Strategy Note India │ February 28, 2024

India
India Strategy
InCred Sector rating Sales growth recovery provides hope
■ Near double-digit sales growth in 3QFY24, rural growth improving and the
Overweight Neutral Underweight
Interim Budget providing strong FY25F GDP growth outlook are comforting.
Aluminum Auto Ancillary Agribusiness
■ 3Q results providing a 2% beat to Bloomberg consensus Nifty-50 EPS to
Automobile Building Materials Aviation
extend a 21% yoy growth reassures high-teen index FY24F-25F EPS growth.
Cement Consumer staples Chemicals
Consumer Information
■ Maintain our Nifty index target and Overweight rating, with a preference for
Electricals Technology
Diagnostics
automobile, cement, capital goods, defence, EMS and oil & gas sectors.
Capital Goods Pharma Metals & Mining
Defence Ports & Logistics Economic growth momentum comforts but delays interest rate cut
Financial Services The high frequency factors indicate strengthening of economic growth momentum, as the
Infrastructure rural economy also seems to be on a gradual growth recovery. Gross domestic product or
Oil and Gas GDP growth outlook, aided by government capex outlook in the Interim Budget for 2024-
25, seems credible at 7% for FY25F. However, the Reserve Bank of India’s recent policy
meeting giving an outlook of prolonged Consumer Price Index (CPI) inflation rate of 4.5%
for FY25F disappoints and hints about prolonged peak interest rates for some quarters.

Sales growth improvement & PAT beat in 3QFY24 impress

The Nifty-50 index companies posted close to double-digit sales growth of 9.3% in 3QFY24
aided by the festive season. The PAT growth at 21% yoy showed a 2% beat vs. Bloomberg
consensus estimate. However, the quality of the beat was not at all comforting as only a
few companies in the group witnessed a big beat. The outperformance continued to come
from the sectors like automobile, oil & gas, pharmaceuticals, real estate and capital goods.
In this results season, we continued to witness more downgrades (13 stocks) than
upgrades (3).

Drop our housing investment theme and trim high-conviction list

After the strong festive season-led demand led to new home sales scaling a new peak and
a robust 19% yoy price rise in big towns, we feel the Nifty realty index’s return of 70% in
the last six months makes the risk-reward ratio unfavourable. Easing enquiry levels,
demand slowdown for building materials like tiles & plyboard and a prolonged high interest
rate environment led us to book profits in our housing investment theme. In our high-
conviction list of stocks, we continue to book profits, removing KEI Industries and Spandana
Spoorthy Financial from the list. We have introduced SBI Cards, but with a REDUCE rating.

We remain Overweight; maintain our index target

We maintain our Overweight stance on the sectors like automobile, oil & gas, capital goods
and defence where the FY24F-25F EPS upgrade support our thesis (Fig. 35). The earnings
downgrades in commodities support our Underweight rating. We maintain our Overweight
rating on the Nifty-50 index with an unchanged blended target of 22,509 and a bull-case
target of 23,571 (Fig. 39). High stock price movement in low-liquidity stocks is a cause of
concern, especially in small-caps and mid-caps. The key downside risks are political
uncertainty in India and globally, as nearly 50% of democratic countries’ voters express
their opinion through election outcomes in CY24.

Figure 1: Quarterly EPS beat/miss vs. Bloomberg consensus estimates

20% 15% 13%
13%
5% 8% 4%
Research Analyst(s) 10% 4% 1% 3% 1% 2% 2%
0%
-10% -1% -2% -4%-2%-1%-2% -4%
-20% -10%
-30% -22% -23%
-40% -28% -27%
-50%
-60%
-70% -59%
Pramod AMTHE
Jun'18

Jun'19

Jun'20

Jun'21

Jun'22

Jun'23
Sep'18

Sep'23
Dec'17

Dec'18

Sep'19
Dec'19

Sep'20
Dec'20

Sep'21
Dec'21

Sep'22
Dec'22

Dec'23
Mar'21
Mar'18

Mar'19

Mar'20

Mar'22

Mar'23

T (91) 22 4161 1541

E pramod.amthe@incredresearch.com
Ravi GUPTA Nifty Earnings surprise (%)
T (91) 02241611552
E ravi.gupta@incredresearch.com SOURCE: INCRED RESEARCH, COMPANY REPORTS

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 India
Strategy Note │ February 28, 2024

