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Top Investment Ideas: Cement/Realty

Ultratech Cement: Steady expansion paves the way for industry leading growth

Key Rationales

* Cement demand is expected to pick up post the festive season and volume growth should be in double-digits in FY23/24. Prices should improve going forward to mitigate the impact of sustained cost pressures.

* UTCEM is expanding grinding capacity domestically to 131mtpa/154mtpa by FY23E/FY25-26E, offering strong growth visibility. We expect sales volume growth of ~9% in FY23/24.

* It remains best placed to benefit from demand recovery, helped by its consistent capacity additions plans. Cost-savings initiatives should help structural cost improvement.

Concerns

* coal prices are likely to remain at an elevated level

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* Ultratech’s capacity expansion plans, along with scope for an improvement in utilization of existing capacities, offer strong growth visibility. We expect a growth of ~9% in sales volumes in FY23-24. We expect it to trade at higher-than-historical multiples, given its leadership position and strong growth opportunities

Macrotech Developers: Healthy growth outlook; Balance sheet strengthening

Key Rationales

* The Indian housing market is on the cusp of multi-year growth and the industry has the potential to grow by 3-4x in the next decade aided by rising income levels and improving demography

* Marcrotech is aiming 20% CAGR in pre-sales in the medium term, backed by robust launch pipeline and targeted growth strategy. The company expanded into newer micromarkets across Mumbai Metropolitan Region (MMR) and Pune through the capital-light JDA route and added 11 new projects amounting to nearly INR150b of cumulative GDV.

* It continues to progress well both on deleveraging as well as seeking its ‘20-20-20’ medium-term growth strategy. Under this strategy, it plans to deliver 20% growth in pre-sales, maintain PAT margin at 20%, and generate a RoE of 20%. The management expects pre-sales to reach INR200b by FY26.

Concerns

* Cost Inflation to impact on the sales price

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* We expect the topline to clock 7% CAGR over FY22-25 aided by 8-9msf of project completions each year and INR12-16b of monetization in commercial and industrial segments. We expect the company’s RoE to improve to 16% aided by expanding PAT margin and marginal improvement in asset turnover from FY23E base

Top Investment Ideas: Consumer

ITC: Broad-based sales growth drives EBITDA beat

Key Rationales

* A stable tax environment for Cigarettes in recent years has allowed ITC to calibrate price increases and we expect this trend to continue, which should drive earnings visibility over the medium term.

* Healthy sales momentum in the FMCG business is driven by improved reach, enhanced penetration and better last mile execution. Market/Outlet coverage stood at ~2.0x/1.3x of pre-pandemic levels.

* Hotels segment witnessed ARR and occupancy rates ahead of pre-pandemic levels driven by Retail (packages), Leisure, Weddings and MICE segments. This has led to EBIT turned to profit from 3QFY22.

Concerns

* Volatile macro environment.

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* Resilient nature of its core business, amid an uncertain environment, and 4-5% dividend yield makes it a good defensive bet in the ongoing volatile interest rate environment.

Varun Beverages: Momentum to sustain

Key Rationales

* VBL’s distribution network of over 3m outlets is expected to grow at ~10-12% p.a. The company is expanding its dealer network by ~5-10% every year. Further, dealers are also increasing their carrying size by ~5-7% every year. Besides, VBL is adding ~40,000- 50,000 chilling equipment every year.

* Board has approved the proposal to distribute and sell “Lays, Doritos and Cheetos” for PepsiCo’s wholly owned subsidiaries in the territory of Morocco with effect from Jan’23.

* VBL is raising its capacities by 20%, which are likely to be operational before the next summer (except for dairy beverages facility that will be operational by Jul’23). The capex for capacity expansion is likely to be ~INR12b.

Concerns

* Increased competition from global players

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* We expect revenue/EBITDA/PAT CAGR of 23%/28%/45% over CY21-24, energized by: a) increased penetration in the newly acquired territories of South and West India, b) higher acceptance of newly launched products, and c) growing refrigeration in rural and semi-rural areas.

