PL Strategy Report: India Strategy - In fine fettle

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

In fine fettle

NIFTY has given 8.7% return over the past 6 weeks as confluence of strong FII inflows, state election results and hopes of interest rate cut in 2024 ignited the markets. Domestic demand remains mixed as rural recovery is stunted due to inflation and poor spatial distribution of monsoons while urban India is resilient. we believe that it is a passing phase and India will see significant shift in consumer wallet share towards discretionary and premium products as we move towards USD5 trillion economy in coming few years. We believe trends are already visible across PV’s, 2W, FMCG, Jewellery, Mobiles, Smartwatches, Real Estate, Food Delivery, Fintech and Travel etc.

India is in the most transformative phase in its history with massive Infrastructure development (Highways, Logistics, Ports, railways, Metro), Defense, PLI and significant increase in domestic demand with rising income levels and youngest population globally. Markets have been exuberant post state election results as chances of ruling NDA coming to power post elections has increased significantly, however it remains the biggest risk also. We remain positive on Banks, Capital Goods, Hospitals, Pharma and Discretionary consumption. NIFTY is trading at 10.8% discount to 10-year average with 12.6% EPS CAGR over FY24-26. We increase our base case NIFTY target to 24544 (22584 earlier) with clear focus on quality and companies with strong balance sheets and business moats.

We estimate 11.8% sales growth, 11.9% growth in EBIDTA and 16.9% growth in PBT of coverage universe. Ex oil & Gas we estimate 10.2% growth in EBIDTA and 15.1% in PBT. Auto, Capital Goods, Pharma, Metals, Building Material, HFC, and Travel will lead growth. Chemicals, Media, Education and Telecom will be drags.

• 3Q24 results show impact of a tepid festival, marriage and rural demand while urban demand has been resilient. Demand scenario is mixed with strong demand from upper and upper middle class while lower class seems to be under inflationary pressure. Rural recovery has been slower due to impact of inflation and poor monsoons in some states. Discretionary spending on travel, tourism, Jewellery, housing, PV/UV has been good while 2W are showing signs of revival. QSR, apparel, Durables demand however remains impacted.
• Strong volumes and benign inputs re proving strong 132bps margin expansion in autos. Banks PBT will increase by 5.3% only due to NIM compression and higher Opex. Capital Goods will report 16.6% sales and 20.4% PBT growth led by govt capex and PLI. Travel companies will report 36% EBIDTA growth due to seasonally strong quarter, rising domestic leisure travel and world cup. 24% PBT growth in Pharma universe will be led by strong domestic formulations and steady US demand and pricing.
• Stable RM prices and steady demand will boost build material companies. Consumer companies will report tepid performance in most staple companies, steady growth in jewellery while most QSR will report decline in profits. Durables will report tepid growth except wire and cable companies. Oil and Gas will show impact of lower refining margins. Chemicals will show impact of tepid global demand and pricing.
• NIFTY EEPS has seen an increase of 0.6/03/-0.2 for FY24/25/26 with 17.1% CAGR over FY23-26 and EPS of Rs1092/1221/1384. Our EPS estimates are 2.5% higher for FY24 but lower by 0.1/1.8% in FY25/26 than Bloomberg consensus EPS estimates.
• NIFTY is currently trading at 18.1x 1-year forward EPS, which is at 10.8% discount to 10-year average of 20.3x. Nifty was trading at discount of 17.2% with a PE of 16.9 before recent rally.
• Base Case: we value NIFTY at 10% discount (15% earlier) to 10-year average PE (20.4x) with Dec 25 EPS of 1343 and arrive at 12-month target of 24544 (22584 based on 17.3x Sept 25 EPS of Rs1302 earlier). Bull Case, we value NIFTY at 5% discount to 10-year average PE (7.5% discount earlier) and arrive at bull case target of 25907 (24573 earlier). Bear case Nifty can trade at 25% discount to LPA (25% earlier) with a target of 20453 (19927 earlier).
• Model Portfolio: We increase weight and remain overweight on Banks, Cap Goods and Healthcare. We turn overweight on diversified financials (led by HDFC AMC). We turn equal weight on IT services and underweight on Auto. We remain underweight on Metals, Cement, Consumer and Oil & Gas with most weight cuts in consumer space. Maximum weights increase has been in Siemens, Larsen & Toubro, ABB India, ICICI Bank, Max Healthcare Institute, Tata Motors, Hindalco Industries, HDFC AMC, L&T Technology Services. We have removed Ashok Leyland / HDFC Life Insurance from model portfolio and maximum weight cut has been in Avenue Supermarts, Hindustan Unilever and TCS.
• High Conviction Picks: We are adding Astral, Jupiter Health, Safari and Triveni Turbine in high conviction picks. We are removing contra sells and Kajaria ceramics from contra buys. Changes in the list are based on current market position while our long term view remains same on some of the names.