The Indian economy has shown remarkable resilience in FY23, with an uptick visible in most high-frequency indicators. A pick-up in urban demand and rural demand, too, poised to move up on the back of a normal monsoon are adding to the positive sentiment.
A full return to normalcy in contact-intensive services sectors such as travel and tourism, hotels, schools and colleges and with all public transport systems like air, rail and bus now fully operational point to a resilient recovery in economic activity.
Remittances (a major contributor to rural incomes) are likely to return to pre-pandemic levels with the pick-up in the services sector. Easing supply chain conditions and easing commodity prices have partially offset anxieties over worryingly high levels of inflation. In this context, the market narrative has shifted from inflation concerns to a cool-off in inflation expectations in the next one or two quarters.
Based on the above themes, Axis Securities recommends the following stocks that are well-placed to benefit from robust festival season demand:
Maruti Suzuki : Rating: Buy | Target: Rs 9,801 | Upside: 10%
Maruti Suzuki India is the market leader in the domestic passenger car industry commanding a market share of about 40 percent. Order bookings for the revamped Brezza compact SUV and Grand Vitara midsize SUV, both recent launches, have already crossed 70,000 and 20,000, respectively, as per last management conference call.
“We expect gross margin to improve going forward, driven by fall in the price of commodities, yen being devalued in comparison to rupee/dollar. In addition, volume ramp-up will bring in operating leverage. The higher fuel price has led to very strong demand for CNG, supported by good expansion in the CNG network (currently covering ~250 cities with 3800 stations against 1400 stations covering 150 cities 3-4 years back). CNG volumes consist of 20 percent of total sales volumes,” Axis Securities said.
Outlook & valuation: Maruti, already strong in the entry-level segment, seems to be focusing on regaining lost market share with the new launches in the compact and midsize SUV segments. “We expect a rise in demand from new launches along with upgradation of existing product portfolio, softening commodity inflation and improving ECU shortages to support recovery in the margins. The company would gain further market share, driven by an expected shift towards petrol, CNG and hybrid vehicles. Looking at the existing order book we expect the company’s volumes to witness strong growth H2FY23 onwards,” said Axis Securities.
Bajaj Finance : Rating: Buy | Target: Rs 8,250 | Upside: 15%
Bajaj Finance began FY23 strong, with its assets under management (AUM) growing 28 percent on an annualised basis and 3 percent sequentially in the first quarter. This growth came from its strong presence in the rural market, loans to small, medium and large enterprises and mortgages. “The approaching festive season is likely to help the company sustain its strong growth momentum. Additionally, the customer addition momentum remained strong with the highest-ever customer addition during the quarter, leading to customer base growth of 20/5 percent YoY/QoQ. The company plans to scale up its gold financing business by expanding its geographic reach. Moreover, the launch of non-captive two-wheeler financing in July 2022 along with plans to foray into new auto loans in FY24 would support the company’s AUM growth moving forward,” the commentary read.
“It also plans to strengthen its credit card segment with its partnerships with RBL Bank and DBS. Thus, multiple new product launches coupled with sustained growth momentum in the existing products and strong momentum on new customer acquisitions should collectively drive growth for BAF going ahead.”
Outlook & valuation: Its digital initiatives and business transformation are key positives and appear to be going well. “With the digital transformation journey likely to be completed by FY23, we believe it should contribute meaningfully to the overall growth. We believe the marginal compression in NIMs will be offset by improved fee income and stable credit costs, thereby enabling BAF to deliver superior return ratios,” said Axis Securities.
SBI Cards & Payment Services | Rating: Buy | Target: Rs 1,050 | Upside: 13%
The festive season is traditionally a good one for card companies given the higher spending associated with it. In the first quarter, SBI Cards reported strong customer addition that drove cards in-force (CIF) growth of 19 percent year-on-year. “Going ahead, SBI Cards intends to maintain the monthly acquisition run-rate of over 3 lakh new customers, targeting a mix of 50:50 between Banca and Open-market channels. A pick-up in travel-related spends along with improving discretionary spends, propelled spends growth in Q1FY23 and is likely to sustain with the expectations of a strong festive season. Spends/customers are likely to improve hereon, with the old category of spends reviving to pre-Covid levels and new categories of spends contributing incrementally to spends growth,” the Axis Securities statement said.
Outlook & valuation: “Robust business momentum, improving NIMs, and muted credit costs will help SBIC deliver superior RoA/RoE of 6-6.3 percent/27-28 percent over the medium term. However, owing to intensive competition, especially from the private banks, maintaining and improving market share will be challenging and remain a key monitorable. The RBI’s proposal on linking of RuPay Credit cards with the UPI is structurally positive for the credit card industry as it will help in increasing the acceptance of Credit cards amongst UPI merchants. This, in turn, would enable credit card issuers to tap into the wallet share of UPI customers or allow the migration of UPI customers to credit cards along with improving the market penetration of credit cards.
“With over 1 million RuPay cards, SBI Cards should be a key beneficiary of the proposal. The RBI in its recently released discussion paper has touched upon a possible cap/regulation of MDR on credit cards, which if implemented, could impact fee income/profitability. However, we await further clarity in the final guidelines from the regulator in this regard.”
Trent | Rating: Buy | Target: Rs 1,530 | Upside: 10%
The nascent economic recovery was reflected in Trent’s operating performance in the first quarter, with revenue growing 39 percent sequentially, outperforming its peers, and its fashion arm posting the best ever quarterly sales.
Outlook & valuation: “Superior store metrics, supply chain optimization, diligent focus on cost rationalization, aggressive store expansion, higher contribution from private brands, and innovative offerings in value space would be key growth drivers in the long run.”
Relaxo Footwears | Rating: Buy | Target: Rs 1,120 | Upside: 11%
The largest footwear manufacturer in India, the company boasts of several popular brands including Relaxo, Sparx, Flite and Bahamas, all leaders in their segments.
Axis said, “We believe value players such as Relaxo should see earnings and profitability improvement as rural and small towns recover coupled with market share gain from smaller/unorganized players, continued demand for quality value-for-money products in rural and smaller towns, strong festive season, and sustained product additions. Moreover, macro drivers such as lower per capita consumption in India and lower penetration will remain the company’s long-term growth drivers.”
V-Mart Retail | Rating: Buy | Target: Rs 3350 | Upside: 11%
The value retailer with a focus on smaller towns and cities V-Mart has 391 stores and plans to open over 60 stores in FY23. V-Mart’s presence is mainly in Uttar Pradesh, Bihar and Jharkhand, with about half of its stores in these states. It moved into West and South India with its July 2021 acquisition of Unlimited stores from Arvind Lifestyle.
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