Figure 2: Our high-conviction ADD/ REDUCE stock ideas’ valuations

2-year EPS
Market Market Target EV/EBITDA Dividend RoE
BLOOMBERG Price Up/down EPS CAGR P/E (x) P/BV (x)
Company Reco. Capital. Capital. Price (x) Yield (%) % Analyst Name
TICKER (Rs) (%) (FY24F-
(Rsbn) (US$bn) (Rs)
FY25F)
FY24F FY25F FY24F FY25F FY24F FY25F FY25F FY25F FY25F
Ashok Leyland AL IN ADD 511 6.2 174 208 20% 8.0 9.5 6% 20.5 18.2 5.2 4.6 8.8 2.9% 26.9% Pramod AMTHE
Aurobindo Pharma ARBP IN ADD 613 7.4 1,046 1,178 13% 54.5 67.1 7% 19.6 15.6 2.1 1.9 8.1 0.7% 12.6% Praful BOHRA
Bharat Electronics Ltd BHE IN ADD 1,501 18.1 205 235 14% 5.3 5.9 3% 38.5 34.7 9.5 8.2 25.6 1.2% 25.2% Dipen VAKIL
Bharat Forge BHFC IN ADD 548 6.6 1,178 1,366 16% 21.2 27.4 9% 55.5 43.0 6.0 5.1 19.9 0.9% 12.8% Pramod AMTHE
Camlin Fine Sciences CFIN IN ADD 20 0.2 121 300 148% 15.1 21.8 13% 8.0 5.6 1.5 1.2 4.1 1.8% 23.3% Satish KUMAR
Clean Science and Technology CLEAN IN REDUCE 155 1.9 1,461 663 -55% 22.1 25.5 5% 66.1 57.2 13.6 11.2 43.8 0.0% 21.5% Satish KUMAR
Container Corp of India Ltd CCRI IN ADD 592 7.1 972 1,083 11% 22.0 27.9 8% 44.1 34.9 4.9 4.3 22.2 0.0% 13.0% Rajarshi MAITRA
Cyient DLM Ltd CYIENTDL IN ADD 69 0.8 870 1,049 21% 8.6 14.2 18% 101.3 61.3 7.1 6.4 35.8 0.0% 18.6% Vipraw SHRIVASTAVA
Data Patterns (India) Ltd DATAPATT IN ADD 143 1.7 2,549 3,000 18% 35.1 51.3 13% 72.6 49.7 10.7 9.1 35.4 0.3% 19.7% Dipen VAKIL
Globus Spirits Ltd GBSL IN ADD 23 0.3 793 2,519 218% 46.7 100.8 29% 17.0 7.9 2.3 1.8 5.2 0.5% 25.2% Nitin AWASTHI
HDFC Bank HDFCB IN ADD 10,787 130.1 1,420 2,000 41% 83.5 104.6 8% 17.0 13.6 2.3 2.1 30.0 2.1% 16.1% Jignesh SHIAL
InterGlobe Aviation Ltd INDIGO IN REDUCE 1,229 14.8 3,183 2,000 -37% 96.5 38.9 -26% 33.0 81.7 -47.5 -113.5 12.1 0.0% -82.0% Rajarshi MAITRA
Mahindra & Mahindra Finance MMFS IN ADD 357 4.3 289 370 28% 14.1 22.7 17% 20.5 12.7 2.0 1.8 9.0 3.1% 14.7% Jignesh SHIAL
Maruti Suzuki MSIL IN ADD 3,616 43.6 11,501 12,554 9% 422.6 485.6 5% 27.7 23.7 5.2 4.0 15.6 1.5% 19.0% Pramod AMTHE
Reliance Industries RIL IN ADD 20,104 242.5 2,971 3,369 13% 178.7 NA NA 0.0 NA 0.0 NA NA NA NA Satish KUMAR
Shriram Finance Limited SHFL IN ADD 891 10.8 2,372 2,800 18% 192.6 233.1 7% 12.3 10.2 1.8 1.5 25.0 1.1% 16.3% Jignesh SHIAL
Som Distilleries & Breweries Ltd SDB IN ADD 22 0.3 283 446 58% 12.3 15.4 8% 23.0 18.4 3.9 3.3 11.3 0.5% 26.1% Nitin AWASTHI
State Bank of India SBIN IN ADD 6,692 80.7 750 800 7% 67.1 69.7 1% 12.3 10.8 1.8 1.6 19.2 2.6% 15.9% Jignesh SHIAL
SBI Cards SBICARD IN REDUCE 696 8.4 732 500 -32% 24.6 24.9 0% 29.7 29.4 5.9 5.0 3.8 0.5% 18.4% Jignesh SHIAL
Tata Steel TATA IN REDUCE 1,800 21.7 144 82 -43% 5.5 5.4 0% 26.3 26.6 1.6 1.6 9.4 1.4% 6.1% Satish KUMAR
Tech Mahindra TECHM IN ADD 1,265 15.3 1,296 1,625 25% 29.1 64.2 30% 47.2 20.2 4.4 4.2 12.0 4.0% 21.2% Abhishek SHINDADKAR
Thermax Ltd TMX IN ADD 441 5.3 3,699 3,675 -1% 52.2 70.0 10% 75.5 52.9 9.4 8.1 41.2 0.3% 16.5% Arafat SAIYED
SOURCE: INCRED RESEARCH, COMPANY REPORTS

2
 India
Strategy Note │ February 28, 2024

Sales growth recovery provides hope

Macroeconomic indicators strengthen
The high-frequency macroeconomic indicators remain strong despite global
geopolitical headwinds. The Interim Budget for 2024-25 providing sustenance of
investment-led economic growth and avoiding the temptation to offer election
freebies provides medium-term comfort. The initial positive monsoon rainfall
outlook by global agencies should help sustain rural market recovery into FY25F.
Figure 3: Overall loan growth is strong Figure 4: Non-food credit growth eases in recent months
%
30.0 YoY credit growth- Sector-wise 170

160

150
20.0
140

Rs tr
130
10.0
120

110
0.0
100
Dec/17

Dec/18

Dec/19

Dec/20

Dec/21

Dec/22

Dec/23
Aug/20

Apr/23
Apr/18
Aug/18

Apr/19
Aug/19

Apr/20

Apr/21
Aug/21

Apr/22
Aug/22

Aug/23

90

Dec-23
Dec-19

Sep-20
Dec-20

Sep-21
Dec-21

Sep-22
Dec-22

Sep-23
Mar-20

Mar-21

Mar-22

Mar-23
Jun-20

Jun-21

Jun-22

Jun-23
-10.0
Non-food Agriculture and allied activities
Industry Personal loans
Services Non-food credit (Rs tr)
SOURCE: RBI, INCRED RESEARCH SOURCE: RBI, INCRED RESEARCH

Figure 5: Passenger vehicle or PV sales continued to witness good growth

5,00,000 25,00,000
4,50,000
4,00,000 20,00,000
3,50,000
(units)

(units)
3,00,000 15,00,000
2,50,000
2,00,000 10,00,000
1,50,000
1,00,000 5,00,000
50,000
0 0
Jul-20

Jul-21

Jul-22

Jul-23
Jan-20

Jan-21

Jan-22

Jan-23

Jan-24
Apr-20

Oct-20

Apr-21

Oct-21

Apr-22

Oct-22

Apr-23

Oct-23

PV - Retail EV - Retail 2W - Retail (RHS)

