Is the budget hit or miss for stocks? ICICI Securities decodes for 14 Nifty cos

1) ITC: An increase of about 16% in National Calamity Contingent Duty (after three years) will lead to an increase in tax incidence of about 2% in four key cigarette categories. ITC is likely to offset the impact of tax hikes through selective price increases, given the general inflationary environment and lack of price increases in the last two years. We expect the company to continue volume-driven outperformance in the cigarette business. ITC is a potential candidate for multiple (valuation) re-rating driven by outperformance in the cigarette business led by likely price hikes and improving volume trajectory. Secondly, the expectation of continued volume market share gain in cigarettes led by a curb on illicit trade. Moreover, the hotel business would benefit from the improvement in occupancy (above 60%; a 7-8% improvement in occupancy is 16-30% profit accretive). Further, there is the FMCG sector volume growth tailwind for the paperboard and packaging business.

2) Hindustan Unilever: While there were no direct implications for FMCG companies, the benefits of higher disposable income, led by lower tax incidence on personal income shall be positive to revive discretionary consumption. Overall, we maintain our positive outlook on Hindustan Unilever (HUL). The raw material cost index has likely peaked and is declining sequentially. HUL would be one of the biggest beneficiaries of a benign raw material cost environment. The price-retention benefits are to be utilised towards higher investments in advertising and promotion; and new product development. Overall, we note that HUL continues to deliver outperformance in all key segments (market share gains in 75% of portfolio) driven by share gains in fabric wash both in value and volume and health food drinks (despite milk inflation). Incremental work on category development (both formats and premiumisation) is tracking well. Premiumisation, bolt-on acquisitions in niche segments (baking a bigger cake), focus on cost efficiencies and utilising technology to enhance distribution efficiency may enable HUL to outperform during FY24E.

3) Asian Paints: While there were no direct implications for paint companies, higher allocations to the Pradhan Mantri Awas Yojana scheme is likely to boost the real estate industry and expand the addressable market for the paint companies. With a steep increase in competitive intensity in the paint sector post entry by JSW, Grasim, JK Cements, Astral and aggressive investments by smaller players such as Kamdhenu, Sirca and Shalimar, we note the industry profit pool is likely to shrink. We note three structural factors which indicate the price-to-earnings multiples are likely to decline. One, the portfolio mix continues to deteriorate with weaker consumer sentiment, higher sales of putty, primer as well as institutional/ projects sales. Two, the structural reduction of 250 basis points in Ebitda margin is likely to hurt discounted cash flow valuation by 8-10%. One basis point is 0.01%. Thirdly, with Asian Paints reaching 150,000 outlets, there is limited scope to expand distribution. Average annual revenue/outlet is now lower than Rs1.4mn. It is tough to run a store profitably with such a small turnover which indicates Asian Paints has hit the ceiling to add new stores in the near term.

4) Reliance Industries: The budget provisions that are relevant to Reliance Industries (RIL) include: 1) Naphtha import duty raised by 150 basis points (bps); ii) Increase in customs duty on Styrene and vinyl chloride monomer by 50bps and iii) Provision for the investment of ₹35000 crore in energy transition (Government is targeting 5mt of Green Hydrogen production by the calendar year 2030). One basis point is 0.01%. These are positives. The increase in Naphtha import duties is marginally positive for RIL as domestic prices will go up to factor in the higher import parity prices. RIL is investing Rs75000 crore or so over the next few years in New Energy segments. If the execution keeps pace with the intent, the segment can generate a potential Rs16500 crore of incremental Ebitda (@18% pre-tax RoCE) – for context our FY25E consolidated Ebitda estimate for RIL is at Rs189900 crore. RoCE is the return on capital employed.

5) BPCL: The budget provisions relevant to Bharat Petroleum Corp. Ltd (BPCL) include i) petroleum subsidy provision of ₹9170 crore in FY23RE and Rs2260 crore for FY24 ii) No additional subsidy support provided to meet losses from retail fuels iii) Ethyl alcohol customs duty reduced to NIL (used in ethanol manufacture). The lack of budgetary support for compensating retail fuel losses implies FY23e will see BPCL report operating losses for the year, despite a stronger H2FY23 versus H1FY23. However, a tight refining demand-supply balance and improving marketing margins should ensure a materially better FY24E and we believe that valuations of just 6.7x FY24 estimated earnings per share and 5.9 times EV/Ebitda offer material upsides from here. EV is enterprise value. Ebitda is earnings before interest, tax, depreciation and amortisation.

