Diwali 2023 picks: Bharti Airtel, SBI Life, Astral, KPIT Tech among Axis Securities top ideas

Samvat 2079 proved to be an intriguing year for the Indian equity market, characterized by notable volatility in the first half. However, in the second half, the Indian market witnessed a remarkable recovery from its Mar’23 bottom. During this time, the broader market outperformed largecap companies by notable margins.

Axis Securities said Samvat 2080 will be a very interesting year to watch out for the global economy.  According to the estimates of the International Monetary Fund (IMF), the Indian economy is set to be the fastest-growing economy in FY24 and FY25 within the emerging market category. This is poised to be a significant driving force behind Indian equities in the foreseeable future.

Here’s a look at Axis Securities top Diwali picks for Samvat 2080.

TVS Motor: Buy for a target of Rs 2100

Outlook: We continue to like TVS Motor considering its strong focus on the EV product pipeline ahead of incumbent 2W OEMs, product premiumisation in the ICE category, and growth in export markets. Being well-placed among listed players, we expect the company’s Revenue/EBITDA/PAT to grow by 16%/21%/23% CAGR over FY24E-26E. FY24/FY25 to be critical for the company as it executes its EV strategy for the domestic and export markets.

Valuation & Recommendation: We recommend a BUY rating on the stock with a target price at Rs 2,100/share, valuing it at a sustainable premium P/E multiple of 30X on Dec’25 core EPS, other investments at 1x P/BV, and TVS Credit Services at 2X P/BV. The upside potential is 34% from CMP.

Bharti Airtel : Buy for a target of Rs 1155

Investment Rationale

A. Best ARPU in the industry: Bharti Airtel has the leading ARPU in the industry. The management expects ARPU to improve from the current level of 203 due to a richer customer mix. Aided by strong customer conversion from 2G to 4G/5G and other services, it continues with its ARPU trajectory and expects it to reach Rs 300 going ahead. The company has strong focus on customers will continue to gain further increase in the realization. Increase in the data conversion also help to gain the ARPU, average data usage per customer stands healthy at 21.7 GB/month.

B. Huge revenue and profit growth potential: The company's business fundamentals remain strong and continue to improve. The management foresees huge potential for continued strong revenue and profit growth, supported by expanding distribution in rural areas, investments in the network, and increasing 4G coverage. Furthermore, strategic investment opportunities are available in tower sales, minority, and IPO investments in mobile money, among others. The company's digital portfolio is gaining momentum along with market share gains The company continued a strong share of 4G/5G net ads in the market with the 4G customer base growing by 7.7 Mn QoQ and 27.2 Mn YoY. This forms 69% of the overall customer base now.

C. Improvement in the Home Segment: The management sees improvement in the Home Segment with multiple solutions in one go. It has a strong strategy of Hunting (offering different solutions to existing customers (mainly 50 Mn customers having strong financial conditions) and mining new customers. The management is confident of gaining industry-leading growth backed by strong rural penetration and a better service portfolio.

D. Moderated Capex and const optimization effort: The management is expecting similar Capex levels to continue. It will also spend on broadband, enterprise, and data centres. 4G-related radio Capex is likely to decline. The company has identified more than 2,500 sights for reducing the network cost which will help to reduce the operating cost.

APL Apollo Tubes: Buy for a target of Rs 1950

Investment Rationale

A. Raipur Plant Ramp-up: The Raipur capacity of 1.2MT is now on stream (from 1MT in Q1FY24). In Q2FY24, the plant achieved volumes of ~100kt at 28% utilization level (vs. 75kt in Q1FY24). This will ramp up to 40% utilization in Q3FY24. Volumes will eventually ramp up to 1.2MT at a 100% capacity utilization level by FY26 as the company’s market-creation efforts have bought order visibility. EBITDA/t at Raipur improved to Rs 5k/t (from Rs 4k/t in Q1FY24) which will increase to a steady state of Rs 6k-7k/t once the ramp-up gets completed over the next 2.5 years.

B. Blended EBITDA/t to improve from hereon: With the ramp-up of the Raipur plant, the blended EBITDA/t is expected to improve gradually. In FY23, the EBITDA/t stood at ~Rs 4,481/t. The target is to achieve Rs 5,000/t in FY24 and Rs 5,500/t in FY25 and Rs 6,000/t in FY26, assuming the Raipur plant manages to deliver products at Rs 6k-7k/t..

