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India Strategy & Q4FY22 Review - Long term growth prospects to overshadow near term uncertainties

Posted On: 2022-06-11 13:55:47 (Time Zone: IST)

By Mr. Amnish Aggarwal - Director - Research at Prabhudas Lilladher.

Global Headwinds Just a Blip in India growth story: Global headwinds emanating from geo political uncertainty, disruption of supply chain, rising crude and commodity prices and global food shortage has led to aggressive increase in interest rates by central banks. We note that the rate tightening cycle is far from being over with further increase of 50-100bps in India in next 3-6 months. We believe further increase in crude prices and shortage of key components is slowly pushing major economies towards recession. We believe that India is in a unique position given 1) Huge domestic demand 2) self sufficiency in major food items 3) Govt support to develop Infra 4) strong corporate balance sheets and 5) emerging domestic investor class which has enabled absorb FII selling from past 3 quarters. We believe India will continue to remain as a major growth engine and current geopolitical impasse will only increase opportunities in both domestic market and also in global markets. We believe this uncertainty is only a passing phase and add fundamentally strong companies with business moats in uncertain times.

- 4Q22 has seen sales, EBIDTA and PBT lower than estimates by 0.8%, 1.9% and 6.9% respectively. 4Q was impacted due to 3rd wave of covid, although the impact was much less than 2nd wave of covid. Recovery post 3rd wave was quick although it got impacted by Russia Ukraine war from end of February, which disrupted supply chains and led to jump in commodity and crude prices. Demand remained impacted for Consumer staples, 2W, cement, Durables etc. LCV, Capital Goods, Multiplexes, Apparels and travel showed smart increase on a low base. Rural slowdown sustained amidst poor sentiment and high inflation.

- Maximum beat from estimates was recorded in Agri Chemicals, Chemicals, Auto and HFC

- Major Rating Upgrade: Avenue Supermart, Jubilant Foods, Hindalco, JK Lakshmi, Aarti Inds, LIC Housing and Chola.

- Rating Downgrade: Ambuja Cement, Bayer, Avaas Housing, LTTS, HCL, Tata Steel, JSPL, JSW Steel, IOC and Lupin

- Major Estimates Upgrade - M&M, SBI, Chola, Ambuja cement, Fine Org, and IOC

- Estimate Downgrade - HDFC, HDFC Bank, Muthoot, Ramco Cement, Kansai, Apollo Hospital, NH, Infy, Wipro, Zeel, Tata Steel, JSPL, JSW, SAIL, GAIL, IOC, Aurobindo and Lupin. Downgrades outweigh upgrades by 2.25:1

- NIFTY EEPS is estimated at 14.7% EPS CAGR over FY22-24 with FY23/24 EPS of Rs773.6 and 891. Our estimates are lower than consensus by 2.2/1.2% for FY23/24. NIFTY is currently trading at 20.7x 1-year forward EPS which is at 1% discount to 10 year average of 20.9x.

- Base Case: we value NIFTY at 10 year av. PE (20.7x) with March 24 EPS of 891 and arrive at June 23 target of 18622 (18470 based on 20.8xMarch 24 EPS earlier), a 13% upside.

- Bull Case, we value NIFTY at 10% premium to 10 year average (23x) and arrive at bull case target of 20484 (20317 earlier).

- Bear Case like March20 can see Nifty trading at 20% discount to LPA with a target of 14898. However we remain positive on India growth given strong tailwinds and expect positive returns by end of FY23.

- Model Portfolio - We remain overweight on Auto, Banks, IT services and Healthcare. We remain Underweight on Metals, Cement, Consumer, Oil and Gas and NBFC and increase cash to 3%. Our Model portfolio has outperformed NIFTY by 717bps since inception and 44bps in last 2 months.

- High Conviction Picks - We remove HDFC Bank, JSPL and Fortis Hospitals while we and add ICICI Bank and Apollo Hospitals.

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