Market Outlook – November 2024

Date: 14 Nov, 2024

Domestic Updates 

The US Presidential election, a closely contested race between Trump and Harris, injected significant volatility into the Indian market. Following Trump's decisive victory, the benchmark Nifty 50 index suffered its worst monthly decline since the 2020 pandemic, shedding 6% in October to close at 24,340 points. This downward trend extended to the broader market, with the Nifty Midcap 100 and Nifty Smallcap 100 indices falling by 7% and 3%, respectively. All sectors were negatively impacted, with the Auto sector bearing the brunt of the decline, losing 13% month-overmonth. As a result, the Nifty index's year-to-date return in 2024 stands at 11%.

 ^{Source - 1 IDBI Capital}

October 2024 marked a significant shift in India's equity market dynamics. Domestic Institutional Investors (DIIs) poured a record USD 12.8 billion into the market, while Foreign Institutional Investors (FIIs) pulled out a substantial USD 10.9 billion. This divergence underscores the growing influence of domestic investors on India's equity markets. In 2024, FIIs have been net sellers, contrasting sharply with their net inflows of USD 21.4 billion in 2023. DIIs, on the other hand, have been consistent buyers, contributing approximately USD 53.6 billion over the past 10 months, a figure nearly equal to the combined inflows of 2022 and 2023. This trend highlights the significant shift in investor sentiment, with DIIs emerging as the primary drivers of the market. Moreover, DII inflows have been 15 times higher than FII inflows since 2021. The primary market also witnessed notable activity in October, with 6 companies launching IPOs to raise a total of Rs 38,700 crore. The Hyundai IPO, the largest in Indian history, dominated the scene. While Waaree Energies listed with a strong 93% premium, other IPOs faced a less enthusiastic reception, listing at a discount to their issue price. 

Global yield trends, particularly the upward movement in US 10-year Treasury yields, influenced domestic bond markets in October 2024. Indian 10-year government bond yields climbed 10 basis points to 6.85% from 6.75% in the previous month. This increase was primarily driven by the surge in US yields and the delayed expectations of potential rate cuts by the Reserve Bank of India (RBI) following higher-than-anticipated September inflation figures. Throughout the month, 10-year G-sec yields fluctuated between 6.73% and 6.87%. The RBI issued a new 10-year Gsec with a coupon rate of 6.79%, which closed at a yield of 6.81% on October 31, 2024. 

Key Takeaways from 2QFY25 so far: 

• Banking: Private banks delivered mixed earnings, while public sector banks showed strong performance. However, margin compression impacted both sectors.
• NBFCs: Asset quality deteriorated, particularly in the microfinance segment. Regulatory pressures and macroeconomic factors led to reduced AUM growth forecasts .  
• Technology: IT services companies exceeded expectations with solid revenue growth. Nonetheless, the outlook remains cautious due to global uncertainties.
• Automobile: Results were largely in line with expectations, driven by domestic two-wheeler sales and recovering exports. Demand trends remain moderate.  
• Consumer: Earnings were slightly below estimates, with urban demand weakness offset by rural growth.
• Healthcare: Pharma companies continued to deliver strong growth, driven by domestic formulation sales.
• Oil & Gas: Results were disappointing, with Reliance Industries and oil marketing companies underperforming due to weak refining margins and subscriber churn.  

Macro Update

India's GST collections for October 2024 reached Rs 1.87 lakh crore, a substantial 8.9% increase compared to the previous year. This figure is the second-highest since the GST regime's inception in 2017, with April 2024 holding the record at Rs 2.1 lakh crore. The total GST collections for 2024 have climbed 9.4% to Rs 12.74 lakh crore, reflecting robust domestic consumption and import activity. While policymakers are optimistic about sustained rural consumption, they remain vigilant regarding potential urban demand moderation. These trends have significant implications for India's economic growth trajectory. 

India's central government has made progress in reducing its fiscal deficit. In the first six months of the current fiscal year (FY25), the deficit reached 29.4% of the annual target. This is a decrease from the previous year, primarily due to higher tax collections, dividends from the Reserve Bank of India, and lower government spending, especially in the first quarter. On a 12-month moving average basis, the fiscal deficit has improved to 4.5% in September 2024, down from 4.7% in August. This improvement is attributed to sustained revenue growth and relatively weak spending. The government aims to further narrow the fiscal gap to 4.9% of GDP in FY25. This is a significant reduction from the 5.6% deficit recorded in the previous year.  