Top Investment Ideas: Financials

ICICI Bank: Blurring boundaries between Bank and Fintech

Key Rationales

* ICICI Bank has been reporting strong growth, led by its digital capabilities and its constant efforts toward simplifying customer journeys and strengthening the trust and brand

* The bank’s focus continues to be on growing the core PPoP in a risk-calibrated manner with Return of Capital being the core philosophy.

* The bank is realigning the distribution to capture the opportunities in various markets.

Concerns

* Investment in new initiatives could raise the cost to income ratio

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* ICICI Bank appears to be several notches above its peers, when it comes to business transformation, led by tech initiatives and these digital capabilities will enable the bank to deliver superior growth over years to come. We expect ICICIBC to register a loan CAGR of 20% over FY22-24E and estimate FY24E RoA/RoE of 2.1%/17.2%.

SBI: Earnings momentum accelerates further

Key Rationales

* SBI’s robust performance has been aided by strong loan growth, margin expansion, and lower provisions. The improvement in its treasury and controlled OPEX led to a healthy growth in core PPOP

* High mix of floating loans, which will benefit from loan re-pricing, will continue to support the NII and overall earnings even as deposit cost could see some increase.

* Asset quality performance has been strong with continuous improvements in slippages and headline asset quality ratios with restructured book being under control at 0.9%.

Concerns

* Business trends remain modest, impacted by continued deleveraging by corporates.

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* Among PSU Banks, SBIN remains the best play on a gradual recovery in the Indian economy, with a healthy PCR (~78%), Tier I of ~11.4%, strong liability franchise, and improved core operating profitability. We estimate earnings to post 32% CAGR over FY22-24 and project SBIN to deliver an FY24 RoA/RoE of 1.0%/ 17.3%, respectively

Top Investment Ideas: Financials

Indusind Bank: RoA expansion on track; asset quality improves further

Key Rationales

* IIB’s operating performance remains on track led by healthy NII growth and controlled provisions. Asset quality ratios have improved driven by lower slippages in corporate as well as consumer portfolios. Thus, outlook for credit cost remains controlled.

* Growth in MFI book should also pick up as disruption due to regulatory changes has been fully addressed. • Healthy provisioning in the MFI portfolio and contingent provisioning buffer of 1.0% of loans will enable a steep decline in credit cost, thus driving a sharp recovery in earnings. Concerns

* Asset quality remains monitorable

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* The management is guiding for continued momentum in loan growth and is looking to end FY23 with a growth of 20%. We estimate PAT to report 40% CAGR over FY22-24, leading to 16% RoE in FY24E.

IDFC First Bank: Earnings momentum remains strong

Key Rationales

* IDFCF continues to witness strong growth in Retail deposits and has succeeded in building a robust liability franchise over the past three years, led by attractive customer service levels, higher interest rates, a strong brand, and transparent products and services. It has scaled up retail deposits at a robust 73% CAGR over FY19-22 with solid CASA mix of 51%.

* Credit growth remains stable and strong. The bank is in a position to fund loan growth from its deposit growth. The bank has grown at 25% YoY after three years of muted growth. The bank has guided for 25% YoY growth in loans and 50% YoY rise in core PPoP in FY23

* Historical track record of keeping NPAs low in retail lending is backed by deep underwriting capabilities.

Concerns

* Elevated Cost Ratio

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* IDFCF Bank is entering a phase of strong loan growth as the drag from wholesale book moderates and we estimate loans to report 24% CAGR over FY22-24E. We estimate 41% CAGR in PPoP over FY22-24E, while controlled credit costs will drive 364% CAGR in PAT over the same period.

Top Investment Ideas: Financials

Angel One: Share of F&O continues to rise

Key Rationales

* ANGELONE is a perfect play on: 1) the financialization of savings and 2) digitization. It demonstrated a strong operating performance in 2QFY23, even amid challenging market conditions.

* Its market share in ADTO rose to 21.7% in 2QFY23 from 20.8% in 1QFY23. This was driven by an increase in its F&O market share to 21.7% from 20.8% in 1QFY23. Its F&O market share remains the highest since 1QFY22. Its market share in Cash ADTO remained stable sequentially at 13.8%.

* It continues to invest in building its digital capabilities to capture the industry growth.