SOURCE: INCRED RESEARCH, VAHAN.COM

3
 India
Strategy Note │ February 28, 2024

Figure 6: Electricity generation witnesses seasonal weakness

5,500

5,000

4,500

MU
4,000

3,500

3,000

2,500

May-22
Aug-20
May-19
Aug-19
Nov-19

May-20

Nov-20

May-21
Aug-21
Nov-21

Aug-22
Nov-22

May-23
Aug-23
Nov-23
Feb-19

Feb-20

Feb-21

Feb-22

Feb-23

Feb-24
Average Monthly Electricity Generation (MU)

SOURCE: POWER SYSTEM CORPORATION LIMITE, INCRED RESEARCH

Figure 7: E-way bills register sequential growth

GST Eway Bill perday (Rs.in mn) GST collection (Rs.in bn)

3.5 2000
1800
3
1600
2.5 1400

2 1200
1000
1.5 800
1 600
400
0.5
200
0 0
Nov-19

Nov-20

Nov-21

Nov-22

Nov-23
May-19

May-20

May-21

May-22

Sep-22

May-23
Sep-19

Sep-20

Sep-21

Sep-23
Jan-20

Jan-21

Jan-22

Jan-23

Jan-24
Mar-20

Mar-21

Jul-21

Mar-22

Mar-23
Jul-19

Jul-20

Jul-22

Jul-23

SOURCE: GOODS AND SERVICES TAX NETWORK (GSTN), INCRED RESEARCH

Consumer sentiment on a gradual uptick

AS per a Reserve Bank of India (RBI) survey, consumer confidence continues to
improve gradually in India. The rural market recovery seems to be gaining ground
with the festive season-led demand witnessed in 2W or two-wheelers. According
to the data released by market research firm NielsenIQ, FMCG volume sales in
rural markets increased by 5.8% yoy in 3QFY24. Rising minimum support prices
for crops and prospects of a healthy rabi harvesting season will further strengthen
rural demand, in our view.

4
India
Strategy Note │ February 28, 2024

Figure 8: Rising volume growth in FMCG sales

SOURCE: INCRED RESEARCH, DEPARTMENT OF ECONOMIC AFFAIRS, NEILSON IQ

Figure 9: Consumer sentiment is on a gradual improvement but rural market

sentiment is still volatile

112
108
104
100
96
Absolute value

92
88
84
80
76
72
68
64
60
56
52
48
44
40
24-Jan-22
23-Feb-22
25-Mar-22

23-Jun-22

19-Jan-23
18-Feb-23
20-Mar-23

18-Jun-23

14-Jan-24
13-Feb-24
23-Jul-22

18-Jul-23
25-Nov-21
25-Dec-21

24-May-22

22-Aug-22
21-Sep-22

20-Nov-22
20-Dec-22

19-May-23

17-Aug-23
16-Sep-23

15-Nov-23
15-Dec-23
24-Apr-22

21-Oct-22

19-Apr-23

16-Oct-23

All-India Urban Rural

SOURCE: RESERVE BANK OF INDIA (RBI), INCRED RESEARCH

Figure 10: Consumer sentiment scales pre-Covid peak level

SOURCE: MOSPI, RESERVE BANK OF INDIA (RBI), INCRED RESEARCH

5
 India
Strategy Note │ February 28, 2024

Figure 11: Consumer perception on essential spending for the Figure 12: Consumer perception on non-essential spending for
current year and a year forward ease post festival the current year and a year forward improve

Essential spending-Current perception Non-Essential spending-Current perception

Essential spending-One Year ahead perception Non-Essential spending-One Year ahead perception

88 15
86 10
5
84
0
82
-5
80
-10
78 -15
76 -20
74 -25
72 -30
70 -35

Mar-23
May-22

Sep-22

Nov-22

May-23

Sep-23

Nov-23
Jul-22

Jan-23

Jul-23

Jan-24
Sep-22

Sep-23
May-22

Nov-22

May-23

Nov-23
Jan-23

Mar-23

Jan-24
Jul-22

Jul-23

SOURCE: CMIE, INCRED RESEARCH, RBI

SOURCE: THE CENTRE FOR MONITORING INDIAN ECONOMY (CMIE), INCRED
RESEARCH, RBI

Figure 13: Naukri Jobspeak hiring Index witnessed a sequential uptick

3,300

3,100

2,900

2,700

2,500

2,300

2,100

1,900

1,700
Sep-21

Sep-22

Sep-23

Nov-23
May-21

Nov-21

May-22

Nov-22

May-23
Jan-21

Mar-23
Mar-21

Jan-22

Mar-22

Jan-23

Jan-24
Jul-21

Jul-22

Jul-23
Naukri Jobspeak Hiring Index

SOURCE: INCRED RESEARCH, NAUKRI JOBSPEAK REPORT

Strong GDP growth outlook for FY25F

The domestic economic activity is strengthening. As per the first advance
estimates released by the National Statistical Office (NSO), real gross domestic
product (GDP) is expected to grow by 7.3% in FY24F. Going ahead, recovery in
rabi crop sowing, sustained profitability in manufacturing and the underlying
resilience in the services sector should support economic activity in FY25F.
Among the key drivers on the demand side, household consumption is expected
to improve while the prospects of fixed investments remain bright owing to an
upturn in the private capex cycle, improved business sentiment, healthy balance
sheets of banks and corporates, and the government’s continued thrust on capital
expenditure. The outlook on global trade improving and the rising integration of
global supply chains will support net external demand. Headwinds from
geopolitical tensions, volatility in international financial markets and geoeconomic
fragmentation, however, pose risks to the outlook. Taking all these factors into
consideration, RBI estimates India’s real GDP growth for FY25F at 7%, with 1Q
at 7.2%, 2Q at 6.8%, 3Q at 7% and 4Q at 6.9%.