July 2024 brought a glimmer of hope for the industrial sector, with output expanding marginally to 4.8%. Manufacturing took the lead, powered by sectors like refined petroleum products, machinery, and transportation equipment. However, mining and electricity generation were dampened by monsoon-related challenges. Capital and intermediate goods segments exhibited growth, while others slowed down. The government's proactive approach, with increased spending on infrastructure and state revenue, is expected to breathe life into the construction sector and its allied industries. Moreover, the promising Kharif sowing progress is poised to invigorate rural demand. 

India's inflation surged in October 2024. Consumer Price Index (CPI) inflation jumped to 5.5% from 3.7% in August, primarily due to a waning base effect. Food inflation accelerated to 9.2% from 5.7%, driven by higher vegetable prices, especially tomatoes and onions. Wholesale Price Index (WPI) inflation also climbed to 1.8% from 1.3%, mirroring the trend in food prices. The outlook for inflation is closely tied to future food price movements. Global geopolitical tensions and commodity price trends, particularly for oil and metals, will also play a significant role. However, a better-than-last-year kharif crop sowing suggests potential relief in the coming months. 

India is gearing up to release its Q2FY25 GDP data later this month. While market projects a 7.3-7.4% growth rate for FY25, Q2 (Jul-Sep) is expected to clock in at 6.9%, building on Q1's 6.7% growth. This momentum is fuelled by strong domestic consumption and a revival in private and public investment, as the nation emerges from the election cycle. The festive season and other urban consumption metrics have also contributed to this positive trend. 

International Updates

October proved to be a challenging month for major US indices, with the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite declining by 1.3%, 1%, and 0.5%, respectively. This marked the end of the Nasdaq's fivemonth winning streak and broke the S&P 500 and Dow's five-month positive run. Globally, while markets like Japan, Taiwan, and Indonesia saw gains, others such as Russia, MSCI Emerging Markets, China, Brazil, the UK, Korea, and others experienced declines. This negative sentiment was fueled by uncertainty surrounding the US elections and potential policy shifts, as well as underwhelming corporate guidance in the US and a less-than-expected impact from China's stimulus package. 

US Fed decided to lower the policy rate by 25bps in its latest meeting in Nov’24, thus bringing the policy rate down to 4.5-4.75%. This is the second rate cut since CY20. The FOMC highlighted that “labour market conditions have generally eased, and the unemployment rate has moved up but remains low. In line with market expectations, Bank of England (BoE) in its Nov’24 meeting, lowered the policy rate by 25bps to 4.75% with a vote of 8-1. This is the second rate cut, and it comes after first 25bps rate cut was announced in Aug’24. The policy statement continued to maintain a hawkish tone, as Governor Bailey stated that in order to lower inflation gradually, the central bank cannot cut rates too quickly or too steeply. BoJ in Oct’24 kept its policy rates steady, in line with market expectations. Short-term rate was left unchanged at 0.25%.The recent US elections and their outcome will have significant implications for global geopolitics, international trade, and the US economy. While initial market reactions may be volatile, it's important to remember that government policies take time to implement and their direct impact on markets may be delayed. 

We believe that the results could be neutral to positive for India, considering certain key factors: 

• China Relations: The potential for increased tensions between the US and China could present further opportunities for India to solidify its position on the global stage.  
• Geopolitical Stability: A potential stabilization of geopolitical tensions could lead to lower freight costs, benefiting India's economy.
• India-US Cooperation: Strengthened cooperation between India and the US could mitigate certain risks and enhance bilateral relations.
• IT Sector: The US's continued reliance on technology and software services makes the Indian IT sector wellpositioned. Any potential increase in visa-related costs can likely be passed on to end-clients.

While we maintain a cautiously optimistic outlook, it's important to avoid excessive enthusiasm. 

Rockstud Capital Market Outlook 

October saw a significant correction in Indian equities, driven by lacklustre Q2FY25 earnings and substantial selling by foreign portfolio investors (FPIs). For Nifty- 50, Earnings growth expectations is subdued with expectation of 6% pa in FY26E. India’s market capitalization-to-GDP ratio has been volatile, plummeting to 57% (of FY20 GDP) in Mar’20 from 80% in FY19 and then sharply reviving to 132% in FY24. It is now at 137% of FY25E GDP (of 10.8% YoY), above its long-term average of 85%. Valuations do look stretched at current juncture where benchmark Nifty index currently trades at a 12-month forward P/E of 20.6x i.e. ~5% premium to its long-term average as compared to other markets.

