Share market outlook of the week: New highs conquered; Nifty geared up for 23,400 by June

• Indian equities outshined global peers to record new highs, led by rate sensitives even as RBI maintained statues quo on policy rates.
• US equities declined amid profit taking from life highs as stronger economic data pushed back early rate cut expectations.
• New highs done, acceleration likely: Nifty broke out of one month consolidation, despite global volatility in a sign that pre-election rally is brewing up in tandem with historical election year price-behaviour. We expect Nifty to head towards 23,400 over next couple of months while short term milestone is placed at 22,900.
• Sectorally, BFSI, IT, Auto, Metal to outperform.
• Midcap at new highs, small cap index to follow: Both indices respected their bull market correction regime of around 12%-15% corrections from highs and formed higher base. Midcap index posted faster retracement of five-week corrective phase indicating continuation of structural uptrend.
• Breadth: Percentage of stocks above 50 day ema rebounded strongly from its bearish extreme to current reading of 70% indicating broad-based participation in recent recovery.
• Strong fund flow domestically despite concerns over valuations will continue to act as support in corrective phases especially for companies with earnings potential.
• Commodities on uptick: major industrial commodities like Aluminium and Copper are coming out of prolonged base formation., were up 4%-6% last week. This supports bullish stance on Metal.
• Brent: prices are rising amid strong economic data from China, US, India. We expect prices to face strong hurdle around 98-100 band while support is around 82-84 zone. We donot expect much adverse impact on Rupee as it has strong support around 84-84.20 zone.

Monetary Policy - a non-event

• The monetary policy meeting was largely a non-event on expected lines with no change in benchmark repo rate (6.5%) and liquidity stance (withdrawal of accommodation). It is the 7^th consecutive meeting with no change in rates.
• There is no change both GDP and Inflation forecast for FY25. GDP growth forecast remain at 7% for FY25 while inflation forecast retained at 4.5%.
• It seems like RBI by stating about achieving the inflation target of 4% on a durable basis wants to keep the bar for rate cut higher and wants to keep the market rate cut expectations lower. However, overall the monetary policy does change the rate-cut expectation in October 2024.
• Since monetary policy was largely on expected lines, bond yields were largely unchanged with minor uptick of around 2 bps. 10-year is hovering at 7.11% vs 7.09%. Equity market also did not had any major reaction to the policy with indices trading in a very narrow range post policy outcome.

Banking Sector outlook

• Given nominal GDP growth anticipated at 11.5%, banking credit growth is expected at 12-14% in FY25E, however, maintaining balance between growth and margins remains a crucial juncture under consideration.
• Banks covered under Liquidity Coverage Ratio (LCR) framework are required to maintain a stock of high quality liquid assets (HQLA) to cover the expected net cash outflows in the next 30 calendar days. Liquidity Coverage Ratio (LCR) framework might witness some alteration in assumptions given episodes of increased ability of the depositors to quickly withdraw or transfer deposits during times of stress, using digital banking channels.
• Continued selective approach in banks with PSU banks remaining beneficiary of anticipated reversal in interest rate cycle and recovery from stressed pool.

IT results unlikely to buoy sentiments

• Revenues: We expect Tier I IT companies to report -1% to 1.2% QoQ growth. TCS will lead the pack with revenue growth of 1.2% QoQ in Q4 on the back of ramp up of large deals. Infosys, on the other hand is likely to report 1% QoQ revenue decline in Q4 as we expect the extended furloughs to continue. Wipro and HCL Tech would likely report a flattish QoQ revenues with the Q4 being a seasonally weak quarter for HCL Tech software business. Within Tier 2, Coforge revenues to grow by 1.5% QoQ in Q4 with growth momentum driven by strong order wins. Both Tech Mahindra and LTIMindtree would witness weak quarter with revenues decline of 1.5% and 1%, respectively, amid weak discretionary spends.
• Margins: most IT majors are likely to witness resilient margins (stable to QoQ increase) with improved efficiency and utilisations. Among Tier 1, outlier could be HCL Tech wherein margins may decline by 120 bps QoQ to 18.5% due to lower software revenue. Among the Tier 2, Tech M to report margin expansion of 160 bps due to absence of exceptional expenseslike in Q3. We expect Coforge's margin to increase by 120 bps QoQ due to operating leverage.
• Key Things to watch:
• Most companies: Commentary on demand environment in US, BFSI & Retail sectors and Clients IT spending budgets
• Infosys: Infosys utilisation of significant one-time IT refund of ~Rs 4,000 (net)
• Tech Mahindra: Mgmt comments on business restructuring & business revival plans

