t delta in EBITDA/T), acceptance of the latest price hike attempt would further provide thrust to the profitability (~Rs 150-200/t) in FY24E

Key Top Picks:

UltraTech Cement (CMP: Rs 7,550, TP: Rs 8,050, Upside: 7%)

• UltraTech is the largest cement manufacturer in India with a domestic capacity of 126.95 MT (over 23% of total market). Given the company's strategic growth plan (target to become 200 MT player by 2030, ie. at 7.2% CAGR), prudent approach in generating higher cash flows to capex with IRR target of +15% for the new capex

Sagar Cement (CMP: Rs 187, TP: Rs 250, Upside: 33%)

• Sagar Cements is a south based cement player with cement capacity of 10.1 MT. With the recent price correction, Sagar Cement is trading at attractive valuations (US$50/t vs. replacement cost of US$110/t). Going forward, the company will be able to develop a presence in the faster growing eastern market and the more profitable central market with recent commissioning of new 2.5 MT capacity. Ramping up of new plants by Q1FY24E to contribute to overall profit pool

JK Cement: (CMP: Rs 2,950 , TP: Rs 3,350, Upside: 14%)

• With 20.7 MT grey cement capacity, JK Cement is the fourth largest player in North India, which contribute over 40% of its revenues. The recent capex programme of 4 MT integrated grey cement capacity has been completed and dispatches have also started. The full impact of the same will be visible from the next quarter onwards

Hospitals - High yielding payer mix, remunerative surgeries to improve financials & return ratios

• We are structurally positive on Hospitals space based on changes in payer mix with shift towards private insurance from government schemes, supported by changes in case mix with more complex procedures such as targeted oncology, transplants, cardiovascular and neurological procedures to have higher contribution
• We note that substantial bed addition between FY15-19 took place in Tier II/III cities and as these beds attain break-even level, the same could have positive implications on financials
• Medical tourism has bounced back to ~95% of pre covid levels. Medical tourists account for 8-10% of the overall payer mix on a normalized basis
• During FY19-23 average occupancy for I-Direct Hospitals universe has improved from 57% to 62%. Similarly, the blended ARPOB for the universe has improved from Rs 34,000/day to Rs 45,000/day
• Overall, we expect Sales and EBITDA CAGR of 14% and 22% for I-Direct hospitals universe during FY23E-25E. Similarly, we expect ROCE improvement from 14% to 17% for the I-Direct universe during the same period

Top picks:

Narayana Hrudayalaya: Target: Rs 870

• Optimum blend of cost efficient India model and remunerative Cayman island model which caters to international patients.

HCG: Target: Rs 385

• HCG remains a compelling play on the cancer treatment theme in India with most of its emerging centres now inching towards maturity.

Apollo Hospital: Target: Rs 5,460

• The new hospitals, ventures are turning profitable on the back of a judicious case mix, cost rationalisation besides better occupancy and pick-up in elective surgeries.

Rainbow Children’s Medicare: Target: Rs 840

• Focused pan India paediatric and perinatal hospitals chain with strong financials and significant growth plans.

Life Insurance challenges bottoming out; strategy pedalling growth to drive valuation

• Post Union Budget proposal to tax gains from maturity of non-linked life insurance policies with aggregate annual premium contribution of Rs 5 lakh and above
• Life insurers witnessed steep correction to the extent of ~12 – 20%; variation across insurers depending on the extent of impact. For example, HDFC Life, with 10-12% impact on top-line, witnessed ~20% correction in stock price while SBI Life(with <2% impact on business) saw price declining ~12%
• Recent announcement in Finance Bill, wherein tax arbitrage for debt mutual funds stands to cease from April 2023 onwards, is set to bring all investment avenues on par with each other. Life insurance industry, thus, remains one of the beneficiaries anticipated to witness some inflows of funds ahead
• At current price, concerns regarding impact of change in taxation seems to be priced in. Business growth, amid healthy VNB margin, will act as catalyst for driving valuation ahead. New business strategy to be adopted by the insurers needs to be seen, in our view, focus on protection and pension business could aid healthy business growth and thereby valuation
• SBI Life Insurance (trading at 2.1x FY24EV) is well poised led by 1) healthy NBP (New Business Premium) growth at ~15% in YTD’23, 2) VNB margin (Value of New Business – matrix to gauge profitability of life insurer) ahead of 29%, 3) higher proportion of linked business. HDFC Life (trading at 2.3x FY24EV), though have witnessed steep correction, is seen to remain in a narrow range owing to 1) relatively higher proportion of high ticket non-linked business, 2) uncertainty on stake held by parent, 3) gradual flow of benefit of Exide merger 

