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Ushering in the Amritkaal

India: Where size meets agility!

India is set to exit FY24 with a GDP of USD3.6t and an underlying growth of 7.6%+. Capital markets signed off FY24 with a stellar 29%/60%/70 % returns in Nifty/Nifty Midcap 100/Nifty Smallcap 100. India’s market cap has reached USD4.4t, making it the fifth largest in the world. During FY20-24, Nifty and MOFSL Universe’ profit pool has expanded from INR3.5t to INR7.7t and INR4.3t to INR11t in FY24, representing a solid compounding of 22% and 27%, respectively. India’s capital markets have witnessed vibrant participation from domestic retail savers, with Demat accounts surging to 151m in Mar’24 from 36m in Mar’19. Cumulative domestic equity inflows have amounted to USD92.7b over the last five years. India Inc. has raised USD92.9b through primary markets over the last five years. India now boasts a unique combination of ‘size and growth’. India’s GDP is likely to exceed USD4t in FY25/26 and USD8t by FY34. Expectations of political continuity after the forthcoming Lok Sabha Elections’24 should bolster the overall economic momentum further, with a focus on infrastructure, capex and manufacturing occupying the center stage, in our opinion. With size and growth in its wings, India’s capital markets are truly poised to embrace the Amritkaal going forward.

story and have conviction in selected domestic cyclical themes, such as financialization of savings, private capex revival, rising discretionary consumption, strengthening real estate cycle, and the massive development of digital and physical infrastructure. We do expect intermittent volatility along the way driven by notable events (General Elections’24), expensive mid- and small-cap valuations, and potential global macro shake-ups. Our model portfolio underscores our strong belief in various domestic structural and cyclical themes.

India in a mini-Goldilocks!

India is currently experiencing a mini-Goldilocks moment due to solid macroeconomic conditions, healthy corporate earnings, peaking of interest rates, moderate inflation print, and ongoing policy momentum. This is, of course, ably supported by flows (discussed above). We firmly believe in the medium-term India story and have conviction in selected domestic cyclical themes, such as financialization of savings, private capex revival, rising discretionary consumption, strengthening real estate cycle, and the massive development of digital and physical infrastructure. We do expect intermittent volatility along the way driven by notable events (General Elections’24), expensive mid- and small-cap valuations, and potential global macro shake-ups. Our model portfolio underscores our strong belief in various domestic structural and cyclical themes.

MOFSL and Nifty earnings likely to grow 6% YoY each in 4QFY24

We estimate MOFSL and Nifty earnings to grow 6% YoY each in 4QFY24. Margin tailwinds are likely to narrow due to a high base. EBITDA margin (ex-Financials) is likely to experience minor gains (+30bp) for the MOFSL Universe, reaching 16.4%. Meanwhile, it is projected to remain flat for the Nifty at 19.8% (+10bp). Overall earnings growth is anticipated to be driven, once again, by domestic cyclicals, such as Auto and BFSI, which are expected to post 20% and 15% YoY growth, respectively. Conversely, earnings growth is expected to be weighed down by global cyclicals, such as O&G and Metals, which are anticipated to decline 6% and 12% YoY, respectively. Healthcare (+33%) and Cement (+32%) are likely to report robust YoY earnings growth. Consumers (+7%), Capital Goods (+5%), and Technology (+4%) are anticipated to report moderate YoY growth. Our FY24 Nifty EPS remains stable at INR980, while the FY25 EPS has witnessed a cut of 1% to INR1,132. We expect the Nifty EPS to grow 21% and 16% in FY24 and FY25, respectively

Key ponderables!

As the 4QFY24 earnings season is set to begin, we see three important factors that are likely to dominate investor conversations: 1) Political continuity: With Lok Sabha elections scheduled in Apr-Jun’24, multiple opinion polls are predicting a return of the BJP-led NDA government with full majority for an unprecedented third term. This augurs well for sustained economic reforms and continued policy momentum, with a focus on capex, manufacturing, and infrastructure development. However, this could keep the equity market multiples elevated, in our view. 2) Consumption slowdown: Both macro and micro indicators suggest a persistent weakness in consumption, particularly noticeable in rural India. With inflation moderating and predictions of a normal monsoon, coupled with election spending, we expect consumption trends to bottom out and contribute to growth in 2HFY25. 3) Institutional flows: DII + FII flows stood at ~USD50.5b in FY24, the highest ever in any financial year. The continued rise in retail participation, along with increasing SIP contributions and the addition of new demat accounts (over 3.6m accounts per month during Oct’23-Mar’24) amid the ongoing trend of financialization of savings, has supported the markets in the face of global volatility.