The markets have negotiated critical events such as the General Elections and the Budget with minimal volatility, as every minor dip has been met with robust buying activity. However, as we gaze into the horizon, it appears the waters may get a bit turbulent for Indian equities in the short term. The escalation in the Israel-Iran conflict only adds fuel to the fire of the already simmering geopolitical tensions from the ongoing Russia-Ukraine and IsraelPalestine conflicts. Corporate earnings, after four consecutive years of healthy double-digit growth, are moderating due to pressures from commodities and fading tailwinds from BFSI asset quality improvements. With a recency bias, it is very natural for investors to have high return expectations but wisdom says otherwise. One needs to 

• Temper down expectations in the short term – this will help avoid taking excessive risks
• Stay away from FOMO – FOMO is one of the biggest reasons why investors at large fall into the trap fads with basic principles of investing getting compromised due to greed. AVOID this at any cost. It is very tough but very very relevant. 
• Stick to the basic fundamentals of investing. There is no alternate to common sense. 

While the broader market may deliver single-digit to mid-teen returns in the coming year, opportunities for selective stock-picking remain. Investors should prioritize sectors with strong fundamentals and reasonable valuations, exercising caution in overvalued segments. This approach aligns with current market conditions and positions investors to capitalize on emerging opportunities.

RC Diwali picks 2024-25 

Amber Enterprises Ltd | CMP – 6086 | TGT – 9040 (FY26E EPS of 113 and Avg PE 80) (+48%) 

About -Amber Enterprises Ltd is a leading player in the Indian Room Air Conditioner (RAC) industry, specializing in both components and finished goods. The company boasts a strong presence in the HVAC sector, offering a diversified product portfolio that includes Room ACs, reliable critical components, and mobility applications for various sectors like railways, metros, buses, and defense. With a focus on backward integration and strong R&D capabilities, Amber Enterprises secures a significant share in the ODM industry.

Leadership in AC segment - Amber had 70.7% market share in the RAC OEM/ODM industry in FY20 vs 47.3% in FY15. Amber’s key customers include leading RAC brands such as Blue Star, Daikin, Godrej, Hitachi, LG, Panasonic, Samsung, Voltas and Whirlpool, who cumulatively control more than 75-80% of the RAC market in India. Strong growth in the overall AC industry, addition of new clients, and strategic focus to grow the electronics segment.

New Initiatives - Recently, Amber added a new MNC customer from gas charging to full ODM solutions and another one for tower AC. The company also formed a JV with Resojet for manufacturing of fully automatic washing machines, and mass production is likely to begin in 2HFY25. Amber anticipates margins to improve further from FY26 onwards and guides it to reach double digits by FY30, once the doors open for the company in the export market. 

Amber aims to become a key player in PCB assembly and PCB manufacturing - It has strategically taken steps to grow this segment in the last 1-2 years by: 1) focusing on newer sectors having a higher margin and growing its PCBA business; 2) entry into PCB manufacturing by acquiring Ascent Circuits; 3) expanding capacity in the electronics segment with a targeted capex of INR5-6b over the next two years that will provide incremental revenue to the company; and 4) JV with Korea Circuits for advanced manufacturing of PCB. Backed by these steps, the EMS segment’s revenue nearly doubled YoY (+99%) to INR4.9b. Amber is also expanding its PCB manufacturing capacity by adding up to 840,000 SqM annual capacity in two phases through its subsidiary, Ascent Circuit, by developing a new PCB manufacturing plant at Hosur, Chennai. Amber also expects to benefit from the government’s anticipated policy on PCBs and targets to reach INR40b revenue by FY27-28.     

Data Points 

• India has only 7% penetration in the RAC market vs Indonesia 17%, Global 30%, China 53% 
• India’s RAC volume - +8% (FY20-FY24) | Amber’s Volume – +16% (FY20-24) 
• • India’s market growth expected FY24-28 - +13% CAGR from 11.9M units to 24M units. 

Reason – 

• low penetration
• shorter replacement cycles 
• energy-efficient RACs 
• growing urbanization 

availability of multiple brands at various price points. 

Sona BLW Precision Forgings Ltd | CMP – 664 | TGT - 1058 (FY26E EPS of 14.1 and Avg PE 75) (+59%)  

About - SONA offers a unique play on the global electrification disruption, with strength lies in R&D and identifying the emerging trend and be market ready in advance. SONA’s focus on R&D has helped it capitalize on the electrification opportunity from both ends of the power spectrum. Sona BLW Precision Forgings (Sona) is a multiproduct, multi geography auto ancillary company which is into manufacturing products like differential gears (32% of revenue), differential assemblies (23%), starter motors for hybrids and ICE (21% and 15%, respectively), traction motors for two-wheeler electric vehicles (4%) and others (5%). Exports account for 71%, with the U.S. and Europe being the largest markets (43% and 20% of total exports, respectively).  

