GDP growth past its trough, may rise to 7.7% in Q4

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The weakness in the manufacturing sector in June seems to have been led by transitory factors like GST and water shortages. Over the next few months, output should improve as firms resume production following GST (to restock) and as monsoon alleviates the water shortage. But some overhang from GST (weaker production) may continue in July as it could take firms more time to adjust to the new tax regime. But given that intermediate goods led the weakness while consumer goods demand and production strengthened, we view this as a temporary disruption.

Despite the weakness in June, the average manufacturing PMI edged up to 51.7 in Q2 from 51.2 in Q1, reinforcing our view that GDP growth is past its trough. We expect GDP growth to rise from a low of 6.1 per cent YoY in Q1 to 6.6 per cent in Q2, 7.1 per cent in Q3 and further to 7.7 per cent in Q4, supported by remonetisation, lower lending rates, stronger rural consumption, pay hikes for state government employees and front-loaded public spending. Inflationary pressures also appear to be kept at bay in the near-term. We expect RBI to cut repo rate by 25 bps to 6 per cent on August 2 (70 per cent probability) followed by a prolonged pause. —Nomura

Bajaj Corp

It is the market leader in light hair oil ma­rket with vo­lume share of 58 per cent. Although Q4FY17 numbers were impacted by demonetisation and weak consumer dema­nd, we expect recovery in the coming quarters on ba­ck of good monsoon, incre­a­sed distribution network and rollout of GST. We expect Bajaj Corp to report revenues of Rs 9,900 crore and Rs 11,300 crore and net profit of Rs 2,700 crore and Rs 3,100 crore in FY18E & FY19E, respectively. Based on expected EPS of Rs 21, the stock trades at valuatio­ns of 18.5x FY19E earnings. Consider­ing the firm’s market leadership and pricing power, along with attractive valuations, we keep ‘buy’ recommendation on the stock with a TP of Rs 463.

—Reliance Securities

NTPC

We consider NTPC as one of the best-placed firms in terms of fuel security, as most of its capacity off-take will continue to be through long-term power purchase agreeme­n­ts. We expect NTPC’s busi­n­ess to improve further ba­c­ked by higher capacity commercialisation, better fuel av­ailability and likely improvement in demand owing to the UDAY scheme.

Looking ahead, we expe­ct NTPC to add commercial capacity of 2.8 gw and 6 gw in FY18 and FY19, respectively, which would lead to a significant jump in regulated equity from current level of Rs 44,000 crore. We have valued NTPC on (P/B vs RoE) methodology given its regulated business model. At CMP, the stock trades at P/B of 1.1x & P/E 10.5x bas­ed on FY19E, which is attra­ctive in our view. Capacity addition track record, assu­red RoE, robust balanc­e­s­h­e­et and strong operational cash-flows augur well for NTPC. We reiterate ‘buy’ recommendati­on on the stock with a TP of Rs 192.

—Reliance Securities

Bharti Infratel

We upgrade the firm to an outperformer as there is hi­g­her visibility about the company using its RoFR and balancesheet str­e­ngth to raise stake in Indus Towers. Full control of In­d­us would ensure that the firm becomes a direct beneficiary of all future network rollout by the top 3 incumbents in India, and also improve its capital structure.

The firm’s stock has mo­ved up 30 per cent from recent lows as exit penalties, staggered re-allocation of te­n­ancies, and strong tenancy additions (led by R-Jio) have partly allayed investor conc­e­rns. The availability of str­ategic assets would help it widen the gap with peers.

We expect a re-rating to kick-start (trades at 9.2x FY19E EV/Ebitda) with visibility on potential acquisitions. Thus it’s the right time for the firm to execute its strategy of ‘value accretive acquisitions’. We expect it to bid to raise its stake in In­dus (from 42 per cent to 95 per cent by buying out Idea/Vodafone) due to its ca­pacity to invest and the str­ategic fit of assets. Such a potential deal would incr­e­a­se the firm’s net leverage to ~3.0x Ebitda. But steady FCF generation would suffice to repay debt in 4-5 ye­ars and maintain return on equity at ~20 per cent. We roll-forward our DCF to FY19 (Rs 385) and attribute an option value of Rs 55 for a better capital structure le­a­ding to aggregate price target of Rs 440. We expect the gap between Bharti Infra­t­el+Indus and others to gr­ow wider in 2 years given continued data network rol­lout by the top 3. The com­b­i­ned entity with a str­ong portfolio of anchor tenants has gained over 50 per cent te­nancy share over the past decade. —IDFC Securities

ITC

It may not be too wrong to conclude, ba­sed on FY17 an­nual report of ITC , the government is a bigger gainer from ITC’s operations than other stakeholders, and it’s in the former’s interests that the legal cigarette industry be treated fairly. ITC contributed Rs 1,400,000 crore to the exchequer cumulatively over FY13-17 during which its own profits were just Rs 44,000 crore – share of the government in the value-ad­ded by ITC is 3.5x the amount that accrues to the providers of capital. While ITC’s PAT has grown at 6.8 per cent per annum like-to-like over FY14-17, its contribution to the exchequer has compounded at a higher ra­te of 7.7 per cent. GST hop­e­fully marks the start of a more benign tax view on the sector. ITC currently trades at over 25 per cent discount to peers and is among our favoured consumer picks. We expect the ITC stock to continue its good run on the back of such a positive outcome, especially considering a >25 per cent discount to peers. Our 12 month TP of Rs 375 per share offers a 17 per cent total upside.

—JM Financials

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