FY24 – the year of mid and small caps!

-       FY24 witnessed a broad-based growth, with all indices and sectors delivering positive returns. Both the Nifty Midcap 100 (+60% YoY) and the Nifty Smallcap 100 (+70% YoY) outperformed the Nifty-50 by a wide margin of 31% and 41%, respectively. On a five-year basis, Nifty-50/Nifty Midcap 100/ Nifty Smallcap 100 reported a CAGR 14%/21%/18%.

-       The recovery of the underperforming sectors from the past decade, such as Real Estate, Capital Goods, PSUs, Industrials, Defense, etc. (despite not being a major contributor to the large-cap indices), drove the rally in the broader markets. This propelled the mid- and small-cap indices to new highs. The top sectoral gainers in FY24 were: Real Estate (+133%), PSU Bank (+89%), Capital Goods (+77%), Auto (+75%), Energy (+71%), Healthcare (+58%), Metals (+50%), Technology (+22%), FMCG (+18%), and Private Bank (+14%).

-       The Nifty-50 delivered a 26% earnings growth in 9MFY24. High-frequency data (GST collections, Auto monthly numbers, Power demand, PMI data, et al.) indicates that earnings momentum will continue to remain intact going forward as well. The sectors that underperformed on the earnings front for the past several years, such as Automobiles, Real Estate, Capital Goods, Infrastructure, Industrials, Utilities, Hotels, and PSUs have also made a strong comeback in FY24. The pick-up in government capex and the growth in order books continue to boost sectors such as Railways, Defense, Capital Goods and Utilities.

Earnings highlights – 4QFY24E | BFSI and Auto would continue to lead, while contributions from Healthcare and Cement to improve

-       We predict both MOFSL and Nifty earnings to grow 6% YoY each in 4QFY24. Excluding global commodities (i.e. Metals and O&G), the MOFSL Universe and Nifty would post 12% and 9% YoY earnings growth, respectively, for the quarter.

-       Overall earnings growth is likely to be driven once again by domestic Cyclicals, such as BFSI and Auto. Private Banks and NBFC-Lending would mainly lead BFSI’s earnings, with 14% and 23% YoY growth, respectively. Earnings growth of Private and PSU Banks, at 14% and 12%, while healthy, is the lowest in 10 and 8 quarters, respectively. The Auto sector’s earnings are expected to grow 20% YoY, amongst the best performers within MOFSL Coverage sectors, once again.

-       Sales and EBITDA of the MOFSL Universe are likely to grow 5% and 7%, respectively; while for Nifty, we expect sales and EBITDA to improve 9% YoY each. Ex-OMC’s, EBITDA of the MOFSL Universe/Nifty is likely to grow 8%/10% YoY though.

-       The Healthcare universe is likely to report a strong 33% YoY earnings growth – the highest since Mar’21 – on a low base.

-       The Cement universe too is expected to report a strong 32% YoY earnings growth on a weak base. The sector is likely to clock its third consecutive quarter of strong earnings growth after posting an earnings decline for seven quarters.

-       The Metals universe is projected to report a 12% YoY earnings decline on weak base of 4QFY23.

-       The Capital Goods sector is anticipated to report earnings moderation at 5% YoY for the quarter (the lowest in nine quarters) dragged by L&T. Ex-L&T, the MOFSL Capital Goods universe is likely to record 21% YoY growth.

-       The Technology sector is expected to clock a modest earnings growth of 4% YoY, mainly due to weak global macros. The MOFSL IT universe profit pool has stagnated around INR280-290b for six quarters since 3QFY23.

-       The Specialty Chemicals sector too is expected to post earnings decline of 38% YoY; the sector is likely to report earnings decline for the fourth straight quarter.

-       EBITDA margin is projected to expand 30bp YoY for the MOFSL Universe (ex- Financials) to 16.4%. On the other hand, EBITDA margin for Nifty-50, excluding Financials, is likely to remain nearly flat YoY at 19.8% during the quarter.

-       The MOFSL Midcap Universe is estimated to report a growth of 1% and 5% YoY in sales and EBITDA, respectively, and a decline of 4% YoY in PAT. Conversely, the MOFSL Smallcap Universe is estimated to clock a growth of 9%/8%/7% YoY in Sales/EBITDA/PAT for 4QFY24. The MOFSL Largecap Universe is likely to register sales/EBITDA/PAT growth of 6%/8%/7% YoY during the quarter.