Concerns

* Business could be impacted by high market volatility

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* Despite the current industry headwinds, management expects the long-term growth story to remain intact. As and when the environment is relatively conducive, investments towards client acquisitions would be scaled up.

CAMS: Strong outlook for non-MF businesses

Key Rationales

* CAMS, with a 70% market share, is leader in India’s MF registrar and transfer agent (RTA) industry. The company commands ~50% market share in AIFs and PMS.

* Barring one, CAMS has entered into new agreements with all major AMCs and does not expect revisions in the next 2-3 years. Some contracts have been rolled over at previous rates while a few have seen marginal reduction in pricing.

* AIF segment clocked 32% YoY growth in 2QFY23 with more than one signings every week. CAMS has gained significant market share in this segment. Thus, non-MF businesses particularly AIF, Insurance Repository and Account Aggregator are expected to grow at a healthy pace from FY24.

Concerns

* Volatility in equity market

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* We like CAMS given: 1) the duopoly nature of the industry and high-entry barriers, 2) relatively low risk of a market share loss, and 3) higher customer ownership as compared to AMCs. CAMS is expected to deliver a revenue/EBITDA/PAT CAGR of 13%/12%/14% over FY22-25, respectively, with an RoE of 44.9% in FY25.

Top Investment Ideas: Healthcare/Chemicals

Apollo Hospital: Mobilizing resources for another healthy take off

Key Rationales

* Apollo Hospital (APHS) is well placed to deliver: a) improved occupancy in healthcare services, partly supported by international patients and higher share of insurance-linked patients, b) enhanced offerings to patients through Apollo 24/7 platform and c) better footfalls in Apollo Health and Lifestyle (AHLL) network.

* APHS intends to build omni-channel healthcare platform through Apollo Healthco comprising back-end pharmacy, Apollo 24/7 digital platform, and pharmacy retail including private labels. It is investing heavily in diagnostics, primary care and specialty care segments, which are likely to enhance AHLL’s presence and increase footfalls.

Concerns

* Any delay in capex execution could impact future growth

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* We expect 15% revenue CAGR over FY22-24 driven by growth in Pharmacy, Healthcare, AHLL businesses. We expect free cash flow to improve going forward despite capex for bed additions and increased spend on Apollo 24/7, led by better show by healthcare services/AHLL segment.

Vinati Organics: Demand remains strong

Key Rationales

* Vinati is the largest producer of ATBS in the world, with a global market share of more than 65% and contributing 53% to overall revenue in FY22. The management is confident that a niche product portfolio, expansion in its existing capacities, and foray into new products will enable it to keep the revenue momentum strong.

* While Ibuprofen demand remains strong, Butyl Phenols segments has also come back well after a lackluster FY22 and the management expects a strong 2H for both IBB and BP.

* Veeral Additives has commenced production of AOs and post amalgamation, Vinati would become the largest and the only doubly integrated manufacturer of AOs in India. Further, Veeral Organics, its wholly owned subsidiary is set to commence production of MEHQ, Guaiacol, Iso Amylene in 1HFY24E, which should propel next leg growth.

Concerns

* Global headwinds may impact export demand

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* The management is focusing on its already announced capacity expansion to 60ktpa from 40ktpa. A gradual ramp-up in expanded capacity over the next two years will drive growth for Vinati. We expect revenue/PAT CAGR of ~29%/36% over FY22-24.

Top Investment Ideas: Hotels/QSR

Lemon Tree: Buoyant demand drives ARR growth

Key Rationales

* With improving traction in corporate travel, resumption in international travel, and an improvement in MICE activity, LEMONTRE is expected to witness strong growth as it garners ~86% of its revenue from Business Hotels.

* Lemon Tree is focusing on adding rooms under the ‘management contract’ model where it has a strong pipeline of 24 signings lined up. The management indicated that 2HFY23 fees are expected to be 1.5x of 1HFY23. For FY25, the management guided it to be north of INR1b.

* Lemon tree is well-placed to capitalize on the impending opportunity in the domestic Hospitality industry and the expected upcycle, due to, its strong presence in the Mid-Priced Hotel segment, stabilization of Hotels launched before COVID-19 in greater demand and higher ARR markets, and an increase in inventory through management contracts.