C. Favorable demand outlook: The company’s market-creation efforts have brought more orders from railway stations and airports for the heavy structural and coated products at Raipur which has higher EBITDA/t. These new projects provide demand visibility for the company over the next few years. With a lower Capex intensity ahead, higher OCFs, and the Raipur plant stabilizing in due course, the

company’s ROCE is likely to improve from ~27% in FY24 to 37% by FY26. The company’s vision is to expand its capacity over to 10 mtpa by FY30 providing a growth tailwind in the longer term.

D. Outlook & Valuation: Incremental production from the Raipur plant will drive higher EBITDA/t. We value APL Apollo Tubes at 33x PE of Sep’25 EPS on continued demand visibility to arrive at our TP of Rs 1,950/share. We maintain our BUY rating on the stock.

Jyothy Labs: Buy for a target of Rs 440

Investment Rationale

A. JLL is embracing the transformation for the next leg of growth: The company's recent initiatives, implemented over the last couple of years, have begun yielding positive results, and we expect these benefits to extend over the coming years. Notable initiatives include

a) Expanding value offerings through LUPs and promoting premiumisation, primarily in the Detergents and Dishwash segments, b) Diversifying into the larger Body Wash segment (Toilet Soap) as opposed to its previous presence in the niche (natural) segment, creating a broader market for the company in the Soap segment, and c) The company's commitment to expanding its direct distribution network, with aspirations to increase its current 1.1 Mn outlets. It intends to enhance its on-the-ground execution through its dedicated team of 3,000 sales representatives and streamlining the distribution channel. These efforts signify steps in the right direction for achieving long-term sustainable growth.

B. Room for margin expansion: We expect the company’s EBITDA margin to be in the range of 16-17% for FY24-26 and it will be driven by 1) Improving product mix – scaling up fast-growing premium products and launching a broader portfolio of Toilet Soap, thereby increasing its canvas in the bathing soap market, 2) Improving on-ground execution by selling larger number of products and SKUs that will increase efficiency and throughput across outlets, and 3) Focusing on driving economies of scale and cost rationalization measures.

C. Decent valuation compared to peers: We expect the company to deliver healthy Revenue/EBITDA/PAT growth of 13%/25%/25% CAGR over FY23-26E respectively which will elevate the company’s overall return profile. We expect its ROE to increase from 15% in FY23 to 21% in FY26. At CMP, the company is currently trading at 32x/29x its FY25/26 EPS and with a better earnings growth visibility and return profile, the stock appears attractive in the Small to Midcap Consumer space

KPIT Technologies: Buy for a target of Rs 1500

Investment Rationale

A. Capitalizing on growing investment in the Automobile vertical : KPIT has strategically centered its efforts on the automobile vertical, aiming to assist automobile companies in enhancing their product development and software integration capabilities. Given the swift shift of ER&D (Engineering Research and Development) spending toward electric and software technologies, we anticipate that original equipment manufacturers (OEMs) will increasingly depend on strategic partners such as KPIT, known for their software expertise. This trend is poised to unlock substantial growth opportunities for the company in the foreseeable future.

B. Robust investments in commercial vehicle segments: While the aggregate global market in value terms for medium & heavy commercial vehicles is smaller than passenger vehicles, the commercial vehicle category is especially relevant from an autonomous driving and electrification standpoint. The key variable costs for fleet operators in the CV arena are driver cost and fuel. Autonomous driving technologies and electrified powertrains are cutting costs and making trucking and logistical service operations more cost-effective and profitable. Despite a slower start, the criticality of these technologies to customer profitability indicates a faster pickup in CASE R&D spending for commercial vehicle manufacturers going ahead. This, in turn, indicates significant growth avenues for the company moving forward.

C. Accelerating demand for digital ER&D services: Digital engineering spends are accelerating across industries, and companies moving from traditional to digital engineering will quickly adopt digital engineering. Major industries such as Manufacturing, BFSI, Media & Technology, Retail, Healthcare Payers & Providers, and Travel & Hospitality are developing new products and services to differentiate themselves in their respective industries, thereby creating remarkable opportunities for the company.

D. Outlook & Valuation: We believe KPIT has a resilient business model and strong earnings visibility through its multiple long-term contracts with globally leading brands. We further believe that KPIT is well-positioned to capture the immense growth opportunity in the industry considering 1) Robust demand for ER&D spend, 2) Focus on client retention for long-term sustainable growth, 3) Margin tailwinds driven by cost efficiencies, lower input costs, rupee depreciation, and lower travel cost, and We expect KPIT will attain strong revenue growth of 29% CAGR over FY24E- FY26E.

