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PL Capital- Prabhudas Lilladher, one of the most trusted financial services organisations in India, in its latest India Strategy Report stated that NIFTY's EPS projections has been revised downward by 0.3% for FY25 and 0.4% for FY26, with an expected CAGR of 17.8% over FY24-26, resulting in EPS estimates of Rs.1,247 and Rs.1,411 for FY25 and FY26, respectively. PL Capital’s EPS estimates align with the consensus for FY25 but are 2% lower for FY26. Currently, NIFTY is trading at 18.9 times its 1-year forward EPS, which is almost on par with its 15-year average of 19 times.

PL Capital values Nifty at 15-year average PE (19x) with March 26 EPS of Rs.1,411 and arrives at 12-month target of 26,820, revised higher from earlier target of 26,398. In a bull case scenario, PL Capital values Nifty at PE of 20.2x and arrives at a target of 28,564. In a bear case scenario, Nifty may trade at a 10% discount to a long-period average with a target of 24,407.

Since PL Capital’s last India strategy report which was released on 11^th July 2024, NIFTY has delivered a return of 1.6% despite rising volatility amidst deteriorating geopolitical situation as Indian markets were supported. Markets have experienced extreme volatility due to the Japanese carry trade and geopolitical uncertainty. However, strong DII inflows continue to drive the markets, even as FII selling has subsided. Demand conditions are mixed, but there are high expectations for a festival season revival, supported by favourable monsoon conditions, a strong infrastructure spending push by the GOI, and a revival in private capex. Additionally, the increasing likelihood of an interest rate cut by the FED and overall inflation dropping to below 4% raises hopes for a potential repo rate cut in the second half of FY25.

The return variation between large-cap and mid-cap indices has significantly narrowed over the past three months. Meanwhile, the return gap with small-cap indices remains around 6%, as small caps continue to outperform large caps. PL Capital anticipates that the return differential between large caps and mid-caps will remain low. FII outflows have abated with 33bn inflows in the last 6 weeks while DII inflows, at Rs.608bn, continue to remain strong and support markets.

Large cap and mid/small cap returns are showing convergence.

Liquidity remains robust, with domestic inflows significantly surpassing FII flows, providing a buffer for the markets. PL Capital anticipates a strong festival season demand, a rural revival, and potential interest rate cuts will further support the markets. The upcoming US elections are a critical factor to monitor, particularly in light of rising global geopolitical tensions, including those in Southeast Asia. Given the high valuations in some growth sectors, PL Capital expects a shift towards defensive sectors such as consumer goods, durables, building materials, IT services, pharmaceuticals, and telecom. While sectors like capital goods, infrastructure, logistics/ports, EMS, hospitals, tourism, auto, new energy, and e-commerce present attractive opportunities, investors should remain mindful of their valuations.

The 1Q results indicate Sales, EBITDA, and PAT growth of 4.8%, -2.1%, and -5.2%, respectively. These figures show a variation of 0.1%/-0.9%/-0.4% compared to our estimates. Sectors such as Auto, Pharma, Hospitals, Durables, and Capital Goods reported EBITDA growth exceeding 20%. In contrast, sectors like Cement, Travel, Metals, and O&G experienced a YoY decline in EBITDA. Consumer remained tepid in QSR, Apparel, and Jewellery. Staples demand grew faster in Rural India than urban, for the second quarter in a row. Durables led by AC and Fans reported robust demand while building materials, travel companies had a mixed quarter with lower growth. Given the heat wave and election impact, outlook remains better with improved bookings.

Vehicle demand continues to shift towards UVs, while overall PV volumes have peaked in the near term due to a slow demand. 2W showed positive momentum, albeit from a low base, while CV demand remained sluggish. Meanwhile, tractor demand has seen an uptick.

Conviction Picks Changes

High Conviction Picks: PL capital is removing HDFC Bank (recent rally and slow growth to bring down LDR), ITC (Some pause post-recent rally), Maruti Suzuki, Eris Lifesciences and TCI Express from conviction picks. The company is adding Bharti Airtel, IndusInd Bank, Interglobe Aviation, Lupin, M&M, BEML and Lemon Tree Hotels in conviction picks.

