PL Report - India Strategy - On a roll, but hiccups likely

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

On a roll, but hiccups likely

NIFTY has given 5% return in past 2 months led by strong resilience in Indian economy and revival of FII flows. India continues to be in a sweet spot given 6.5% GDP forecast for FY24 (highest globally), pause in repo rates (6.5%), declining inflation (Food and Fuel), revival in industrial capex and strong Infra push by GOI. We are structurally positive on India growth story given globally leading growth, favorable Govt policies and strong demographic dividend. High frequency indicators like GST collection (11.5% YoY), peak power demand (8% YoY), recovery in Air Travel (pre covid levels), PV, CV, Housing demand, credit card spends (25.8% YoY) services export growth (24.2% in FY23 and 26.2% in April23) and improving capacity utilization are positive. Rural demand is also showing signs of a gradual pickup post strong Rabi crop and declining inflation, although El Nino remains a big risk. We remain optimistic on Auto, Banks, Capital goods, Hospitals, Discretionary consumption and Building Materials. We believe EL-Nino and consequent increase in inflation and 2024 General elections are key risks to our call.

♦ 4Q23 (Ex-Oil &Gas) seen have been largely in line sales, PBT and PAT are higher by 2.2% and 8.8%.

♦ Building materials, Pharma and travel had the maximum beat in sales. Agri was worst performer with 10% lower sales than estimates.

♦ Building materials, Auto, Pharma, HFC and Travel had maximum beat in EBIDTA estimates. Agri and Specialty chemicals were highest miss. Consumer staples, Banks and Hospitals were largely in line.

♦ Agri was worst performer with sales/ EBIDTA and PAT miss of 10/28/38% respectively. Media had a poor performance with loss of Rs3bn. Travel and Telecom had PAT beat of 83% and 52% respectively.

♦ Major Rating Upgrade: Apar Ind, Marico, Navneet Education

♦ Rating Downgrade: Dr Reddy, Glenmark, Voltas, City Union Bank, Aavas Financiers, Chambal Fertilizers, Laxmi organics

♦ Major Estimates Upgrade: Ashok Leyland, Tata Motors, Ceat, Astral, Prince Pipes, ABB, Triveni Turbine, Voltamp, Asian Paints, Britannia, Navneet, PVR, IOC, MGL, Safari, Interglobe Aviation

♦ Estimate Downgrade: Bharti, Nocil, Laxmi Organic, Aarti, Dr Reddy, ZEE, Nazara, Jubilant Foods, Dabur, Crompton Greaves Consumer, Voltas, Kalpataru, Finolex, UPL, Rallis, Chambal Fertilizers

♦ NIFTY EPS has seen an increase of 2/1.8% for FY24/25 with 15.2% EPS CAGR over FY23-25 with FY24/25 EPS of Rs1010/1148. Our EPS estimates are 5.2% and 5.6% lower than Bloomberg consensus EPS estimates.

♦ NIFTY is currently trading at 18x 1-year forward EPS which is at 13.5% discount to 10-year average of 20.8x.

♦ Base Case: we value NIFTY at 12% discount to 10-year average PE (20.8x) with March25 EPS of 1148 and arrive at 12-month target of 21013 (20551 based on 18.2x March 25 EPS of Rs1128 earlier). Bull Case, we value NIFTY at 10-year average (20.8x) and arrive at bull case target of 23878 (23354 at LPA PE). Bear Case: Bear case Nifty can trade at 25% discount to LPA (25% earlier) with a target of 17909 (17515 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 835bps since inception and by 133bps in past 2 months.

♦ High Conviction Picks: We prune the high conviction picks post recent run up. We are adding HDFC Bank, Maruti, Siemens, Sumitomo Chemicals, Apar Inds and Aster DM Health in conviction list. We remove ABB, Apollo Hospitals, BOB, BEL, Bharti, Havells, M&M, PI Inds and Max Health. Many of these are due to recent run up and we are not negative on these names.

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