FNA 13 July

TOP NEWS

Alert: Varun Beverages: PepsiCo International business delivered 15% organic revenue growth largely driven by strong growth in AMESA (Africa, Middle East & South East Asia) region with beverage volume growth of 28%. Strong growth in AMESA was largely driven by strong double digit organic volume growth in the India business after two years of lull. This was due to early onset of summers and normalised operations of out-of-home channels

View: Positive read through for Varun Beverages. We had already highlighted it in one of our recent Investor Knowledge series. Varun Beverages revenues are expected to grow by ~50% with volume growth of around 40% in Q2CY2023. The stock is not under our active coverage.

Mahanagar Gas Limited: The company has increased the retail price of CNG by Rs 4/kg to Rs 80/kg and that of domestic PNG by Rs 3/scm to Rs 48.5/scm in and around Mumbai. The price hike reflects pass through of recent surge in spot LNG price and depreciation of Indian rupee. Price would help to protect margin and is positive for MGL.

Oil & gas (ONGC, Oil India, OMCs and Paint companies): Brent oil price below $100/bbl due to demand concern amid fear of global economic slowdown, China COVID restriction and strengthening of US Dollar. Weak oil price is negative for ONGC and Oil India as it would impact net oil realisation amid high fixed cess rate of $41/bbl while lower oil price is positive for OMCs (IOCL, BPCL and HPCL), paint and adhesives companies like Asian Paints and Pidilite as reduction in crude derivative prices will help in improving margins in the coming quarters. Further lower crude oil price is Positive for overall FMCG sector as packaging cost will reduce in the quarters ahead.

Navin Fluorine International Limited: The company inaugurates Hydrofluoroolefin manufacturing plant (commissioned jointly by Honeywell and Navin Fluorine) at Dahej (Gujarat). The planr has started manufacturing of Honeywell’s Solstice zd, which is a hydrofluoroolefin (HFO) and has various applications, including blowing agents for foam insulation and refrigeration liquid for chillers. Positive read through for Navin Fluorine.

SBI and BOB: Bank seeks to recover around Rs. 1,740 crores from SKS Power Generation Chhattisgarh. It is seeking expressions of interest from prospective buyers. The transaction is likely to be finalized by next month. Total debt of power firm is around Rs. 2,000 crores, BoB and SBI among major creditors. Positive read through for SBI & BOB.

MACRO WRAP

· The International Monetary Fund warned that avoiding recession in the United States will be "increasingly challenging" as it again cut its 2022 U.S. growth forecast to 2.3% from 2.9% in late June as recent data showed weakening consumer spending. The Fund has also cut its 2023 real GDP growth forecast to 1.0% from 1.7% on June 24, when it met with U.S. officials for an annual assessment of U.S. economic policies.

· Key expectations for today: US CPI is seen rising by 8.8% in June, up from May’s 8.6%, the highest since 1981. Consumer inflation is expected to be higher but it could be peak of inflation for now as per the economists.

· India's headline retail inflation rate, as measured by the Consumer Price Index (CPI), reported at 7.01 percent in June as against 7.04 percent in May. The latest inflation print remained in line with the consensus estimates. June CPI inflation print takes average inflation for April-June to 7.3 percent, 20 basis points lower than the Reserve Bank of India's (RBI) forecast of 7.5 percent. However, undershooting the forecast is of little significance at this stage, with the central bank on track to miss its mandate. The latest inflation number is unlikely to have any effect on the RBI's rate hike plans, with June being the 33rd month in a row that CPI inflation has come in above the medium-term target of 4 percent. An expected repo rate hike in early August could be followed by even more rate action in subsequent months.

· India's industrial growth, as per the Index of Industrial Production (IIP), surged to 19.6 percent in May from 7.1 percent in April aided by a favourable base effect. The manufacturing sector's output grew 20.6% in May this year. The mining output climbed 10.9%, and power generation increased by 23.5%. The improvement in industrial growth has been supported by resilient demand, with the index now 1.7 percent above its pre-pandemic levels in May 2019. So far, robust growth in exports, along with greater mining and fertilizer production is helping to boost output, while manufacturing also faced easier supply headwinds.

INVESTMENT CALL

Stock Update: HCL Tech – Q1FY23 results review: Mixed bag Q1; Guidance maintained

Rating: Buy Reco Price: Rs928 Target price: Rs1,140

· Q1FY2023 revenue growth was in line with expectations with steady progression of clients across higher size buckets. Margins missed estimates owing to supply-side pressures. Cash generation, net staff addition and attrition rate remained weak.

· The management reiterated its revenue growth guidance of 12-14% on CC terms, in line with our expectations, and 18-20% for EBIT margin for FY2023 despite supply side pressures, and delay in hike in realisations.

· HCL Tech is expected to achieve its revenue growth guidance in FY2023E given its strength in digital foundation, unique integrated infrastructure and app services, and presence in the fast-growing ERD segment.

· We maintain a Buy on HCL Technologies with a revised PT of Rs. 1,140, given strong growth in application services, good dividend payout, healthy order intake and reasonable valuation.