Bharti Airtel: Bharti Airtel has subscriber base of 355mn and ARPU of Rs.211 with 25mn subs in the postpaid category. Bharti continues to focus on quality customers, prepaid to post-paid conversion, rural expansion and growth from B2B segments. Bharti will gain from tariff hikes in the pre-paid category effected in 1Q25. However, we are currently witnessing 15-20% hike in various postpaid plans, which will provide tailwind to numbers in 2H25. PL Capital estimates FY25/26E net subscriber adds at 13/19 mn each with an ARPU of Rs.230/268.

IndusInd Bank: Loan growth over FY24-26E of 16-17% is likely to outpace the system while NIM could remain one of the best in class at 4.3-4.4%. Despite baking in elevated provisions, better loan growth and margins would flow through to profitability leading to healthy core earnings CAGR of ~19% over FY24-26E. While lower liability growth and buffer provisions are concerns, they seem to be factored in, given attractive valuation of 1.35x on FY26E ABV.

Interglobe Aviation: Indigo’s strategy includes deepening international reach with Airbus A350-900 orders and premiumisation through a new business class. Key factors to monitor include fuel prices, competitive intensity, and P&W engine issues. PL Capital maintains EBITDAR estimates for Indigo over the next two years, adjusting for higher fuel CASK due to VAT increases and the introduction of less fuel-efficient CEO aircraft via damp lease, and expects a 16% revenue CAGR over FY24-26.

Lupin: Lupin saw a remarkable turnaround in profitability with ~2x jump in EBITDA over FY23-24 aided by better product mix, continued niche launches in the US, clearance from USFDA for facilities, domestic formulations regaining momentum and cost optimization measures. We expect margins to sustain given strong pipeline in the US. Any competition in Spiriva and delay in new launches in the US will be key risks to our estimates.

Mahindra & Mahindra: PL Capital expects the UV segment to continue its growth trajectory, driven by evolving consumer preferences. M&M seems well positioned to capitalize on this trend, backed by a positive response to its new UV models and planned capacity expansions. As a result, the company projects an overall automotive volume growth of 12.6% CAGR from FY24-26E. Additionally, the IMD's forecast of an above-average monsoon, coupled with robust sales momentum, supports a mid to high single-digit growth expectation for tractor volumes. Factoring healthy growth outlook, we expect its PAT to grow at a CAGR of 22.1% over FY24-26E and assign a target price of Rs.3,330 based on a SoTP, valuing core business at 25x FY26E core EPS, Rs.229 for its EV business and Rs.385 for its listed subsidiaries.

BEML: BEML is well positioned for a sustained long-term growth on the back of 1) huge tender pipeline in metro & Vande Bharat worth ~Rs.580bn in FY25 (Rail ~Rs.440bn & Metro ~Rs.140bn) and Rs.320bn in FY26. 2) Healthy defence opportunities driven by modernization of armoured vehicles & engines where BEML has order pipeline of ~Rs.400bn over next 4-5 years. 3) significant capex of ~Rs.5.0bn in FY25 for capacity expansions across portfolio leading to better execution and margins, 4) reorganization of company into 11 SBUs & 2 micro-SBUs to streamline decision making, improve execution & accelerate R&D. PL Capital expects the company to report revenue/Adj. PAT CAGR of 18.8%/37.6% over FY24-26E.

Lemon Tree Hotels: Lemon Tree Hotels' decision to exit the low-yield airline business signals confidence in stronger retail demand and better pricing in 2HFY25. Renovations, typically a 1H event, should boost occupancy in 2HFY25. PL Capital believes challenges faced by Lemon Tree were self-induced in anticipation of better recovery in future. PL Capital maintains their sales/EBITDA CAGR at 17/22% for FY24-FY26E and see the recent stock drop as a buying opportunity.

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