Jefferies India Strategy – Sep’24 Review
Analysts have downgraded earnings for over 60% of 98 companies covered. Heavy rains and weak government spending have impacted results. Earnings cuts suggest a 2.2-2.5% reduction in Nifty estimates for FY25-26, with expected EPS growth at 10%. Equity supply has surged to $7 billion/month, meeting strong domestic demand. Key overweights include banks, two-wheelers, healthcare, and telecom. IT has been raised to neutral, while consumer staples were downgraded.
CLSA on L&T
CLSA has given L&T an “Outperform” rating with a target price of ₹4,151. The company showed strong performance in the second quarter (Q2), indicating the strength of its business model. L&T has achieved margin expansion in its Engineering and Construction (E&C) segment for the third consecutive quarter, with better-than-expected results in inflows and execution despite a high comparison base. They believe the infrastructure segment’s margin expansion of 60 basis points will surprise the market.
Bernstein on L&T
Bernstein has maintained an “Outperform” rating with a target price of ₹3,891. In Q2 FY25, they noted that the international hedge is working well. L&T achieved strong execution and a solid working capital position, although order inflows declined due to a high base from last year. While management has kept its guidance, Bernstein sees this as a challenging target. They believe core margins have not fully improved but remain higher than last year. They expect a positive surprise due to lower commodity prices and maintain confidence in India and the Middle East markets.
UBS on L&T
UBS maintains a “Neutral” rating with a target price of ₹4,000. In Q2 FY25, the Middle East contributed positively, but domestic performance lagged. Profitability in the Energy and Hi-Tech segments fell, limiting improvements in core margins for the quarter and the first half of the fiscal year. UBS believes L&T can increase its market share in domestic orders based on the current project pipeline.
Morgan Stanley on L&T
Morgan Stanley has an “Overweight” rating with a target price of ₹3,857. Leading into Q2, there were doubts about orders, revenue, core margins, and net working capital, but all of these turned out positively. L&T has maintained its guidance, and its core orders for the first half of the year reached ₹1.17 trillion, accounting for 50% of their target for FY24, despite weak government spending and oil price volatility.
Nomura on L&T
Nomura has rated L&T as a “Buy” with a target price of ₹4,100. They reported that L&T exceeded consensus expectations, offering a favorable risk-reward situation. The guidance for order inflow growth in FY25 appears achievable after the Q2 surprise. Management has kept its Core EBITDA margin guidance at 8.25% for FY25, which they consider conservative with potential for upward revisions.
Jefferies on Tata Power
Jefferies rates Tata Power as “Underperform” with a target price of ₹340. They noted that Q2 EBITDA exceeded expectations by 8%, primarily due to better performance in Solar EPC (Engineering, Procurement, and Construction), additional income, and contributions from coal. The management remains positive about its renewable energy investments, especially regarding a new solar cell manufacturing facility.
Morgan Stanley on Tata Power
Morgan Stanley has an “Overweight” rating with a target price of ₹577. They found that operationally, Tata Power’s generation, Transmission & Distribution (T&D), and green initiatives were in line with expectations, with the solar EPC business exceeding predictions. The execution of third-party solar EPC projects is set to increase, and management plans to commission 5GW of renewable energy generation by FY26.
CITI on Cipla
Citi maintains a “Buy” rating for Cipla with a target price of ₹1,830. They forecast $24 million in sales for a specific product into FY26/27, with potential increases of $25-40 million, which could affect earnings per share (EPS) by 3-5%. Improved visibility in the pipeline is highlighted, particularly for key products scheduled for approval. They note that the USFDA has classified Cipla’s Goa facility as “Voluntary Action Indicated” (VAI), paving the way for the approval of generic Abraxane, a key product from that facility. With this clearance, the launch of generic Abraxane could occur in FY25, earlier than previously expected.
Goldman Sachs on Biocon
Goldman Sachs has a “Buy” rating on Biocon with a target price of ₹350. In Q2 FY25, Biocon reported a 4% increase in sales but an 8% decline in EBITDA year-on-year, which fell short of Goldman’s expectations. The weakness in the Generics segment was a primary factor, while the Biologics segment grew by 19% year-on-year. Margins surprised negatively due to lower gross margins and operational challenges.
DAM Capital on Steel Sector
DAM Capital reports that spreads in China have fallen to their lowest levels in years, which may lead mills to practice supply discipline. They believe that capacity expansion will support the profitability of Indian steel players, positioning them better than in previous cycles. India is expected to be a major driver of global steel demand moving forward.
Specific Companies Initiated for Buy Recommendations:
JSPL: Initiated “Buy” with a target price of ₹1,300.
JSW Steel: Initiated “Buy” with a target price of ₹1,255.
Tata Steel: Initiated “Buy” with a target price of ₹185.
SAIL: Initiated “Buy” with a target price of ₹130.
DAM Capital on OMCs
DAM Capital has initiated coverage on several Oil Marketing Companies (OMCs):
IOCL: “Buy” with a target price of ₹181.
BPCL: “Buy” with a target price of ₹395.
HPCL: “Buy” with a target price of ₹440.
They expect significant improvements in the refining environment, and marketing margins are predicted to rise steadily. Additionally, they anticipate reimbursement for LPG losses and see a low risk of significant oil price increases.
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