Concerns

* Any potential rise in Covid cases

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* LEMONTRE is expected to witness strong growth, led by;

1) buoyant demand during the wedding season,

2) improving traction in corporate travel,

3) increase in inbound travel, and

4) India assuming the G20 presidency (meetings across India). We expect it to deliver a revenue/EBITDA CAGR of 59%/97% over FY22-24 and RoE to improve to 13% by FY24.

Jubilant Foodworks: Growth prospects attractive, moats widening

Key Rationales

* Growth outlook and margin for the QSR sector remain attractive, unlike the rest of the Consumption space, where uncertainty prevails.

*- Demand environment continues to be positive. Regionalization of product mix, specifically for the Eastern region and Gujarat, during the quarter is a welcome move.

* JUBI added over 7m customers to its loyalty program within a short span of time (launched in May’22). This along with its highest ever own channel contribution to total delivery sales augurs well in strengthening its moats.

Concerns

* While material cost pressures remain, there appear to be no material concerns on lease rentals and employee costs.

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* JUBI remains our top pick in this space, given that a) it has the best Balance Sheet to fund expansion; b) its proven track record of managing both store expansion and healthy SSSG; and c) its technological edge over peers. The experience of the new CEO from Amazon India will further augment JUBI's clear leadership on the technology front.

Top Investment Ideas: Metals/Oil & Gas

Coal India: E-auction continues to drive profitability

Key Rationales

* E-auction premium soared 40% QoQ to an all-time high of 329% in Q2FY23. We believe that the 3Q performance of COAL will be better QoQ with higher volume on e-auction with almost similar levels on premium.

* With the onset of winters, we believe the demand for coal for power should slow down somewhat giving the company some headroom for higher non-power and e-auction dispatches. This in turn should help deliver another record set of profits for 3QFY23.

Concerns

* Sharp pick up in renewable energy demand

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* We believe the port-based power plants in India will continue to operate at lower PLF as Europe continues to buy more south African coal, leading to shortage of high grade thermal coal in India (needed for the non-power sector), which in turn will lead to sustained e-auction premiums. Coal continues to be our top pick in the metals sector driven by strength in the E-auction premiums and high dividend yield

Reliance: Capex intensity accelerates

Key Rationales

* There is strong traction in the retail and the telecom biz & large part of windfall tax related derating is behind so we expect stock to start performing.

* Reliance Retail’s revenue/EBITDA are likely to clock 30%/42% CAGR over FY22-24E, respectively, powered by accelerated store adds across segments, aggressive foray into digital & new commerce and healthy store economics.

* We expect Rjio’s revenue/EBITDA CAGR of 16%/21% over FY22E-24 backed by 10%/8% CAGR in ARPU/subs, respectively. Going forward, the market share gains from VIL, tariff hikes, wireline – Jiofibre subscriber additions and other digital avenues triggered by 5G rollout should drive growth.

Concerns

* The Oil and Gas business is witnessing challenging macro environment and volatile energy markets

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*  Retail, Telecom, and new energy can be the next growth engines over the next two-to-three years, given the large technological advancements and ambitious growth targets. We expect consolidated revenue/EBITDA to clock 14%/16% CAGR over FY22-24.

Top Investment Ideas: Retail

Titan: Well set to achieve its five-year targets

Key Rationales

* TTAN has a strong runway for growth, given its market share of sub-10% in Jewelry and continued struggles faced by its unorganized and organized peers. Its medium-to-longterm earnings growth visibility is nonpareil as management aims to grow Jewellery business by 2.5x over FY22-27.

* The management indicated a healthy 17-19% growth in festive season demand across its key businesses in Oct’22.

* The wearables category is growing rapidly, with a strong innovation pipeline, led by strong domain experts hired. It will be a critical driver of the targeted 20% CAGR in the Watches and Wearables segment.

Concerns

* Guidance on margin for subsequent quarters is relatively muted, given its outperformance in 2QFY23

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* Titan remains an attractive investment case in the large-cap Consumption space in India, with strong earnings growth visibility and compounding ~20% for an elongated period of time. We expect this trend to continue, with a 31% earnings CAGR over FY22-24.

