In the light of progressive Union Budget, a revival of capital expenditure cycle, and healthy credit growth and asset quality in the banking sector, brokerage house ICICI Direct Research maintains an optimistic outlook for the domestic markets.
According to the brokerage report, easing inflation and subsequent moderation in the pace of interest rate hikes by the central banks are the main reasons for the global and domestic markets' significant recovery since the interim low in September 2022 end.
Domestic markets remained robust due to the Union Budget 2023–24's focus on growth and the lack of significant changes to the capital gains tax structure.
On the earnings front, outperformance was witnessed across auto, capital goods, fast-moving consumer goods (FMCG) and pharmaceuticals space while the metals and oil & gas space underperformed.
Further, the brokerage in its report stated that any dips should be used to build a long-term portfolio of quality companies that have lean balance sheet and are capital efficient in nature and possess growth longevity. The brokerage is positive on sectors like capital goods, auto, infrastructure and banks.
Let's take a look at the brokerage's top picks for March 2023
With a capacity of 31.5 million tonnes distributed across India's North (35%), South (24%), West (nearly 20%), and East (nearly 21%), Ambuja Cement, now a part of the Adani Group conglomerate, is one of the country's biggest cement producers.
According to the brokerage's estimate, the new management intends to boost combined capacity to nearly 140 million tonne over the next five years.
"Over the past five years, the company has lost its market share to other large players with no major new capacities coming in place during this period. With the aggressive new promoter, we now expect volume growth to get ramped up, going ahead," said the brokerage in its report.
Also, the group’s exposure into energy and logistics will help it to improve cost dynamics and gain supply chain efficiencies. Overall, as per the brokerage's rough estimates, it expects cost savings of ₹300-350/tonne from the current run rate. Further, the company continues to have a strong balance sheet having debt free status. The target price of the stock is ₹500.
The company has laid out growth plans to reach a valuation of nearly US$2.8 billion (roughly Rs. 21,000 crore) by FY26E, which translates to a 15% compound annual growth rate (CAGR) over that period. The debut of luxury menswear ethnic brand Tasva, the acquisition of Reebok's India operations, and the setup of a distinct platform are just a few examples of multiple strategic initiatives that will add value over the medium to long term.
"The company has strengthened its balance sheet through recent equity infusion with net debt declining sharply from ₹2,500 crore (in FY20) to around ₹340 crore. The company with strong bouquet of brands is well placed to accelerate the pace of store addition and revenue growth," said the brokerage in its report. The target price for the stock is ₹340.
With a 25% share of port cargo movement in India, the company is the biggest commercial port operator in the country. The Adani Group company is enhancing its capabilities across all logistics segments as it sets out to become India's biggest integrated transport utility business by 2030. As a result, it will be able to provide end-to-end support to its clients, increasing its wallet share and making the cargo more sticky.
"Further, dedicated freight corridor (DFC) connectivity to Mundra is expected to provide faster port evacuation, quicker transit time and would enable higher volume generation for Adani Ports. The company is backed by strong free cash flow (FCF) generating assets with a 15%+ return on capital employed (RoCE). Further it has a comfortable Debt/Equity ratio close to 1. We have valued Adani Ports and Special Economic Zone on sum-of-the-parts valuation (SOTP) basis with a target price of ₹800," said the brokerage.
The bank is significantly ahead of its goal, according to the brokerage report, with its retail/commercial book at Rs. 1.1 lakh crore and its current account and savings account (CASA) deposits at about 51.3%. With the balance sheet restructuring largely complete, the emphasis is on accelerating growth by entering new markets (digital, gold, personal loans, and credit cards).
"Improvement in gross non-performing assets (GNPA) at 3.18% coupled with adequate provision buffer on legacy infrastructure exposure provides confidence on credit cost remaining at around 1.5-1.7% in FY23-24E. However, key variable to drive further improvement in return ratios is improvement in cost income ratio (CI ratio) from current 73.3% to targeted 55% in FY25E. Thus, strong retail execution, steady credit cost and improving efficiency should drive RoE at 10-12% in FY24-25E and thus valuation," said the brokerage.
The future customer acquisition and business growth of HDFC Bank are expected to be aided by its emphasis on developing physical and digital capabilities. As a result, the brokerage expects advance growth to increase by 18% CAGR in FY24–25E.
"Diversified asset mix, healthy liabilities franchise, relatively superior efficiency and prudent under-writing is seen to keep return on assets (RoA) strong at nearly 2% ahead. Merger with parent (HDFC Ltd), expected to get complete in Q1FY24, to induce long term benefit; however, liabilities accretion should remain in focus in medium term. At current price, stock is available at 2.4x FY25E adjusted book value (ABV), which remains attractive. Near term volatility in stock price owing to uncertainty related to regulatory approvals offers investment opportunity," said the brokerage. The target price for the stock is ₹1,920.
The brokerage claims that the order backlog, which is estimated to be worth ₹84,000 crore, provides good revenue visibility. Additionally, the management estimates that there are projects worth around ₹55,000 crore in the works that will be completed in the following 1–1.5 years. This year, the Tejas MK2 prototype is also expected, which will represent another significant deal for the business given that the Indian Air Force (IAF) needs six squadrons of medium weight fighters. In terms of rising localisation, improvement in execution, and solid visibility of order inflows, the company appears to be in a good position overall. The target price for the stock is ₹3,300.
The brokerage claims that KSB is well-positioned to profit from the rising demand for pumps and valves in major industries like building, oil and gas, energy, water, and wastewater. The company's current priorities are diversifying its product line and identifying new rail industry opportunities.
"Acquisition of technology from Bharat Pumps and Compressors would help KSB to increase its share of services & spares revenue in the coming period. Revenue is expected to grow nearly 18% CAGR over CY22-24E led by strong demand for standard pumps in Industrials segment with timely execution of NPCIL orders. With positive operating leverage expected to kick-in, earnings before interest, taxes, depreciation, and amortisation (EBITDA) and profit after tax (PAT) expected to grow at 22.1% and 21.6% CAGR over the same period," said the brokerage in its report. The target price for the stock is ₹2,390.
The brokerage claims that the business is still expanding as a result of the high demand for its products, which include cranes, construction equipment, and material handling equipment. The management's forecast for revenue growth over the next two years is still optimistic at 15-20%, with margin levels expected to increase due to softer material prices, increased operating leverage, and backward integration.
The brokerage believes that the company is well-positioned to seize the growth from the broad increase in private capital expenditure thanks to the expansion of its crane and material handling segment capacities, the expansion of its product portfolio for electric cranes, and an increased emphasis on exports. The target price for the stock is ₹435.
The company has a sound balance sheet and a cash balance of ₹1,200 crore, according to the brokerage. In keeping with the company's strategy to exit non-core businesses and continuing concentrating on growing their global footprint and becoming a major engineering, procurement, and construction (EPC) player, the company recently sold its wind power assets. The management reported a ₹5,000 crore order proposal pipeline for FY24 and stated that the current order book is at ₹4,000 crores. They expect that order momentum will continue in the FGD, T&D, and smart metering sectors.
"The company expects to bag another ₹1,000 crore order in Q4YF23E that gives medium term revenue visibility. We expect revenue, EBITDA to grow at CAGR of around 39.8%, 13.1%, respectively, in FY23-25E, and value the company at ₹500," said the brokerage.
