Q3 results review: PL adds IndiGo, Astral, ups exposure in RIL, Airtel; cuts weight of HDFC Bank, ITC in model portfolio

It has also made some major changes in its model portfolio on the back of the Q3 earnings. PL cut weights on HDFC Bank, ITC, Titan, Avenue Supermarts and Hindalco in the model portfolio. Meanwhile, it increased the weights on RIL, Bharti Airtel, SBI, and M&M in the model portfolio. It also added Interglobe Aviation and Astral to the Model portfolio and removed Bharat Electronics.

Q3 Earnings

PL universe Q3FY24 aggregate coverage sales, EBIDTA, and PBT grew by 4.1 percent, 15.4 percent, and 34.9 percent YoY respectively as margins expanded 186 bps YoY and 258 bps QoQ.

“Auto (strong volumes and benign inputs), Capital Goods (Strong sales, lower inputs and operating leverage), Pharma (Strong sales and benefit of stable generic pricing in the US and lower API prices), travel (Aviation and Hotels gain from strong travel surge) reported strong sales, EBITDA and PAT. Specialty Chemicals (Poor pricing and demand), and consumer durables reported lower EBIDTA as margins remained under pressure. FMCG/Retail/QSR showed the impact of poor demand even as raw material prices provided some cushion to margins and profitability,” it noted.

The brokerage stated that domestic demand remains mixed as the growth is being led by Govt induced infra capex, revival of private capex, and structural shifts happening across green energy, digitization and EV, etc. Rural recovery remains stunted and urban demand is tepid; however, PL believes underlying demand is also showing a shift in wallet share as consumers spend on emerging necessities by use of new channels, a trend which will only accelerate as we march towards a $5 trillion economy by 2028.

Read here: Q3FY24 Review: Nifty 500 firms deliver 25% growth; BFSI, oil & gas lead the pack

Upgrades and Downgrades

In the PL Universe, there were 10 rating upgrades and 20 rating downgrades, chemicals, Media and Oil and Gad had maximum downgrades while capital goods had both upgrades and downgrades (Valuations led).

Major Rating Upgrade: Astral, Polycab, Praj Industries, Pidilite Industries, Oil India and Gujarat Flurochemicals.

Major Rating Downgrade: GAIL, Petronet LNG, Zee, Asian Paints, SRF, Vinati Organics and Thermax.

Major Estimates Upgrade – Hero MotoCorp, Tata Motors, Voltas, Praj Industries, Siemens, Max Healthcare, Oil India, Lupin Labs, Aurobindo Pharma and Zydus.

Estimate Downgrade – Bharti Airtel, VIP, Westlife FoodWorld, Divi’s Metro Brands, Indraprastha Gas, Bajaj Electricals, Century Ply, Grindwell Norton, Aarti Industries, SRF, Vinati, Laxmi Organic and Gujarat Flurochemicals.

Outlook

The brokerage believes India is best placed in fiscal terms with a fiscal deficit target of 5.1 percent, GDP growth of 7 percent, and CAD being at record lows. With elections being announced the focus shifts to politics as it will hold the key to how markets perform over the next 5 years. NDA seems sitting pretty as of now, however, PL remains cognizant of electoral uncertainties in a freebies-driven culture.

It believes any big announcements like loan waivers and significantly increasing farm outlays, cash transfers, old pension schemes, etc. have the risk of taking the fiscal and growth trajectory to an earlier level.

In the Bull Case, PL values NIFTY at a 6 percent premium to 15-year average PE 20x (5 percent discount to 10-year avg. at 19.3x earlier) and arrives at a bull case target of 26,885 (25,907 earlier).

Meanwhile, in the Bear case, Nifty can trade at a 13 percent discount to LPA (25 percent earlier) with a target of 22,066 (20,453 earlier), predicted the brokerage.

High Conviction Stock Picks

In its high conviction stock picks, the brokerage removed Hindalco (higher capex in Novelis with a reduction in ROCE), and Jupiter Health (target achieved) and added Praj Industries.

The brokerage remains positive on Praj Industries in long run given 1) its leadership in domestic ethanol (50-55 percent market share), 2) strong domestic CBG investment pipeline, 3) focus on newer technologies like 2G ethanol, biomanufacturing, multi-feedstock plants, etc. 4) significant export opportunities driven by energy transition & climate action across the globe, low-carbon ethanol for SAF in the US, etc. and 5) improving margins owing to growing share of services & exports.

It expects Praj to report Revenue/Adj. PAT CAGR of 13.2 percent/22.4 percent over FY23-26E. PL has a ‘BUY’ rating on the stock with a TP of ₹647, valuing it at a PE of 28x Dec-25E.

Large Cap conviction picks: ABB India, Avenue Supermarts, HDFC Bank, ICICI Bank, Maruti Suzuki, Max Healthcare Institute, Reliance Industries, and Siemens.

Mid/Small Caps conviction picks: Astral, Can Fin Homes, Eris Lifesciences, Navneet Education, Praj Industries, RR Kabel, Safari Industries (India), Sunteck Realty, and Triveni Turbine.

Finally, it has picked Restaurant Brands Asia as its Contra BUY pick.

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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Published: 26 Feb 2024, 02:23 PM IST