PL Report - India Strategy - Aiming for a new orbit

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

Aiming for a new orbit

NIFTY has given more than 10% return in FY24 YTD led by resilient domestic demand and USD14bn of net FII flows. India continues to be epitome of global growth with 6.5%+ expected GDP growth for FY24 (highest globally) even as growth is slowing down in US and Europe is embracing recession. India has witnessed revival in FII inflows (Strong global markets) and we expect the same to sustain post USD23bn outflow in last two years and decline in FII ownership by 300bps to 20.3%. Given strong domestic growth, declining inflation (Food and Fuel), revival in industrial capex and strong Infra push by GOI and demographic dividend, we expect sustained traction in FII inflows to continue. We estimate that FII inflows of USD35.7bn to increase market ownership by 1%. Rural India is showing green shoots post and soft inflation and favorable monsoons can accelerate demand further in a pre- election year. We remain positive on Auto, Banks, Capital goods, Hospitals, Discretionary consumption and Building Materials. El Nino and 2024 elections remains a key risk. Stable Govt. post elections and continuation of economic policies can take markets to next level.

We estimate flat sales, 48% growth in EBIDTA and 81% growth in PBT of coverage universe. Ex oil & Gas, we estimate 30.6% growth in EBIDTA and 30% in PBT. Auto, Banks, Oil and Gas, Capital goods and travel will report high growth.

♦ 1Q24 is actually 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, strong growth in Jewellery while other segments are depressed. However, travel, tourism, and spending on marriages continues to show strong growth.

♦ Global commodities continue to soften as fears of recession following sharp increase in global interest rates continue to weigh on prices. The impact of softer commodities has started to reflect in price reductions selectively.

♦ Banks, Travel, HFC’s, Auto and capital goods will report strong growth. Consumer, Hospitals, Pharma and Telecom will report moderate growth in sales. Agri, Building materials and Oil and Gas will report decline in sales on lower product prices. Auto, travel, pharma, oil, and Gas will report sharp margin expansion. Auto, Travel, Building materials, capital goods and durables rank high in PBT growth.

♦ NIFTY EEPS has seen an increase of 1.3/2.0% for FY24/25 with 16.3% EPS CAGR over FY23-25 with FY24/25 EPS of Rs1024/1171. Our EPS estimates are 3.9% and 3.7% lower than Bloomberg consensus EPS estimates.

♦ NIFTY is currently trading at 18.3x 1-year forward EPS, which is at 12% 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 1171 and arrive at 12-month target of 21430 (21013 based on 18.2x March 25 EPS of Rs1148 earlier). Bull Case, we value NIFTY at 10-year average (20.8x) and arrive at bull case target of 24353 (23878 at LPA PE). Bear Case: Bear case Nifty can trade at 25% discount to LPA (25% earlier) with a target of 18264 (17909 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. We are increasing weight on HDFC Bank, Tata Motors, Titan Company, Max Healthcare and L&T. we are adding Carborandun Universal and remove Jubilant Foodworks and Eicher Ltd from Model portfolio.

♦ High Conviction Picks: We are adding Carborandun Universal, Safari and S Chand in conviction list. We are also adding contra bets in conviction list with Crompton Consumer and Sumitomo Chemicals as preferred plays. We are removing PVR and VIP from conviction picks on structural shift in multiplexes and market share loss for VIP. We remove Apar post sharp run up recently.

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