Daily Voice: Expect Nifty at 25,363 by December; bullish on 7 stocks, says Amnish Agarwal of Prabhudas Lilladher

We have 220bps (190bps earlier) overweight on Banks on sustained strong credit growth and asset quality while NIM (net interest margin) seems to have peaked out. We remain overweight on healthcare by 240bps as generic pharma players will benefit from benign API prices and stable US pricing while domestic growth is intact.

We retain overweight on capital goods by 560 bps given strong growth visibility over the next 3-5 years. We also retain Equal weight on IT services as recovery in IT services is getting delayed. We believe segments like engineering design services, ERP, data analytics, digital, artificial intelligence supply chain etc. will drive growth in the next cycle.

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We remain positive on PV (passenger vehicle) segment and have Maruti, M&M and Tata Motors in our model portfolio. We believe sustained traction and margin improvement in the auto business of M&M provides visibility despite near-term headwinds in the tractor business. Tata Motors will benefit from a strong order book in JLR and growth momentum in the domestic PV business.

Do you expect the chemicals space to gain earnings strength in FY25?

Indian chemical industry continues to face weak global demand and ramp-up in China production. Destocking seems largely over and volumes are expected to pick up. The Red Sea crisis has led to an increase in freight costs across the industry.

For Q3FY24 chemical companies under our coverage posted an aggregate sale of Rs 10,400 crore, a decline of 18 percent YoY/ 5 percent QoQ. EBITDAM (earnings before interest, taxes, depreciation, and amortization) on an aggregate basis came at 17.7 percent down 436 bps YoY/ 28 bps QoQ, with Laxmi Organics standing at the lowest EBITDAM of 7.5 percent, Clean Science had the best margins 44.4 percent.

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Are you super bullish on travel and tourism that recorded far better than expected earnings in Q3FY24?

Hotels: In a seasonally strong quarter, we saw a healthy 18.0 percent RevPAR (revenue per available room) growth for Chalet. In the case of Lemon Tree, RevPAR was up 7.7 percent due to the operationalization of Aurika which is yet to stabilize. Management commentary on ARR (average room rate) growth for most hotel companies continues to remain buoyant. Beyond rate buoyancy, Chalet is likely to benefit from the operationalization of ~200 new rooms at Lonavala & Bangalore coupled with expansion in the lease portfolio whereas Lemon Tree is likely to gain from the rising contribution of Aurika.

Aviation: Artificial fleet scarcity arising from higher AoG (aircraft on the ground) can keep pricing at elevated levels. Trends in fuel prices, the extent of competitive intensity (SpiceJet has lined up fund infusion) and the gravity of P&W engine problems are key factors to monitor in the near term.

IRCTC: The Catering division continues to surprise led by the introduction of Vande Bharat trains, rising FTR bookings and expansion of business outside of Railways. However, growth in the high-margin ticketing division will continue to remain in the single digits.

Your top bets for FY25?

We continue to be overweight on banks, healthcare and capital goods while being underweight on Consumers. Some of the top picks would be ICICI Bank, Reliance Industries, Siemens, Astral, Max Healthcare, InterGlobe Aviation, and Tata Motors.

Do you expect a strong rural demand recovery in the coming financial year?

Despite budgetary support, rural demand recovery will remain gradual. We believe it will be at least a 12-month wait before the government's supportive measures will have any significant impact. Green shoots are visible and 2W (2-wheeler) demand is improving. Normal monsoons and declining inflation can result in more rural demand traction over next 6 -8 months.

What is your target for Nifty 50 for FY25 considering the several global and domestic events lined up?

We foresee an upward scenario in our Nifty target of 12 months, from 24,544 to 25,363 (base case scenario), by the end of December 2024. This increase in the Nifty target estimate is due to the upward revision in the 15-year average PE (18.9x) with December 25 EPS of 1,342 which was earlier based on 18.3x December 25 EPS of Rs 1,343.

Do you expect the strong earnings growth to continue in capital goods for coming quarters too?

Product/consumables companies reported decent cumulative revenue growth (up 8.8 percent YoY) led by healthy domestic demand. EBITDA margin expanded across most product companies aided by better product mix, higher share of exports and services, and softening commodity prices. Consumable companies continued to be impacted by competition & pricing pressure from Chinese dumping. Order inflows were driven by demand from sectors like steel, cement, data centres, power, sugar & distilleries, F&B, etc.

Project companies reported robust cumulative revenue growth of 16.1 percent YoY (9.2 percent YoY excluding L&T), driven by healthy execution of substantial order books. EBITDA margins for Project companies were mixed during the quarter as some companies saw healthy gross margin expansion and benefits of operating leverage while others were impacted by the execution of legacy projects.

Order enquiries/tendering pipelines continue to remain healthy across sectors like defence, transmission & distribution, railways, green energy, water, cement, sugar, biofuels, oil & gas and infra in India as well as in export markets such as the Middle East and Africa. Energy transition and infrastructure development remain the key themes driving order inflows.

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