BFSI Q4FY24 – Steady quarter

• Q4FY24 is seen to remain steady in-line with previous quarters. In Q4FY24, advance momentum is expected to sustain at healthy rate across banks (industry growth at ~16% YoY), with focus on corporate lending amid regulatory tightening on unsecured retail loans. Deposit accretion is seen to remain healthy at ~12-13% YoY, led by term deposits which is seen to keep cost of funds elevated, thus keeping margins trajectory benign. Steady opex and moderation in credit cost is expected to support earnings momentum in the quarter. GNPA and NNPA numbers are expected to continue with downward trend in Q4FY24.
• PSU Banks remain preferred picks given healthy liabilities franchise, relatively lower CD ratio and adequate capital. Recovery from stress pool and treasury gains, amid anticipation of interest rate reversal, remains catalyst to aid valuations.

March Auto Volumes – March 2024: Mixed Bag, PV Outshines

Auto wholesale volume for March 2024 came in mixed with PV segment growing healthy double digit on YoY basis while CV & Tractors domains witnessed a decline.  Volumes in 2-W space were broadly flat to positive. Exports remained onto their recovery path in 2W space.

• In 2-W pack, market leader Hero Moto reported a volume decline of 6% YoY at 4.9 lakh units, whereas volumes at TVS Motors were at 3.4 lakh units up 12% YoY and the same at Bajaj Auto grew 27% YoY at 3.1 lakh units. Royal Enfield brand at Eicher Motors reported volumes of 76k units (up 5% YoY), marginally short of our expectations.
• In PV space, market leader Maruti volume for the month were up 11% YoY at 1.84 lakh units. Tata Motors volumes were up by 14% at 50k units, while volumes at M&M were up 13% YoY at 41k units. For the year, M&M outperformed big time amidst healthy order book & capacity expansions.
• In CV segment, Tata Motors reported volumes of 42k units, down 10% YoY. While Ashok Leyland reported a volume decline of 4% YoY at 23k units.
• In tractors, M&M reported a volume decline of 26% YoY at 26k units while Escorts reported volumes decline of 17% YoY at 9k units. Volume decline at both the Tractor players was to the tune of ~7% for FY24E.
• OEM wholesale sales volume for the fiscal year 2024 came in broadly positive with volumes growing high single digit on YoY basis across PV (~8-9%) and the 2-W (5%+) segments while came in flat across the CV space & declined in the Tractor domain (-7% YoY).
• For FY24, M&M and TVS Motors outperformed their peers in their respective segments. In CV space, decline was witnessed in M&HCV truck space while Buses stagged a healthy rebound.

For FY25E, we expect growth trajectory to be led by the 2-W space with high base and impending elections limiting growth in PV and CV categories.

Hidden Gem

Shalby Limited (Target Price: Rs 320)

• Shalby is a multi-specialty hospitals chain that manages 16 hospital assets across India (10 owned multispecialty hospitals and 6 franchisee hospitals). Total bed capacity- 2,362. Although Orthopaedics is the main forte (45% of the revenues), it is moving into other super specialties rapidly.
• The company is following calibrated approach for expansion with asset-light franchisee driven expansion in smaller towns and large hospital set-ups in tier I-II cities.
• Shalby is also into Implants business (knee and hip implants) via its US based subsidiary Consensus with sales in US, India, Japan among others. The business has turned EBITDA positive.
• We expect company revenue to grow at 14.3% CAGR (FY23-26E) to Rs 1,200 crore. EBITDA margins are set to improve from 17% in FY23 to 21.4% by FY26E on account of improvement in ARPOB, better case mix, focus on franchisee model and better profitability of implants business. Consequently the net profuts are expected to grow at 27% CAGR to Rs 140 crore during the same period.
• The ROCE is expected improve from 10% to 16% on the back of thrust on franchisee model and productive capex with better unit economics.
• Our SOTP valuation of Rs 320 is based on 13xFY26E hospitals EBITDA and 2x FY26E Consensus Sales (implant business).