PL Report - India Strategy - Headwinds ahead

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

Headwinds ahead

NIFTY has given more than 14% return in FY24 YTD as India attracted more than USD16.5bn of net FII flows. India seems well poised for growth in longer term, however coming months will be a real test for the economy and markets given 1) EL Nino impact on crops and Inflation as food inflation has spiked to more than 7.4% and rainfall outlook remains subdued and 2) dim possibility of further cut in interest rates with some possibility of an increase in 2H. We expect markets to start factoring in political risks as election related activity picks -up with state elections in November and Lok Sabha elections in April 2024. Economy is getting a big push from Union Govt induced capex even as rural India is showing faint signs of recovery and urban discretionary demand remains tepid. Expected interest rate hike in US and its impact on INR/USD with impending political and inflation risk can impact capital flows. We believe high inflation can be a political hot potato in an election year, forcing govt to slow down capex. We remain positive on Auto, Banks, Capital Goods and Healthcare. We cut NIFTY target to 20,735 given cut in earnings (impact of floods and late Diwali in 2Q) and expect markets to consolidate ahead of 2024 elections. We advise stock specific approach and avoiding sectors / companies with weak fundamentals and lack of business moats.

§ 1Q24 was first normal quarter after 1Q20, devoid of any covid wave during the quarter or base quarter. Demand scenario is mixed, with some green shoots in 2-wheelers and FMCG in rural India. Urban discretionary spending shows seasonal uptick in QSR, price correction led growth in Jewellery while most discretionary segments are depressed. However, travel, tourism, and spending on marriages continues to show strong growth.

§ 1Q24 (Ex-Oil &Gas) seen sales and EBIDTA beat of 2.6% and 10.9%. overall sales and EBIDTA beat has been 9% and 18.8% respectively.

§ Capital Goods, Pharma and Travel have given maximum beat in sales, Agri and specialty chemicals have been worst performer with 8-10% decline in sales. Auto, Pharma and Travel have given maximum beat in EBIDTA, Sp. chemicals, Agri, building material have seen 6-26% lower EBIDTA than estimates, Capital Gods, Durables and Staples were largely in Line. Agri and Sp. Chemicals have given 56% and 26.5% miss on PBT while Auto (JLR), Durables, Pharma and Travel (Aviation) have shown better numbers.

§ 21 rating downgrades, 2 upgrades. Downgrades led by spike in stock prices

§ Major Rating Upgrade: Polycab, Gujarat Gas

§ Major Rating Downgrade: Divi’s Labs and VIP Inds

§ Major Estimates Upgrade: Ashok Leyland, SBI, Tata Motors, ABB, Polycab, Nazara Tech, Zudus, Dr Reddy, Lupin lab, Safari, Bharat Forge

§ Estimate Downgrade: Sumitomo Chem, PVR, HCG, Apollo Hospitals, Britannia, HUL, Jubilant Foods, Moldtek packaging, Bajaj Elec, UPL

§ NIFTY EEPS has seen a cut of 1/2.8% for FY24/25 with 14.7% EPS CAGR over FY23-25 with FY24/25 EPS of Rs1013/1138 (1024/1171 earlier). PL EPSE are 3.9% and 6.1% lower than Bloomberg consensus EPS estimates.

§ NIFTY is currently trading at 18.3x 1-year forward EPS, which is at 11.6% discount to 10-year average of 20.7x.

§ Base Case: we value NIFTY at 12% discount to 10-year average PE (20.7x) with March25 EPS of 1138 and arrive at 12-month target of 20735 (21430 based on 18.3x March 25 EPS of Rs1171 earlier). Bull Case, we value NIFTY at 10-year average (20.7x) and arrive at bull case target of 23563 (24353 at LPA PE). Bear Case: Bear case Nifty can trade at 25% discount to LPA (25% earlier) with a target of 17672 (18264 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 901bps since inception, 174bps since April23 and 51bps since July. We are making minor changes in weights but sectoral calls remain same.

§ High Conviction Picks: We add SBI, Gujarat Gas and Navneet Education in high conviction buys. We are removing HDFC Bank from high conviction picks. We are replacing Sumitomo chemicals with Greenpanel in contra picks. We are also introducing Sell Ideas with Divis Labs and Deepak Nitrate.

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