6) Larsen & Toubro: Larsen & Toubro (L&T) is expected to be the major beneficiary of the increase in capital investment outlay to Rs10 trillion (3.3% of GDP). The effective capex would be ₹13.7 trillion. Other key announcements such as 50 additional airports, 100 critical transport infra projects with an investment of Rs75000 crore, and Rs35000 crore capex for energy transition etc are positive for the company. The 27% increase at Rs70000 crore allocation for Jal Jeevan Mission is positive. The extension of the interest-free loan for states (about 30% of the current order book for L&T) also augurs well for the capex boost. With increasing capital outlay, we expect a significant increase in the domestic prospects pipeline (Rs6.3 trillion in FY23) and thereby an increase in order inflow (estimating core order inflow of Rs1.8 trillion/Rs2.1 trillion for FY24/25E). The current order book stands at a healthy Rs3.86 trillion (3.4 times trailing twelve-month ex-services sales).

7) Sun Pharmaceuticals Industries: The recent budget announcement of a new program to promote research, aims to give a healthy impetus to pharma companies to move up the value chain and facilitate higher research & development (R&D) spending towards innovative molecules. However, we believe the move towards innovative R&D for domestic pharma companies is fairly long-term in nature with minimum impact in the near term as most companies will wait to strengthen their balance sheet and assess the attractiveness of this opportunity that has a long drawn-out process with a high failure rate. Likewise, we don’t see any impact on Sun Pharmaceuticals Industries Ltd from this announcement. Sun Pharma’s domestic revenues have grown at a steady pace and have recorded a 10.5% compound annual growth rate (CAGR) growth over FY17-FY22. The healthy growth can be expected to continue with its strong chronic portfolio and grow at a CAGR of 9% over FY22E-FY25E. Sun’s foray into the speciality segment has also started to reap dividends and has grown at a healthy CAGR of 18.4% over FY17-FY22. The company’s long-term outlook. is positive, However, the current valuation captures the near-term potential.

8) Maruti Suzuki India: The budget proposals have no impact on Maruti Suzuki India Ltd. With car retail levels stagnating at the current levels of about 250000 units per month on average (ex-peak festive season period and December), the industry needs catalysts like new launches and steady total cost of ownership for another double-digit growth year following about 15% growth in FY23. For Maruti Suzuki, we believe Fronx and Grand Vitara along with Jimny would drive about 14% domestic passenger vehicle (PV) growth in FY24, post about 20% growth in FY23, with a slight recovery in PV market share by about 200 basis points (bps) from the lows of 40%. One basis point is 0.01%. From an Ebitda margin perspective, we are factoring in about 11.5% in FY24 versus current levels of about 10%, with operating leverage and improving mix of the key drivers as currency and input commodity cost-driven gross margin improvement has limited scope ahead.

9) Hero MotoCorp: The budget proposals have no impact on Hero MotoCorp Ltd (HMCL). Rural demand has remained subdued for the past couple of years. Further, HMCL does not have a strong portfolio in either scooters or premium bikes (in turn hurting demand from urban markets). Against this backdrop, the domestic two-wheeler (2W) volume of HMCL would be down about 40% in FY19-23E with about 150 basis points market share loss. One basis point is 0.01%. With rising premiumisation and scooterisation (including electrification), HMCL needs to ramp up its scooter market share, or it would be tough for it to gain an overall 2W market share ahead.

10) Bajaj Auto: The budget proposals have no impact on Bajaj Auto Ltd. The company got impacted by subdued export demand in FY23 till date, resulting in overall volume declining by 6% in FY23E, despite growing by 75% and 6% in domestic three-wheelers (3Ws) and two-wheelers (2Ws). We expect domestic 2W premiumisation, recovery in domestic 3W demand along with exports recovering post a weak FY23 to drive FY24 overall volume growth of 13%, still about 10% lower than FY19 levels. With Chetak distribution set to get enhanced from 50 cities currently to more than 100 cities by mid-FY24, we expect the electrical vehicle (EV) mix gradually to ramp up, pushing blended realisation and reducing losses per EV unit with rising scale.