-       Sales/EBITDA/PAT of the MOFSL Universe is expected to report a two-year CAGR of 9%/ 8%/10% over Mar’22-Mar’24.

-       FY25E earnings highlights: The MOFSL Universe is likely to deliver a sales/EBITDA/ PAT growth of 12%/12%/15% YoY. BFSI and Metals are likely to be the key earning drivers with 19% and 34% YoY growth, respectively. These two sectors are likely to contribute 64% of incremental earnings for FY25E.

-       Marginal change in Nifty EPS: Our FY24 Nifty EPS remains stable at INR980, while our FY25 EPS has seen a cut of 1% to INR1,132. We expect the Nifty EPS to grow 21% and 16% in FY24 and FY25, respectively.

MOFSL Top Ideas: Large caps – ICICI Bank, SBI, L&T, TITAN, ITC, HCL Tech, Coal India, M&M, Zomato, and Hindalco.

Mid caps: Indian Hotels, Godrej Properties, Global Health, PNB Housing, KOEL, Cello World, Sobha, Lemon Tree Hotel, and JK Cement.

Model portfolio: Key changes

-       Our Model portfolio remains aligned with key domestic cyclical themes amid a consistent backdrop of earnings growth. We remain OW on Financials, Consumption, Industrials and Real Estate. Industrials, Consumer Discretionary, Real Estate, and PSU Banks are our key preferred investment themes. We have also made several additions from a bottom-up viewpoint across sectors.

-       FINANCIALS: We reiterate our OW stance on Financials and maintain a significant OW position on PSU Banks. Valuations in the banking space are very reasonable after the recent underperformance, even as asset quality continues to remain healthy. We have kept stocks and weights broadly unchanged in both Private and PSU Banks, with a significant OW stance on PSU Banks. In NBFC- Lending space, we are adding Chola Investments. CIFC will continue to grow faster than its peers over the medium term, aided by a diversified product suite and a gradual improvement in market share. With its ability to deliver industry-leading loan growth (~23% AUM CAGR over FY24-FY26E), its strong asset quality (estimated credit cost of ~1.2% over FY25-26) and healthy RoE of ~21-22%, we believe CIFC would continue to command premium valuations relative to its NBFC peers.

-       CONSUMPTION: We continue to remain OW on Consumption with a significant bias towards discretionary consumption names. ITC is the only Consumer Staple stock we hold in our model portfolio. We are adding Cello World to the portfolio. Cello, with a presence across diverse product categories, benefits from the growing total addressable market (TAM) in each category. The overall TAM of Cello is expected to record a 13% CAGR over FY23-27 (to INR1,229b by FY27 from INR743b in FY23). The company is anticipated to register a robust revenue/EBITDA/Adj. PAT CAGR of 18%/23%/25% over FY23-FY26. We continue to maintain our allocations in Avenue Supermart, Indian Hotels, Zomato, Lemontree Hotels, and Metro Brands.

-       AUTOMOBILES: We are replacing Hero Motors with SAMIL. Given its well-diversified presence across components, geographies, and customers, SAMIL is emerging as the key beneficiary of the growing popularity of electric cars and the rising trend of premiumization across segments. This is evident in a solid ramp-up in its order book, where its booked business has scaled up to USD77.3b. The stock trades at an attractive valuation relative to peers (at 17x FY26E EPS). We are reintroducing Craftsman Automation after the correction. Its track record of creating and gaining market leadership organically is uncommon in the auto component industry. This has enabled the company to deliver a good balance of strong growth and superior capital efficiency. We estimate a CAGR of 25%/24%/30% in consolidated revenue/EBITDA/PAT over FY23-26.

-       METALS: While Coal India continues to remain our preferred idea, we are also adding Hindalco to our model portfolio. Novelis has experienced a significant improvement in EBITDA/t over the last few quarters, which is expected to reach USD600 by FY25-end (from USD500 at present). The stock is currently trading at an EV/EBITDA of 5.5x on FY26E EBITDA.

-       CEMENT: We are adding JK Cement, which has demonstrated superior execution capabilities, resulting in higher-than-industry volume growth. Its management has outlined expansion plans to reach over 30mtpa by FY26-27, and we believe that JKCE has the potential to reach 50mtpa+ capacity in the long run. We have upgraded our FY25/FY26 EBITDA estimates by 5%/6%.

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