6
 India
Strategy Note │ February 28, 2024

Figure 14: The Index of Industrial Production (IIP) improves Figure 15: Manufacturing Purchasing Managers’ Index or PMI
of India, China and the US improves

20.0 65
15.0
60
10.0

5.0 55
0.0
50
-5.0

-10.0 45
-15.0

-20.0 40

Apr-19

Oct-19

Apr-20

Oct-20

Apr-21

Oct-21

Apr-22

Oct-22

Apr-23

Oct-23
Jan-19

Jan-20

Jan-21

Jan-22

Jan-23

Jan-24
Jul-19

Jul-20

Jul-21

Jul-22

Jul-23
Dec-23
Oct-19
Dec-19

Aug-20

Dec-20

Aug-21

Dec-21

Aug-22

Dec-22

Aug-23
Apr-20

Oct-20

Apr-21

Oct-21

Apr-22

Oct-22

Apr-23

Oct-23
Feb-20

Jun-20

Feb-21

Jun-21

Feb-22

Jun-22

Feb-23

Jun-23
IIP growth % yoy India Mfg PMI China PMI USA PMI
SOURCE: NATIONAL STATISTICS OFFICE (NSO), INDEX OF INDUSTRIAL PRODUCTION SOURCE: IHS MARKIT, PURCHASING MANAGERS' INDEX (PMI), INCRED RESEARCH
(IIP), INCRED RESEARCH,

Figure 16: India's GDP growth - Bloomberg consensus estimate upgrade sustains

FY24F FY25F
6.9
6.8
6.6
6.7
6.6
6.5
6.4 6.3
6.3
6.2
6.1
6
5.9
Feb/22
Mar/22

Feb/23
Mar/23

Feb/24
Apr/23
Apr/22

Aug/22
Sep/22
Oct/22
Nov/22
Dec/22

Aug/23
Sep/23
Oct/23
Nov/23
Dec/23
Jul/22

Jul/23
May/22

May/23
Jun/22

Jan/23

Jun/23

SOURCE: BLOOMBERG, INCRED RESEARCH Jan/24

Export growth recovery to gain momentum

CY23 was marked by slower growth in world trade volume vs. CY22 for both
advanced and emerging markets/developing economies. As per the projections
by the International Monetary Fund or IMF, CY24F is expected to result in higher
yoy growth in international trade, with trade volume growth outpacing the growth
in the world’s output. Despite the projected global output growth remaining
constant for 2024F, trade volume is expected to recover this year, maintaining the
momentum in 2025F, which should augur well for India’s exports, where green
shoots were witnessed in recent months.

7
India
Strategy Note │ February 28, 2024

Figure 17: World trade volume to grow above its output in 2024F

SOURCE: IMF JANUARY 2024, INCRED RESEARCH

Figure 18: Recession probability declines across the globe

100
90
80
Probability of recession (%)

70
60
50
40
30
20
10
0
Feb-23

Mar-23

Feb-24
Jul-23
May-23
Apr-23

Oct-23
Jun-23

Jan-24
Sep-23
Aug-23

Nov-23

Dec-23
US Eurozone UK Germany France

SOURCE: BLOOMBERG, INCRED RESEARCH

Figure 19: India's fiscal deficit to gradually ease, as per Bloomberg consensus
estimate

-5

-5.2

-5.4 -5.4

-5.6
-5.9
-5.8

-6

-6.2
Feb-22
Mar-22

Mar-23

Feb-24
Jul-22

Jul-23
May-22

May-23
Jun-22

Jan-23

Jun-23

Jan-24
Sep-23
Oct-23
Nov-23
Apr-22

Aug-22
Sep-22
Oct-22
Nov-22
Dec-22

Apr-23

Aug-23

Dec-23

FY24F FY25F

SOURCE: BLOOMBERG, INCRED RESEARCH

8
 India
Strategy Note │ February 28, 2024

Core inflation drop provides comfort but high interest rates

may prolong
As per expectations, RBI maintained the repo rate in its Feb 2024 monetary policy
review. However, its projection of a prolonged above 4% inflation in FY25F
reduces the hopes of rate cut in 1H and defers it to 2HFY25F. CPI inflation for
FY25F is projected at 4.5%, with 1Q at 5.0%, 2Q at 4.0%, 3Q at 4.6% and 4Q at
4.7%.
Figure 20: Core Consumer Price Index or CPI inflation trend Figure 21: Wholesale Price Index or WPI inflation witnesses a
recovery after a dip
% yoy %
9.0 20.0
8.0
15.0
7.0
6.0 10.0
5.0
5.0
4.0
3.0 0.0
2.0
-5.0
1.0
0.0 -10.0

Jul-20

Jul-21

Jul-22

Jul-23
Jan-22
Nov-19
Jan-20

Jan-21

Sep-21

Jan-23

Nov-23
Jan-24
Sep-19

Sep-20
Nov-20

Nov-21

Sep-22
Nov-22

Sep-23
Mar-20

Mar-21

Mar-22

Mar-23
May-20

May-21

May-22

May-23
Nov-20

Nov-22
Nov-19

May-20

Sep-20

May-21

Sep-21
Nov-21

May-22

Sep-22

May-23

Sep-23
Nov-23
Mar-20

Mar-22
Jan-20

Jan-21
Mar-21

Jul-21

Jan-22

Jan-23
Mar-23

Jul-23

Jan-24
Jul-20

Jul-22

CPI (yoy %) Core CPI yoy %) Repo rate

WPI (yoy %)
NOTE: CPI IS CONSUMER PRICE INDEX SOURCE: RBI, INCRED RESEARCH
SOURCE: RBI, CENTRAL STATISTICS OFFICE, INCRED RESEARCH