E. Recommendation: We recommend a BUY on the stock with a target price of Rs 1500/share, implying an upside of 23% from CMP

HDFC Bank: Buy for a target of Rs 1800

Investment Rationale

A. Maturing distribution network to support business growth: HDFCB has strategically utilized the benign credit cost environment to aggressively expand its distribution network. As these branches mature, they will gain traction and will begin contributing healthily to overall business growth, especially supporting deposit accretion. ~90% of the branches that the bank has added in the last couple of years (~2,200 branches) have broken even and are contributing to the business. The bank has been working closely with its subsidiaries to improve customer engagement and also on improving turnaround time (TAT) and believes this will yield results in the coming times. We expect HDFCB’s credit/deposit growth to remain strong at 17/19% CAGR over FY24-26E, which will be largely in line with its historical performance.

B. Margin concerns to ease: A key concern for the merged entity was the pressure on margins, which was visible in Q2FY24. A sharp margin compression was owing to the higher cost borrowing of erstwhile HDFC Ltd, ICRR (impact to be visible only in Q2FY24) and excess liquidity that the merged entity continues to carry. Going forward, NIM improvement will be led by (1) Substituting high-cost debt with deposits, (2) Skewing the portfolio mix towards retail loans and (3) Releasing excess liquidity. While near-term margins will continue to face headwinds, we expect recovery from FY25E onwards. NIMs are likely to gravitate to ~4% over FY25-26E.

C. RoA to remain healthy at 1.9-2.1%: Despite margin pressures, the management remains confident of delivering RoA between 1.9-2.1%, similar to the historical performance of the standalone bank. HDFC Bank has been able to maintain asset quality across cycles and we expect a similar performance from the merged entity. While a part of the non-individual portfolio (of erstwhile HDFC Ltd.) could slip in the coming quarters, it would not have any material impact on the bank’s asset quality and credit costs. We expect credit costs to remain stable at ~70bps over FY24-26E. Thus, supported by improving margins (a key RoA improvement lever) along with stable Opex ratio and credit cost, we expect HDFCB to deliver RoA of ~1.9-2% over FY25-26E.

D. Outlook & Valuation: We remain confident in the bank’s ability to sustain its growth momentum given the enormous opportunity post the merger in terms of a larger customer base, larger distribution network, and higher cross-sell opportunities to existing customers of HDFC Ltd. Moreover, we believe the current valuations, too, are reasonable and below the long-term average.

E. Recommendation: We recommend a BUY on the stock with a target price of Rs 1,800/share, implying an upside of 22% from the CMP.

Astral: Buy for a target of Rs 2150

Investment Rationale

A. Strong Q2FY24 PAT – Management expects strong demand to continue and increased its FY24 volume guidance from 15%+ YoY to 20%+ YoY. According to management, PVC and CPVC prices would bottom out in Q3FY24 and see some bounce-back given the

seasonal increase in demand in H2FY24.Management expects sanitaryware and faucets to surpass Rs 10 Cr revenue run rate in 2-3 quarters and allow breakeven at Rs 300 mn revenue/ quarter. FY26 pipe capacity will be increased from 450K-460K MT from current 310K MT. Company EBITDA margin guidance is in the 16-18% range.

B. Pipes volume growth guidance revised upwards – Management expects strong demand to continue and increased its FY24 volume guidance from 15%+ YoY to 20%+ YoY. According to management, PVC and CPVC prices would bottom out in Q3FY24 and see some bounce-back given the seasonal increase in demand in H2FY24. Management expects sanitaryware and faucets to surpass Rs 100 mn revenue run rate in 2-3 quarters and allow breakeven at Rs 300 mn revenue/ quarter. FY26 pipe capacity will be increased from 450K460K MT from current 310K MT. Company EBITDA margin guidance is in the 16-18% range.

C. Strategic growth pillars see sustained progress in FY23: The company has increased Advertisement spending by 22% which is 3% of sales. Dealer count increased to 1,93,000 from 1,83,000 YoY. Astral started sale of paints and sanitaryware in FY23. It increased valve SKUs during the year. Astral started its new plant in East India (Cuttack, Orrisa) and started producing PVC pipes in Sangli and Aurangabad, in FY23. Onboarded a CHRO and a CTO to streamline human resources and technology strategies. Employee strength more than doubled YoY in FY23.