Metro Brands: FILA - A big value creator

Key Rationales

* We like Metro given its, a) a strong runway of growth, largely funded through internal sources, given its strong OCF-to-EBITDA ratio of over 50% and b) superior store economics reflected in balance sheet and a healthy RoIC of 20% for FY22 (65% on Pre IND-AS 116).

* The missing piece in their product portfolio was sports and athleisure, the fastest growing category in the footwear market, for which, the company has acquired exclusive rights of Fila/Proline. Fila’s revenue may not seem to be significant at present, but over next 3-5 years, we believe it has the potential to become a key growth driver for the company.

Concerns

* rising input costs and competition from foreign brands.

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* The company has been witnessing a consistent healthy double-digit revenue/PAT growth over the last 10 years. We have factored in revenue/PAT CAGR of 30%/37% over FY22- 25E, respectively, led by healthy store additions and strong recovery in SSSG.

* The company’s combination of superior store economics and strong runway of growth should allow it to garner rich valuations going ahead.
 

Top Investment Ideas: Technology/Telecom

Infosys: Strong pickup in margin and deal wins to drive earnings growth

Key Rationales

* INFO is a key beneficiary of an acceleration in IT spends, given its capabilities around Cloud and Digital transformation.

* The management sees traction in the large deal pipeline, despite an adverse demand environment.

* We expect Infosys to deliver margin on the lower side of its guidance band, with strong growth and reduced dependence on sub-contractors as attrition falls

Concerns

* Weakness in parts of Retail, Hi-Tech, Financials (Mortgages), and Telecom as it has started seeing some deal-related slowdowns in these segments.

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* Infosys increased its revenue growth guidance for FY23 to 15-16% YoY in CC terms (from 14-16% earlier). The management narrowed its margin guidance to 21-22% from 21-23% earlier. We factor in 9.6% revenue CAGR over FY22-24, despite cross-currency headwinds, and margin of 21.1%/21.3% in FY23/FY24, leading to 11% PAT CAGR over FY22-24

Bharti Airtel: Strong FCF, but 5G pushes leverage

Key Rationales

* ARPU has risen, led by, device upgrades, data monetization, premiumization, and other services (Broadband/Airtel Black). Management is confident of maintaining this growth.

* Airtel Africa has consistently delivered strong earnings growth over the last 3–4 years, with a ~20% CAGR over FY19–22. A strong balance sheet with low leverage and healthy FCF further additions to the strong capabilities.

* Airtel 5G Plus launch is starting with key cities by Mar’24 and expect to cover all townsin India. They expect massive opportunity in rural as the network coverage is low.

Concerns

• Higher investments in 5G can dilute FCF going forward and may lead to elevated debt levels.

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• BHARTI should continue to clock a strong EBITDA CAGR of 19% over FY22-24E, led by: a) an improvement in the 4G mix, b) market share gains, and c) steady inroads into the nonWireless business. .

• We expect a rise in ARPU to act as a catalyst for the stock and see a potential rerating upside in both India and Africa business on the back of steady earnings growth.

Top Investment Ideas: Auto

Ashok Leyland: Demand continues to recover; RM cost benefit to reflect in 2QFY23

Key Rationales

• 2QFY23 witnessed a continued recovery in market share and start of a margin recovery, led by initial gains in commodity prices. Good demand, a stable pricing environment, and softening commodity prices should drive a strong recovery in its financial performance.

• The company gained market share, led by: a) filling of product gaps; b) astute network management, which aided market share increases in all its geographies; and c) the Avtar range of products, which offers a lower TCO.

Concerns

• loss of road share for freight movement from the upcoming DFCC; Delay in fund raise in Switch Mobility

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• Ashok Leyland is a good play on a CV cycle recovery, coupled with a recovery in market share and bet on expansion in revenue and profit pools. We expect revenue/EBITDA/PAT to grow at a CAGR of 45%/70.5%/361% over FY22–25E on the low base of FY22. Any fundraise in Switch Mobility (the EV business) can serve as a re-rating catalyst

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