Figure 22: India's inflation trend

SOURCE: MOSPI, INCRED RESEARCH

9
 India
Strategy Note │ February 28, 2024

Figure 23: Bloomberg CPI inflation consensus estimate Figure 24: Bloomberg WPI inflation consensus estimate

6 FY24F FY25F 6 FY24F FY25F

5

5.5 4
5.5 3

5 2

1
4.2
4.5 0
4.6
-1
0.5
4 -2
Feb-22
Mar-22

Mar-23

Feb-24
Jul-22

Jul-23
May-22

May-23
Jun-22

Jun-23
Jan-23

Jan-24
Sep-22
Aug-22

Nov-22
Dec-22

Aug-23
Sep-23

Nov-23
Dec-23

Feb-22
Mar-22

Feb-24
Jul-22

Mar-23
Apr-22

Oct-22

Apr-23

Oct-23

Jul-23
May-22

May-23
Nov-22
Dec-22

Nov-23
Dec-23
Jun-22

Jan-23

Jun-23

Jan-24
Oct-23
Apr-22

Aug-22
Sep-22
Oct-22

Apr-23

Aug-23
Sep-23
NOTE: CPI IS CONSUMER PRICE INDEX NOTE: WPI IS WHOLESALE PRICE INDEX
SOURCE: BLOOMBERG, INCRED RESEARCH SOURCE: BLOOMBERG, INCRED RESEARCH

10
India
Strategy Note │ February 28, 2024

Investment themes
We feel the festive season-led short-term sales momentum seems to be
peaking for our housing theme in volume terms. With high interest rates
expected to prolong for some more quarters and the initial weakness seen
in building material sales, we booked profit in our housing investment theme
after a strong 135% returns in the Nifty realty index in the last one year.

Big housing sales in the festive season difficult to beat

soon
The top-8 cities’ housing sales rose by 41% qoq to scale a new peak of 0.14m
units in the Dec 2023 quarter. Property prices across 13 major cities in India
soared by 19% yoy and 4% qoq in the Dec 2023 quarter, with cities such as
Gurugram, Greater Noida, Noida and Hyderabad witnessing the highest increase,
according to a Magicbricks PropIndex report. The online searches for residential
property increased by 2% yoy but dipped 17% qoq primarily due to rising property
prices.
Weakness in new home sales in select big markets like Delhi, slowdown in new
home searches and a drop in the demand for building materials like tiles and
plywood is a cause of concern. With a sharp run-up of 70% in the Nifty realty index
in the last six months, we feel the risk-reward ratio is not favourable. Therefore,
we dropped the sector from our investment themes.
Figure 25: Housing sales scale a substantial new high in 3QFY24

12,00,000
1,40,000
11,00,000
1,20,000

1,00,000 10,00,000

80,000
9,00,000
60,000
8,00,000
40,000
7,00,000
20,000

0 6,00,000
4QFY21

3QFY24
2QFY20
3QFY20
4QFY20
1QFY21
2QFY21
3QFY21

1QFY22
2QFY22
3QFY22
4QFY22
1QFY23
2QFY23
3QFY23
4QFY23
1QFY24
2QFY24

Housing Sales (units) Unsold Inventory (units) (RHS)

SOURCE: PROP TIGER, INCRED RESEARCH

Figure 26: Housing loan growth saw a healthy jump because of HDFC’s merger with
HDFC Bank

30,000 45%
40%
25,000
35%
20,000 30%
25%
15,000
20%
10,000 15%
10%
5,000
5%
0 0%
May-21

Jun-23
Jun-21

Nov-21
Dec-21
Jan-22

May-22
Jun-22

Nov-22
Dec-22
Jan-23

May-23

Aug-23

Nov-23
Dec-23
Aug-21
Sep-21
Oct-21

Apr-22

Aug-22
Sep-22
Oct-22

Apr-23

Sep-23
Oct-23
Feb-22
Mar-22

Feb-23
Mar-23

Jul-23
Jul-21

Jul-22

Housing Loans(Rsbn) Growth YoY(%)

SOURCE: RBI, INCRED RESEARCH

11
 India
Strategy Note │ February 28, 2024

Our high-conviction stocks’ performance and recent changes

The recent performance of our high-conviction stocks, since the start of the series
in Sep 2022, is given below:
Big outperformers to Nifty: Shriram Finance (ADD), Tech Mahindra (ADD) and
Bharat Electronics (ADD).
Underperformers to Nifty: HDFC Bank (ADD), Aurobindo Pharma (ADD) and
Clean Science and Technology (REDUCE).
Addition to the list: SBI Cards (REDUCE) as the Reserve Bank of India
increased risk weight on unsecured loans and increased the Tier-1 capital
requirement to 18% from 22% in 2QFY24, which can slow down the growth in
credit card business.
Deletion from the list: KEI Industries (ADD) and Spandana Sphoorty Financial
(ADD) for the poor risk-reward ratio at their current levels.
Figure 27: Our high-conviction stocks’ price performance since their introduction on 10 Sep 2022

12%
9.2% 8.8%
8% 6.3%
4.8% 5.0%
3.4% 3.7% 3.7%
4% 2.6% 2.9%
1.4% 2.1% 2.0% 1.4% 1.6%
1.3% 1.2% 1.1% 0.9% 1.1%
0%
-0.3%
-1.7% -1.4% -1.5%
-4% -2.2%

-8%

-12%
Indigo
BCL Industries

Shriram Finance
Camlin Fine

Concor
Nifty 200

Globus Spirits

KEI Industries
Nifty 50

Bharat Electronics

Maruti Suzuki

Spandana Sphoorty
Bharat Forge

Tata Steel
Data Pattern

Tech Mahindra
Aurobindo Pharma

Cyient DLM

HDFC Bank

M&M Financial Services

Clean Science

Reliance Industries

Thermax
State Bank of India
Ashok Leyland

NOTE: PERFORMANCE IS BASED ON COMPOUNDED MONTHLY GROWTH RATE, FROM THE DAY THE STOCK WAS ADDED TO THE PORTFOLIO
SOURCE: BLOOMBERG, INCRED RESEARCH