Ahluwalia Contracts India: BUY for a target of Rs 770

Investment Rationale

A. Robust & Diversified Order Book : The company has an order book of Rs 11,780 Cr (as of 30th Jun’23). Break up is as follows: Hospital – 21% (Rs 2,474 Cr), Commercial – 8.7% (Rs 1,023 Cr), Institutional – 24.7% (Rs 2,908 Cr), Residential – 13.6% (Rs 1,604 Cr), Infrastructure – 31.6% (Rs 3,718 Cr), and Hotel – 0.4% (Rs 52 Cr). Recently it was awarded two projects worth Rs 832 Cr by Max Healthcare for construction and expansion of hospitals. With this total order book now stands over Rs 12600 Cr . The company is also L1 in one project, which is worth Rs 2,840 Cr. The current order inflow in FY24 now stands healthy at Rs.5259 Cr. till date. This gives revenue visibility for the next 3-4 years. We expect the company to grow its revenue at 23% CAGR over FY23-FY25E.

B. Successful and timely project execution: ACIL has successfully completed over 100 plus projects by far and has 40 plus projects ongoing across 16 states. The company is associated with the country’s leading architects and consultants and has also established a strong network of channel partners pan-India It has established strong relationship with reputed clientele, and has demonstrated a track record of timely completion of projects . This has helped it to secure repeat orders from the existing customers. With the increase in scale of operation we expect the company to clock higher EBITDA margins of 11% and above moving ahead.

C. Healthy financial position to support future growth: The company exhibits a strong financial position reflected in its debt-free status, high cash/bank balance (12% of market cap), strong OCF, and high return ratio. Furthermore, the government’s higher focus on developing institutions, health care infrastructure, and other emerging opportunities both in the public and private sectors will keep the company’s order inflow intake robust moving ahead.

D. Outlook & Valuation: With favorable attributes such as a strong and diversified order book position, healthy bidding pipeline, new order inflows, its asset-light model, and emerging opportunities in the construction space, we expect the company to generate healthy free cash flows moving ahead and deliver Revenue/EBITDA/APAT growth of23%/26%/27% CAGR over FY23-FY25E.

E. Recommendation: We recommend a BUY rating on the stock with a target price of Rs 770/share, implying an upside of 16% from the CMP.

SBI Life Insurance: BUY for a target of Rs 1535

Investment Rationale

A. APE growth momentum to remain strong: In Q2FY24, APE growth was robust, largely driven by strong growth in the ULIP and group protection portfolio. While the share of ULIP (~58% in Q2FY24) has been higher, the company aims to achieve a balanced mix of ~55% ULIPs and 45% non-ULIP products. It intends to achieve this by increasing the share of NPAR/Protection and growing the number of policies. SBI Life expects strong growth in the individual protection/NPAR segment in H2FY24, aided by new product launches (2 nonPAR savings products and a new RoP protection product for higher ticket size). The company remains confident of achieving ~20% APE growth in FY24 as against the growth of 17% in H1FY24. We expect APE growth to remain strong at ~17-18% over the medium term.

B. VNB Margins to remain stable: In Q2FY24, VNB margins remained stable QoQ, despite the increase of ULIP products in the overall mix. However, despite the sharp inch-up in the share of ULIPs, wherein margins are comparatively lower, the company has been able to offset the impact by improving the margin profile in the non-ULIP products as non-PAR products have been repriced. As the product mix stabilizes, SBI Life expects its VNB margins to remain steady between 28-30%. We expect margins to range between 28.5-29% over FY24-25E.

C. Focus on Agency channel continues: Banca channel remains a major contributor to APE for SBI Life and the company plans to activate the SBI branch network (activation rate of 55-60% in a month). However, the company’s strategic initiatives for the agency channels have started reflecting in strong growth. SBI Life added ~50K agents in H1FY24 and has seen improvement in agent productivity. It expects the growth from this segment to remain robust in the coming quarters.

D. Outlook & Valuation: SBI Life continues to maintain its leadership position with the best in the industry cost ratios. The company has been able to deliver strong APE growth over the past years and we expect the momentum to continue with a more balanced product mix. The company’s channel productivity continues to improve and the focus on improving productivity in the agency channel should yield results in the coming quarters.

E. Recommendation: We recommend a BUY on the stock with a target price of Rs 1,535/share, implying an upside of 14% from the CMP.

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