Share market outlook of the week: Stock specific action to prevail in truncated expiry week

• Nifty recouped losses to end in green helped by strong global cues post US Fed meeting. Midcap and small cap indices snapped four week losing streak to end 1% higher.
• Globally, Nikkei hit new life time highs despite first rate hike in 15 years. US and European indices gained >2% each to hit new highs.
• In the coming couple of weeks, we expect Nifty to hold 21,700 levels and gradually head towards life highs 22,500. Use dips as buying opportunity.
• BankNifty has shown resilience in the face of recent volatility. Since BFSI stocks hold significant weightage in Nifty, we expect BFSI stocks to steer Nifty higher.
• Mid-small cap indices:  to stage further recovery from oversold levels over next few weeks, as we price wise correction in these indices is done going by bull market history.
• BFSI, PSU, Infra, Metal sectors to remain in focus.

Major policy decision across central banks

• Last week was an eventful week from central banks perspective. US Federal Reserve maintained status quo but confirmed 3 rate cuts by the end of 2024, imparting clarity on the rate-cut trajectory.
• This certainty of rate-cut trajectory, helped improve market sentiments leading to rally in equity and commodity market, fall in bond yields and fall in dollar index.
• BOE in its policy meeting, on expected lines, kept policy rate unchanged but indicated towards peaking of policy rates.
• However, in a surprise move, Swiss central bank cuts rates by 25 bps, becoming the first central banker to cut rates in the year 2024.
• On the other hand, Bank of Japan ended eight years of negative interest rates with its first interest rate hike in 17 years.

This led to reversal of trade which panned-out after US Fed policy particularly in currency and commodity market and led some rally in dollar index while commodity prices declined (Earlier there was expectation that US Fed will be the first central banker to lead the rate cut cycle in June 2024).

Accenture outlook drags IT stocks

• Accenture’s Outsourcing revenue (49.2% of revenue mix) remained steady in Q2CY24 on sequential basis at US$7.8 bn while on YoY basis it reported a modest growth of 3.2%.
• New bookings in Outsourcing business came at US$11.1 bn, down 3.2% YoY but it grew sequentially for second successive quarter.
• Geography wise North America (47% of mix) declined by 0.3% YoY while EMEA (35% of mix) grew by 5.6% YoY. Segment wise Health (21% of mix) grew by 10% YoY while Financial Services (~18% of mix) & CMT (~17% of mix) declined by 6.5% & 8% YoY respectively.
• The company during quarter signed TCV of US$ 600 in Gen AI projects bringing the TCV of Gen AI projects to US$ 1.1 bn in H1CY24.
• The company reduced its full year revenue guidance from 2-5% in Q1 to 1-3%.
• Views: The reduction in Accenture’s full year guidance indicates that there is no material improvement in the demand environment.
• The only solace for the company is that the demand for Gen AI services is witnessing an uptick which is likely to aid in revenue growth going forward.
• The company’s growth guidance includes contribution from inorganic acquisitions indicating that the headwinds in organic business persists. The company mentioned that clients continue to prioritize their tech spends indicating that discretionary spends & short-term projects demand remains weak.
• Read through for Indian major IT players is that demand outlook commentary could remain muted and major recovery is likely only by FY25 end/FY26.

Indian Electric PV Industry: Exciting times ahead

Domestic Electric Passenger Vehicle segment is witnessing a lot of action largely in three domains; (i) price cut by existing OEM’s thereby making EV’s more price competitive and in some cases even cheaper than their ICE model counterparts, amid falling Li-On battery prices (ii) policy action in terms of new EV policy promoting concessional duty imports by foreign tech enabled OEM’s who are seriously looking to set up manufacturing base in India and (iii) entrance of new OEM’s who are ambitious about making their mark in industry like Vinfast, JSW group etc.

E-Vehicle policy aimed at incentivising foreign players to set up shop in India

• The Union Government has approved a scheme to promote India as a manufacturing destination so that e-vehicles (EV) with the latest technology can be manufactured in the country.
• The policy is designed to attract investments in the e-vehicle space by reputed global EV manufacturers in PV domain.
• Brief contours of the policy include:

(i) Concessional import duty of 15% for Electric Cars with minimum CIF value of US$ 35,000 over a 5-year period with maximum volumes under concessional duty being limited by duty forgone equivalent to its committed investment in India.

(ii) Commissioning of manufacturing facility within three years of application approval,

(iii) Meeting of localisation content (domestic value addition; DVA) of 25% within 3 years and 50% within 5 years of application approval and

(iv) Adequate bank guarantees to safeguard India’s economic interests. 

Our View: The announced policy is progressive in nature as it allows new tech-oriented OEM players to enter Indian markets and at the same time safeguards interest of domestic auto OEM manufacturers by allowing concessional duty only after a threshold Electric Vehicle sales price i.e. US$35,000 CIF equivalent to ~Rs 30 lakh. We believe it to be neutral for Tata Motors, M&M and Maruti which are currently working in this domain and have no product offerings in the high-end category. 

JSW MG Motors India aims to create “Maruti Moment” in New Energy Vehicles space

• JSW group recent stake purchase in MG Motors India ltd, with consequent entity being labelled as JSW MG Motors India (JSW stake: 35%; MG Motors: 49%) is looking to democratise the New Energy Vehicle space (NEV, like Electric Vehicles) and is looking to make them affordable for the masses thereby targeting ~1 million units of sales volume from this space by 2030 (cumulatively).
• It also aims to invest ~US$ 5 billion over the next 6-7 years across the NEV ecosystem including capacity expansion, new product development etc. In the near to medium term however it is looking to spend ~ Rs 5,000 crore for enhancing its domestic manufacturing capacity from 1 lakh to 3 lakh units.