Figure 28: High-conviction stocks’ price absolute performance since their introduction on 10 Sep 2022
100% 01/24

80% 11/22
6/23 9/22
60%
12/22
40% 8/23 11/23 12/23
9/22 9/22 8/23
5/23 9/22 2/24 8/23
20% 11/23 9/22 8/23
10/23 3/23
0%
-2% 7/23
-20% 9/22
12/22
9/22
-40%
Indigo
BCL Industries

Camlin Fine

Concor

Globus Spirits
Nifty 200

KEI Industries

Shriram Finance
Nifty 50

Bharat Forge

Bharat Electronics

Maruti Suzuki

Tata Steel

Tech Mahindra
Cyient DLM

Data Pattern

HDFC Bank

M&M Financial Services

Spandana Sphoorty
Aurobindo Pharma

Clean Science

Reliance Industries

Thermax
State Bank of India
Ashok Leyland

NOTE: (INTRODUCTION MONTH MARKED ON BAR OF THE STOCK)

SOURCE: BLOOMBERG, INCRED RESEARCH

12
 India
Strategy Note │ February 28, 2024

Sales growth improvement provides comfort

EPS beat vs. consensus estimate in 3Q
3QFY24 Nifty-50 companies’ PAT recorded a growth of 21% yoy but was flat qoq,
leading to a 2% beat to Bloomberg consensus estimate. While the sales growth
momentum improved to 9% yoy in the Dec 2023 quarter with the help of the festive
season, the EBITDA margin eased by 140bp qoq, thereby limiting the EBITDA
growth to 12% yoy. The beat vs. estimates was driven by the sectors like
automobile, oil & gas, pharmaceutical, real estate and capital goods. However,
the miss was in the sectors like information technology or IT, consumer staples,
chemicals and building materials.
In terms of PAT beat distribution, the number of companies beating our estimates
improved by 600bp qoq to 48%. The cause of concern is a sharp rise in the
proportion of companies missing estimates equalling the beat proportion.
However, with the extent of beat being strong, it helped in achieving a total beat
of 2% to Bloomberg consensus EPS estimate.
The Bloomberg consensus FY24F-25F EPS witnessed around 1% upgrade in
recent weeks. The upgrade in the broader Nifty-200 index has been better by 60-
80bp vs. Nifty-50 for the similar period. The major upgrade in Nifty-200 companies
came from new economy stocks like Zomato and PB Fintech (Policy Bazar).
Figure 29: Nifty-50 companies’ quarterly EPS beat/miss trend Figure 30: Nifty-50 companies’ reported EPS growth
15% 13% Rs
20%
13% 250 70%
8%
10% 4% 5% 3% 4% 2%
1% 1% 2% 60%
0% 200 50%
-10% -1% -2% -1%
-2% -2% -4%
-4% 40%
-10%
-20% 150 30%

-30% -22% -23% 20%

-28% -27% 100 10%
-40%
0%
-50%
50 -10%
-60% -20%
-59%
-70% 0 -30%
Jun'23
Jun'18

Jun'19

Jun'20

Jun'21

Jun'22
Sep'18

Dec'22
Dec'17

Dec'18

Sep'19
Dec'19

Sep'20
Dec'20

Sep'21
Dec'21

Sep'22

Sep'23
Dec'23
Mar'19
Mar'18

Mar'20

Mar'21

Mar'22

Mar'23

Dec'16

Dec'17

Dec'18

Dec'19

Dec'20

Dec'21

Dec'22

Dec'23
Jun'19
Jun'17

Jun'18

Jun'20

Jun'21

Jun'22

Jun'23
Nifty Earnings surprise (%) Nifty EPS (Rs) YoY growth (%)

SOURCE: BLOOMBERG, INCRED RESEARCH SOURCE: BLOOMBERG, INCRED RESEARCH

Figure 31: Nifty-50 companies’ revenue beat/miss proportion Figure 32: Nifty-50 companies’ EPS beat/miss proportion mix
mix
Positive In line Negative
Positive In line Negative 100%
100% 90%
90% 80%
80% 70%
70% 60%
60%
50%
50%
40%
40%
30%
30%
20%
20%
10% 10%

0% 0%
1QFY20
2QFY20

1QFY23
4QFY18
1QFY19
2QFY19
3QFY19
4QFY19

3QFY20
4QFY20
1QFY21
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22

2QFY23
3QFY23
4QFY23
1QFY24
2QFY24
3QFY24
1QFY19

4QFY19

1QFY23

4QFY23
4QFY18

2QFY19
3QFY19

1QFY20
2QFY20
3QFY20
4QFY20
1QFY21
2QFY21
3QFY21
4QFY21
1QFY22
2QFY22
3QFY22
4QFY22

2QFY23
3QFY23

1QFY24
2QFY24
3QFY24

SOURCE: BLOOMBERG, INCRED RESEARCH SOURCE: BLOOMBERG, INCRED RESEARCH

13
 India

50

0
100
150
200
250
300
Rs

40
60
80
100
120
140
160
180
200
220
240

-
10.0
20.0
30.0
40.0
50.0
60.0

-20.0
-10.0
Jan-20 118
Feb-20 Jun'19
Mar-20 119

companies
Apr-20 Sep'19 121
Telecom May-20 128
Jun-20 139
Jul-20 Dec'19
Aug-20 100
Consumer Sep-20 144
Mar'20

14
Discretionary Oct-20 59
Nov-20
Dec-20 Jun'20 90
Jan-21 66
Consumer Staples Feb-21 112
Mar-21 Sep'20
Strategy Note │ February 28, 2024