Viewpoint: Sobha: Regional market gaining traction

View: Positive Reco Price: Rs662 Upside: 25%

• Sobha announced more than a 65% y-o-y rise in total sales and share of sales value to Rs. 1146 crore and Rs. 952 crore, respectively, for Q1FY2023. Bengaluru project launches and price hikes aided strong sales performance.

• Bengaluru, a key region for the company saw strong sales and launches during H1CY22. The region saw inventories fall to decadal lows with prices estimated to have risen by 9% y-o-y at the end of H1CY22.

• The management ambitiously plans to double annual sales run-rate to 10 million square feet (msf) in 3-4 years. We expect traction in the Bengaluru housing market and strong project pipeline to aid sales growth.

• We stay positive on Sobha and expect an upside of 25% given its expected scale-up, paid-up land bank, cash flow generation and favourable valuation.

Stock update: Spandana Sphoorty Financials Ltd- Q4FY22 results review- Book Out, challenges persist

Rating: Book Out CMP: Rs. 428

· We advise investors to book out from Spandana Sphoorty Financial given the uncertainty about the company’s performance going ahead. Although the company has articulated a Vision 2025 to scale up its business operations, we believe that it has to go long way before it is back on the growth trajectory.

· Spandana Sphoorty Financial reported washout quarterly performance with below par operating performance. Consolidated NII and PAT declined by ~47% y-o-y and ~42% y-o-y respectively in Q4FY22.

· Disbursements too fell by ~48% y-o-y to Rs. 3,373 crore in Q4FY22. Š Asset quality deteriorated sharply with GNPA ratio at 15% in Q4FY22 versus 5% in Q3FY22. Its restructured book stood at Rs. 995 (~15% of the AUM) as on March 2022.

OTHER NEWS

Hotel: Indian Hotel Company’s revenues and margins are expected to return to pre-covid levels in FY2023 – Positive read through for Indian Hotel Companies

According ICRA, Domestic hotel industry’s revenues and margins are expected to return to pre-Covid levels in FY23, notwithstanding the potential impact on demand with further Covid waves. This will be largely driven by strong demand from domestic leisure travel while foreign tourist arrival is expected to see gradual recovery. Icra expects pan-India premium hotel occupancy to be at 68-70% for FY23, while the average room rate (ARR) is expected to hover around Rs5,600-5,800. The improved operating leverage along with sustenance of cost optimisation measures will support margins and accruals for hotels.

Tata Consumer Products: Tata Neu, the super app from the Tata group, has been downloaded by over 7 million users within seven weeks of its launch. This will help in enhancing Tata Consumer Products (TCPL) revenues from digital platform in the coming years. Further, TCPL has expanded its snacking portfolio with the launch of Tata Soulfull Masala Oats+, competing with companies such as PepsiCo and Marico. Tata Soulfull’s existing portfolio which includes cereals, muesli and plant-based protein drinks.

View: Leveraging on the parent’s strong digital platform and sustained innovation in its products will help TCPL to post consistent revenue and earnings growth in the medium term. It remains one of Top picks in the consumer goods space. We maintain our Buy recommendation on the stock.

Metals stocks: Most of the metal commodity futures are falling in China with coking coal price down by 3.7%, iron ore drops 0.9%, copper down 3.5%, aluminium falls 2.4% and zinc down 1% amid concern of demand slowdown due to COVID restriction in China as COVID-19 cases continue to rise. The continues weakness in metal price (most of metals prices have corrected sharply from recent peaks) is negative for India metal companies like Hindustan Copper, Hindalco, Vedanta, NMDC (cut domestic iron ore price by Rs500/tonne yesterday) and steel players (JSW Steel, Tata Steel, JSPL and SAIL). We have Hold rating on JSW Steel, SAIL and NMDC.

Agri sector: India cumulative monsoon rainfall is 9% above normal average rainfall and the same is expected to boost kharif crop production. Positive for agri-input companies like UPL, Dhanuka, Sumitomo Chemical India and Insecticides (India). Normal monsoon and good kharif season augurs well for FMCG companies as it will help in boosting the rural demand for consumer good products and thus positive for companies such as HUL, Dabur India and Emami who generates large revenues from rural markets.

Axis Bank: Mr. Rakesh Makhija reappointed as Non- Executive (Part-time) Chairman of the Bank, upto October 26, 2023.

Axiscades Technologies: The company has terminated a joint venture agreement with Assystem Engineering and Operation Services SAS, with mutual consent. It had signed the agreement in April 2018 with Assystem Engineering and Operation Services SAS to carry out engineering activities – sentimentally negative

Telecom sector: Reliance Jio Infocomm and Bharti Airtel are expected to bid for 5G spectrum worth Rs. 55,000-60,000 crore and Rs. 45,000-50,000 crore, respectively, in the airwaves sale starting from July 26. The Adani group, through unit Adani Data Networks, and Vodafone Idea, in turn, may bid for spectrum worth Rs. 13,000-15,000 crore and R. 5,000-6,000 crore, respectively.

Source : Sharekhan