Domestic Electric PV space is definitively expected to be competitive with presence of serious players playing their part in expanding the market as well. It bodes well for the domestic Electric PV industry working under the broader government aim of 30% penetration in domestic PV space.

Disinvestment of IDBI Bank – seems a few steps closure to closure

• As per media sources, FairFax seems to have revised its offer for acquiring substantial stake in IDBI Bank. According to the revised offer, FairFax has agreed for an all-cash compensation. In addition, identity of IDBI Bank will be maintained compared to earlier proposal of running the bank as a separate entity before merging it with CSB Bank, where the investor already holds a substantial stake.
• While contours of the deal needs to be seen; recent alterations in the offer seems to have sweetened the deal as it looks more suitable for the government and regulator.

DCB Bank –Appointment of internal candidate as MD & CEO to ensure smooth leadership transition

• DCB Bank’s board has appointed Praveen Kutty as the new MD & CEO, for a period of 3 years, effective from 29 April 2024. Praveen Kutty has been an integral part of DCB Bank for last 16 years, and currently is in charge of retail and agri banking.
• With appointment of an internal candidate as MD & CEO, uncertainty on leadership is put to rest. In addition, internal candidate with a long tenure in the bank ensures smooth leadership transition which remains favorable for investors.
• Given the bank delivering higher than industry growth (~18% in Q3FY24) and RoA at 0.9-1%, current valuation at 0.8x FY25E BV seems attractive.

Life Insurance industry is expected to get a breather

• Life insurance industry has been witnessing pressure on business growth owing to various regulations in last fiscal. Resultantly, premium growth is expected to remain flat in FY24 as compared to growth of ~18% YoY in FY23 (premium growth at -0.2% for YTD Feb 2024).
• The most recent proposal of implementing higher surrender value for policyholders remained a concern for the industry as it could have an impact on profitability. Thus, life insurance players were not in favor of such higher payouts on surrender.
• Recent media support suggests that IRDAI is likely to ease proposed regulation related to higher surrender charges for endowment policies, though final decision is still awaited.
• Easing of surrender charges remains beneficial for life insurers as lower surrender charges will continues to act as a deterrent for policyholder to make an early exit. Further, in case of early exit by policyholder, payout for the insurer will continue to remain lower which will ensure no substantial impact on business and profitability. 

CERC on Final Tariff Norms : No major deviation from Draft paper

CERC has finalised the tariff regulations for FY24-FY29. The regulator has largely maintained the RoE for existing thermal, hydro and transmission assets while incentivising new hydro assets with 17% RoE and reduced the RoE for new transmission assets to 15%. There are no material changes in the final order versus the draft order, except a few:

1) Thermal – incentive of Rs 0.55/unit for off peak (vs. 50p/unit earlier).

2) Transmission – minor changes in O&M expenses.

3) Hydro – relaxed normative availability norms for certain plants.

The new regulations are beneficial for thermal gencos owing to higher renovation and maintenance cost, higher incentive for off-peak supply, and hydro generating companies for higher RoE on new assets.

View : We believe the same has already been discounted in the stock prices of public utilities as there is no material change in the draft vs. final regulations. We continue to like utility like NTPC (Target price: Rs 400) which is on the right path of better operational portfolio mix between thermal and green portfolio. Even Hydro utilities tend to gain given increase in ROE’s for newly commercialized projects which will cushion against delay in operationalization of projects.

Hidden Gem

HEG (CMP: Rs 1,920, Target Price: Rs 2,420, Market Capitalization: Rs 7,411 crore; Potential upside: 26%)

• HEG is one of the leading graphite electrode manufacturers in India and is a key exporter with ~65%- 70% of production exported to global markets. It has the world’s largest single site graphite electrode manufacturing plant of 1,00,000 tonne capacity in state of Madhya Pradesh. It also operates captive power plants of ~80 MW capacity.
• Globally, the steel manufacturers are shifting towards Electric Arc Furnance route of steel making, which emits ~75% less carbon vs. the traditional steelmaking method i.e. BOF (blast furnace) while also offering lower production costs and greater cost effectiveness.
• EAF share in total crude steel production (ex-China) has increased from ~44% in 2015 to ~50% in 2022 and is expected to further rise to ~55% in next few years. Moreover, it is projected that more than ~170 million tons of EAF capacity (ex-China) will be added by 2030, leading to an additional demand for graphite electrodes by ~2 lakh tons vs. the existing market size of ~8 lakh tonne.
• Hence, the global transition towards EAF route of steelmaking bodes well for HEG,  which is one of the top 5 graphite electrodes producer globally.Li-On batteries is the new sunrise sector catering to E-mobility space (Electric Vehicles) with demand pegged at ~150- 160 GWh by 2030, resulting in ~1.5 lakh tons demand for graphite anode, a key component in lithium-ion cell. HEG aims to seize this opportunity by venturing into manufacturing of graphite anode.
• HEG is setting up a capacity of 20,000 tons of this material (catering to ~20 GWh of cell capacity) at a capex cost of ~Rs 1,700-1,800 crores with expected commissioning in H2FY26 and intended asset turnover of 1-1.1x, EBITDA margins of ~25%+ and RoCE of ~20%. With core expertise in processing needle coke for manufacturing graphite electrodes, this venture will offer value added product benefits to HEG and shall provide stability to its earrings profile, structurally positive in nature.
• We hold a positive view on HEG, on the back of structural demand drivers in place amid ongoing global shift towards the EAF route of steelmaking, capacity expansion led volume growth in offering & graphite anode business.
• We assign BUY rating with target price placed at Rs 2,420 thereby valuing it on SoTP basis, i.e. 7.5x EV/EBITDA on core graphite electrode business, 2x P/B on equity investment in BEL and 1x CWIP to graphite anode business, all on FY26E.