129
Apr-21
May-21 135
Jun-21 Dec'20 152
Energy Jul-21 158
Aug-21 Mar'21
Sep-21 178
Oct-21 157
Nov-21 Jun'21 162

Bloomberg Industrial Metal Index

Financials Dec-21 195
Jan-22
Feb-22 Sep'21 196
Bloomberg Estimate EPS (Rs)

EPS Change (6 Month) FY24E

Mar-22 194
Health Care Apr-22 Dec'21 210
May-22
Figure 33: Nifty EPS – trend in actuals and estimates

Jun-22 209
Jul-22 Mar'22
Aug-22 214
Industrials Sep-22
Oct-22 Jun'22 194
187
Nov-22
Dec-22 199
Jan-23 Sep'22 196
IT Feb-23

Return 6 Months
EPS Actuals (Rs)

Mar-23 Dec'22 205

Apr-23 203
May-23 222
Figure 34: Bloomberg Industrial Metal Index and Commodity Index ease

Jun-23 Mar'23
Materials Jul-23 218 235
Aug-23 Jun'23
Sep-23 244
Bloomberg Commodity Index

Oct-23

Figure 35: Sector-wise EPS changes for the last six months in case of Nifty-200
Utilities Nov-23 Sep'23 242
Dec-23 233
Jan-24 241
Feb-24 Dec'23 245

SOURCE: BLOOMBERG, INCRED RESEARCH

SOURCE: BLOOMBERG, INCRED RESEARCH
SOURCE: BLOOMBERG, INCRED RESEARCH
 India
Strategy Note │ February 28, 2024

Figure 36: Nifty-200 companies’ EPS upgrade/down (from 1 Jan 2024)

150%
FY24F Major EPS Up/Dowgrade from Nifty 200 (Since Jan'24) 114%
98%
100%
57%
50% 26% 27% 32%
15% 15% 15% 16% 17% 18% 18%

0%

-50% -36% -32% -31% -28% -28%

-46% -44% -40% -38%

-100% -72%
-86%
Delhivery

Zomato
LaurusLabs

CoalIndia

Indigo
FSN

Devyani

PBFintech
HPCL
Lupin
Vedanta

LIC
UPL

BHEL

BPCL
Piramal Enterprices

Cummins
NavinFluorine

PrestigeEstates

Mazgoan Docks

One97
Tata Steel

AdaniEnterprises

AdityaBirlaFash
SOURCE: BLOOMBERG, INCRED RESEARCH

Figure 37: Nifty-50 companies’ forward P/E valuation provides comfort

(X)
28

26
26.4
24 23.7x
22 20.9x
20 18.2x
18 15.5x

16

14
Feb/14

Feb/15

Feb/16

Feb/17

Feb/18

Feb/19

Feb/20

Feb/21

Feb/22

Feb/23

Feb/24
Nov/18

Aug/19
Aug/14
Nov/14

Aug/15
Nov/15

Aug/16
Nov/16

Aug/17
Nov/17

Aug/18

Nov/19

Aug/20
Nov/20

Aug/21
Nov/21

Aug/22
Nov/22

Aug/23
Nov/23
May/14

May/15

May/16

May/17

May/18

May/19

May/20

May/21

May/22

Nifty 1-year forward P/E 10-year mean -1 s.d +1 s.d. -2 s.d May/23 +2 s.d.

SOURCE: BLOOMBERG, INCRED RESEARCH

Figure 38: Strong equity market rally makes real yield unattractive

Earnings Yield 10 yr Gov Bond Yield Real Earnings Yield

13%
11%
9%
7%
5%
3%
1%
-1%
-3%
-5%
Feb-12

Feb-15

Feb-24
Feb-08

Feb-09

Feb-10

Feb-11

Feb-13

Feb-14

Feb-16

Feb-17

Feb-18

Feb-19

Feb-20

Feb-21

Feb-22

Feb-23
Aug-15
Aug-08

Aug-09

Aug-10

Aug-11

Aug-12

Aug-13

Aug-14

Aug-16

Aug-17

Aug-18

Aug-19

Aug-20

Aug-21

Aug-22

Aug-23

SOURCE: INCRED RESEARCH, COMPANY REPORTS

15
India
Strategy Note │ February 28, 2024

Figure 39: Nifty index target and Bull-case, Base-case and Bear-case scenarios
Bull Case Base case Bear Case
GDP growth >7%, Brent GDP growth >6%, Brent GDP growth <6%, Brent
crude oil <US$105/bbl, crude oil <US$120/bbl, crude oil >US$125/bbl,
Economic variables inflation <5%, repo rate inflation <6%, repo rate inflation >7%, repo rate
hike <75bp, above-normal hike <100bp, normal hike >100bp, below-
monsoon monsoon normal monsoon
Probability of the event 65% 25% 10%
One-year forward EPS (Rs.) 1,178.5 1,178.5 1,178.5
Target P/E (x) 20.0 18.0 16.0
Target index 23,571 21,214 18,857
Nifty-50 now 21,571 21,571 21,571
Up/ downside 9.3% -1.7% -12.6%
Blended index target 22,509
NOTE: FORWARD EPS IS OF BLOOMBERG CONSENSUS
SOURCE: BLOOMBERG, INCRED RESEARCH

16
India
Strategy Note │ February 28, 2024

Sector-wise ratings and stock ideas

The Nifty-50 index has recorded a 3% return in the last one month where mid-
caps underperformed and small-caps outperformed. The big outperformance was
seen in public sector banks, energy, automobile and pharma sectors. Media,
FMCG and private bank sectors underperformed.
The trend of downgrades (13) overpowering the upgrades (4) continued for our
coverage universe in recent months as well.
We upgrade Zydus Lifesciences, UPL, Cummins India and Orient Electric. We
downgrade Amber Enterprises, Dilip Buildcon, Cera, Gujarat Pipavav Port, PG
Electroplast, Gland Pharma. Metropolis Healthcare, Orient Cement, PNC Infra,
Century Plyboards India, Cipla, Astral and IRB Infrastructure.
Figure 40: Sectoral index performance vs. Nifty-50 (YTDFY24)