March Auto volumes anticipated to be healthy

• In auto space, monthly volumes are expected over the coming weekend.The volume prints are expected to be steady for March 2023 given this is the last month before BS-VI stage 2 transition (coming on stream from 1^st April 2023) and vehicles become dearer by 2-5%. For instance in the 2-W space, Hero MotoCorp has announced a price hike up 2% while in the CV space, Tata Motors has announced a price hike of up-to 5%
• In BS-VI stage 2, vehicles sold domestically need to achieve emission targets in real world condition (RDE norms i.e. Real Driving Emission) vs. lab testing in the past. This makes life much more difficult for small diesel engines consequent to which we have seen OEM’s dropping these models namely diesel variant of Hyundai I20, Tata Altroz, Honda Amaze, Honda City among others. For petrol engines the life is supposed to be relatively easier
• On the volumes front, for the month of March 2023, we expect Commercial Vehicle space to outperform other segment with Ashok Leyland and Tata Motors at the OEM level expected to outperform its peers. In the PV space, given production warning alert by Maruti Suzuki and M&M also notifying chip supply issues, volumes could be flat or witness a single digit MoM decline. Key monitorable would be EV sales at Tata Motors and TVS Motors as well as Tractor sales at M&M and Escorts which has been surprising us on the positive front since past few months
• On the retails front, vehicle sales for March 2023 are running healthy at 19 lakh + units, highest post festive season and highest reading in past 4 months at ~108% of pre-Covid levels. We expect it to soften a bit for April 2023 amidst fresh price hikes as well as commentary from key players indicating decline in new bookings as well as enquiries. However, we expect this trend to be transitory with demand to pick up albeit with a lag, as PV space still remains a under penetrated category domestically and CV domain a clear beneficiary of robust government spending on infrastructure in FY24E

Our top bets in the OEM space are Maruti Suzuki (Rating: Buy; Target Price: Rs 11,200), Tata Motors (Rating: Buy; Target Price: Rs 530) and Ashok Leyland (Rating: Buy; Target Price: Rs 185)

Sharp jump in Chinese exports clouds near term prospects for Indian Companies

• In China, despite financial indicators being better than expectation, there are not any signs yet of meaningful pick-up in Chinese steel demand. As a result of which steel prices have remained stagnant over last one month. Chinese steel prices are hovering in tight range of ~US$ 660-670/tonne over last one month
• On the back of muted demand, Chinese monthly steel exports have witnessed a sharp uptick in first couple of months of CY 2023. During the first 2 months of CY23 (Jan to Feb 23), Chinese cumulative steel exports stood at 12.19 MT, up 49% YoY, albeit on a lower base
• While credit data is supportive of steel consumption growth in China, steel demand has thus far stayed subdued. Going ahead, there are expectation of demand to improve as peak construction period sets in from Apr’23

Hidden Gems

JK Cement: (CMP: Rs 2,950 , TP: Rs 3,350, Upside: 14%)

• With 20.7 MT grey cement capacity, JK Cement is the fourth largest player in North India, which contribute over 40% of its revenues
• The company also has a presence in Gujarat, Maharashtra and Karnataka
• The recent capex programme of 4 MT integrated grey cement capacity at Panna MP with split grinding unit and 22 MW WHRS in Uttar Pradesh with total capex of Rs 2,970 crore has been completed and dispatches have also started. The full impact of the same will be visible from the next quarter onwards
• In the next phase, the company will be adding another 5.5 MT Grinding unit capacity with total capex of Rs 1,161 crore. On a per tonne basis, this works out to capex of only $26/tonne
• Expect revenue, EBITDA CAGR of 16.8%, 15.4%, respectively, during FY22- 24E led by healthy volume CAGR of 14.8%. Expect EBITDA/T to improve to Rs 1,107/T in FY24E (9MFY23: Rs 863/T). We value the company at Rs 3,350/share (i.e. at 15x FY24E EV/EBITDA)

Conclusion

Any further global cues in terms of lower than anticipated inflation and banking system stabilizing could trigger short covering driven rally. FIIs have been continuously negative through Derivatives instruments since Mid-February and by mid-March, the value of net shorts in Index futures has reached almost 17k crores which was the highest in a decade. We believe these positions were formed to hedge the portfolio amidst global uncertainty. In the last 1 week, we have seen some closure in these shorts and April series will start with nearly 11.5k crores worth shorts.

Source: ICICIdirect Research