11) HDFC Bank: Union Budget has proposed revamping the credit guarantee scheme for MSMEs through the infusion of ₹9000 crore in the corpus. This will enable additional collateral-free guaranteed credit of Rs2 trillion and reduce the cost of the credit further by 1% which should also provide further impetus to MSME credit growth. HDFC Bank has been placed well on the margin front in a rising rate scenario with >50% of the portfolio being floating in nature. Moreover, with incremental growth being largely led by retail/ SME, further supported by faster repricing of the loan portfolio than deposits, margins should improve in the near term. The merger with HDFC Ltd is proposed at an opportune time given that housing loan growth opportunity with deeper penetration, regulatory convergence, conducive market development, pricing convergence, portfolio rebalancing, enhanced cross-sell, etc. However, there could be a short-term overhang with respect to pressure on deposit costs in the interim, which would result in a return on equity dilution for a year or so.

12) State Bank of India (SBI): Strong loan pipeline coupled with a high single-digit GDP growth outlook gives confidence that credit growth is likely to pick up further momentum in the coming quarters. With Rs13.7 trillion being allocated towards capex in Union Budget 2023-24, SBI could be a big beneficiary in terms of higher corporate credit growth. Moreover, with incremental growth being largely led by retail/ SME, further supported by faster repricing of the loan portfolio than deposits, margins should improve in the near term. On asset quality, slippages have been well below estimates for H1FY23 and we expect contained slippages coupled with higher recoveries should support asset quality trends in coming quarters in our view. In order to accelerate the digital agenda, YONO 2.0 will focus on sleek customer-centric design, quick response time, modern tech stack, innovative product offerings, hyper-personalised, omnichannel presence, partnership-enhanced proposition and leveraging AI/LM/analytics and cloud. YONO could also result in good value unlocking for SBI in the long term.

13) Bharti Airtel: Government has budgeted communication receipt of Rs89500 crore for FY24, while our working shows recurring revenue from licence fees and spectrum usage charge (SUC) is Rs23500 crore; and EMI revenue from the5G auction is Rs10000 crore. Other dues to the government are under moratorium therefore the government will receive no incremental revenues from AGR (adjusted grow revenue) and spectrum dues for earlier auctions. This leaves us with a deficit of Rs56000 crore which the government could have made provision for spectrum auction in FY24, but it still does not explain the entire difference. Bharti Airtel will benefit from repair in the Indian telecom industry which has come a long way in terms of tariffs, and we see telcos have a better pricing environment with only two strong players. Further, in the past eight quarters, Bharti’s incremental AGR market share has positively surprised which has increased visibility for higher sustainable revenue market share for Bharti versus consensus estimates. Bharti is rolling out 5G along with Reliance Jio (RJio) and it has level playing in 5G, unlike 4G, where it lagged RJio by three years in rolling out services. Bharti’s peak capex (including spectrum) is behind, and free cash flow generation organically will reduce net debt by 5-8% per annum at least going forward.

14) UltraTech Cement: The Pradhan Mantri Awas Yojana budget allocation has been increased to about Rs79600 crore in FY24 versus about Rs48000 crore in FY23. This augurs well for the cement industry given housing contributes about two-thirds of the cement consumption in the country. Other relevant announcements for the cement sector include the higher capital outlay. These are positive for pan-India cement company UltraTech Cement Ltd. With a current capacity of~120mtpa, it can capture the incremental demand in housing and infrastructure segments and thus capture a higher market share. UltraTech’s market share increased from 16% in FY17 to 26% in FY22 (one in every four cement bags sold in India belongs to UltraTech) which is further expected to increase to 27% by FY24E. It plans to add about 40mnte over the next 3 years taking the total installed India capacity to about 155mtpa by FY26. The company is likely to post industry-leading volume CAGR (about 10%) over FY22-FY25E. CAGR is the compound annual growth rate. We expect UltraTech to post revenue, Ebitda and profit after tax CAGRs of 14%, 13% and 18% respectively over FY22-FY25E.