160%
135%
140%
120% 104%
100%
74%
80% 68% 63%
58%
60% 47%
40% 28% 33%
19% 16%
20%
0%

START DATE: 01 APR 2023

SOURCE: BLOOMBERG, INCRED RESEARCH, YTD TILL 2023

Figure 41: Our sector-wise ratings

Overweight Neutral Underweight
Aluminium Auto Ancillary Agribusiness
Automobile Building Materials Aviation
Cement Consumer staples Chemicals
Consumer Electricals Information Technology Diagnostics
Capital Goods Pharma Metals & Mining
Defence Ports & Logistics
Financial Services
Infrastructure
Oil and Gas
SOURCE: INCRED RESEARCH

Figure 42: Nifty mid-cap and small-cap indices continue to outperform the Nifty-50
index since Jan 2023

(NIFTY Index) (NSEMCAP Index) (NSESMCP Index)

170
160
150
140
130
120
110
100
90
80
23-Oct-23
10-Apr-23
24-Apr-23

14-Aug-23
28-Aug-23
11-Sep-23
25-Sep-23
09-Oct-23

06-Nov-23
20-Nov-23
04-Dec-23
18-Dec-23
13-Feb-23
27-Feb-23
13-Mar-23
27-Mar-23

12-Feb-24
03-Jul-23
17-Jul-23
31-Jul-23
08-May-23
22-May-23
16-Jan-23

19-Jun-23
02-Jan-23

30-Jan-23

05-Jun-23

01-Jan-24
15-Jan-24
29-Jan-24

SOURCE: BLOOMBERG, INCRED RESEARCH

17
 India
Strategy Note │ February 28, 2024

Figure 43: Our key mid-cap and small-cap stock recommendations

Market Market EV/EBITDA Dividend Upside/ ROE
Target EPS (Rs) P/E (x) P/BV (x)
Bloomberg Price Capital Capital (x) Yield (%) Downside (%)
Company Name Reco. Price
Ticker Rs (Rs (US$
Rs FY24F FY25F FY24F FY25F FY24F FY25F FY24F FY24F (%) FY24F
bn) bn)
Apex Frozen Foods APEX IN ADD 222 323 7 0 13.4 26.9 16.6 8.3 1.4 1.3 8.7 0.6 45% 10.7
Avalon Technologies AVALON IN ADD 524 610 34 0.4 6.7 12.7 78.0 41.2 6.4 5.9 39.2 - 16% 7.8
Balkrishna Industries BIL IN REDUCE 2,289 2,160 443 5.3 66.6 80.3 34.4 28.5 5.8 5.2 21.3 0.9 -6% 16.0
Coastal Corporation CTW IN ADD 290 842 4 0.0 30.4 70.1 9.5 4.1 1.3 1.2 8.1 2.1 191% 18.2
Cyient Limited CYL IN ADD 972 1,083 592 7.1 22.0 27.9 44.1 34.9 5.3 4.9 27.2 0.7 11% 11.5
Cyient DLM CYIENTDL IN ADD 870 1,049 69 0.8 8.6 14.2 101.3 61.3 23.2 7.1 54.8 - 21% 19.6
Dixon Technologies DIXON IN ADD 6,761 7,000 405 4.9 66.8 97.9 101.2 69.1 31.3 24.2 54.5 0.0 4% 27.0
Endurance Technologies ENDU IN ADD 1,856 2,375 261 3.1 44.8 65.3 41.4 28.4 5.9 5.3 20.6 0.5 28% 13.5
Globus Spirits GBSL IN ADD 793 2,519 23 0.3 46.7 100.8 17.0 7.9 2.6 2.3 9.6 0.4 218% 14.1
HEG Limited HEG IN HOLD 1,677 1,800 65 0.8 128.8 192.3 13.0 8.7 1.5 1.3 9.0 1.9 7% 10.7
Home First Finance Co. HOMEFIRS IN ADD 902 1,100 80 1.0 33.7 40.8 26.8 22.1 4.3 3.7 NA NA 22% 15.0
Kaynes Technology KAYNES IN ADD 985 1,000 160 1.9 36.8 51.0 26.8 19.3 3.0 2.8 13.0 0.7 1% 10.7
KEC International KECI IN ADD 2,936 3,120 188 2.3 25.9 40.3 113.5 72.8 19.6 7.4 68.6 - 6% 9.5
Metropolis Healthcare METROHL IN REDUCE 1,632 1,546 84 1.0 26.1 34.4 62.4 47.5 8.5 7.7 28.5 0.5 -5% 12.9
Orient Electric PGEL IN ADD 214 269 46 0.5 3.9 6.4 46.7 33.3 7.8 7.0 25.1 0.7 26% 17.8
PI Industries PI IN REDUCE 3,672 2,872 557 6.7 84.1 91.5 43.7 40.1 7.7 6.6 28.8 0.1 -22% 16.4
Som Distill. & Brew. SDB IN ADD 283 446 22 0 12.3 15.4 23.0 18.4 5.6 3.9 14.9 0.4 58% 26.1
UPL Limited UPLL IN ADD 485 694 364 4 (18.5) 16.7 (13.3) 71.9 1.2 1.3 12.9 - 43% (5.5)
Zydus Lifesciences ZYDUSLIF IN ADD 943 974 955 12 37.2 38.5 25.4 24.5 5.4 4.6 17.7 0.7 3% 19.7
SOURCE: INCRED RESEARCH ESTIMATES, BLOOMBERG, COMPANY REPORTS, PRICE AS ON 27 FEB 2024

18
 India
Strategy Note │ February 28, 2024

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19
 India
Strategy Note │ February 28, 2024

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20