Proxy on global megatrends of electrification and premiumization: SONA is a global play on the megatrends of electrification and premiumization. Its product portfolio of differential gears, motors and sensors is on the right side of the Auto industry evolution, with a substantial increase in content in EV products.

Future Ready -Investing in R&D: SONA’s approach is to own technology to capture maximum value and offer the best products to its customers. It invests on an average of 3-4% of sales in R&D (Industry average is 1-2%). Its technology roadmap is focused on developing new products that enable an increase in share from EVs and reduce dependence on ICE vehicles.  

Large order backlog: Sona backlog stood at Rs. 23100 crs (7.3x FY24 revenue) as of 2QFY25. EV constitutes 78% of order backlog.

Data Points 

• 78% of orderbook is towards EV and 22% towards Non EV 
• Bloomberg estimates ICE+Hybrid cars % sales will reduce from 86% (FY20) to 43.2% (FY30) and EV increase from 2.8% (FY20) to 28% (FY30) globally 
• Years remain until National ICE sale phases out for following countries: Denmark, Iceland, Ireland, Netherlands, Sweden, UK (7 Years), Canada (12 Years), France, Singapore, Spain (17 Years) 
• Indian E-2W to grow by 33% CAGR over next 4 years to 27L sales from 8.6L 

Mazagon Dock Shipbuilders Ltd | CMP – 4012 | TGT – 7070 (FY26E EPS of 202 and Avg PE 35) (+82%)  

About - Mazagon Dock Shipbuilders Ltd. (MDSL) is one of India’s leading Defence public sector undertaking shipyard under the Ministry of Defence. The company is engaged in construction of warships and submarines, and repair of small ship. Since 1960, MDSL has built total 801 vessels including 27 warships, from advanced destroyers to missile boats and 7 submarines. MDSL had also delivered cargo ships, passenger ships, supply vessels, multipurpose support vessel, water tankers, tugs, dredgers, fishing trawlers, barges & border out posts for various customers in India as well as abroad. MDSL have also fabricated and delivered jackets, main decks of wellhead platforms, process platforms.

Strong orderbook brings visibility of revenues – It has OB of Rs. 36,839 crs (3.8x OB/Sales) led by three major contracts - Project-17A frigates, Project-15B destroyers and Project-75 submarines. The company delivered third destroyer ship in CY23 and expects fourth destroyer ship in CY24E. Defense Acquisition Council has approved the procurement of eight next generation corvettes and RFP for the same is expected to be issued in 2024. The contract value is expected to be Rs 36000 crore, which will be divided into two shipyards. The contract will be divided into two shipyards (Rs 22500 crore for L1 and Rs 13500 crore for L2). MDSL is expected to be one of the shipyards to get this contract. Lastly, MDSL is a strong contender for an order book of roughly about Rs.one lakh crore led by five new generation destroyers of Rs ~50000 crore and six conventional submarines (Scorpene submarines P75I) of Rs 43000 crore. A number of RFPs for various shipbuilding projects have been floated by the Ministry of Defence over the last couple of years, and some more are expected to be rolled-out in the near future  

Diversified business model to mitigate fluctuation in revenue recognition - MDSL is engaged in the construction and repair of warships and submarines for MoD to be used by the Indian Navy along with other vessels for commercial clients. The company’s workshops and facilities are in Mumbai and Nhava, where it primarily builds warships and submarines as well as carries out ship repairs and refits work. MDSL is strategically located in Mumbai, on the west coast of India on the sea route connecting to Europe, West Asia and the Pacific Rim, a busy international maritime route. The company is developing a greenfield shipyard at Nhava (Navi Mumbai) with a shiplift, wet basin, workshops, stores and buildings along with a ship repair facility spread over an area of 40 acres.

Modernisation manufacturing program to strengthen operations - MDSL has undertaken a modernization program at a cost of Rs 900 crore, and has increased the building capacity of warship and Submarine over the period since 2014. The company has developed Shore Integration Facilities (SIF) for Shipbuilding and Submarine Divisions, separately, to integrate and simulate various systems and equipment prior to fitting them onboard. MDSL has collaborated with Altair, a global leader in computational science and artificial intelligence (AI), for multiple simulation areas.  

Data Points 

• Indian Navy current fleet – 130 | to be 200 by FY27 as per ship building programe 
• Indian Coastal Guard fleet – 118 | to be 190 by FY27 as per ship building programe
• Indian Navy est capital budget till FY27 amounts to Rs. 4.5Trn
• Plan to reduce current import content from fight/warships from 70% to 30% over FY30

Disclaimer

General Risk Factors:  

• All products/investment approaches attract various kinds of risks. Please read the relevant Disclosure Document/ Client Agreement/ Offer Documents (including Private Placement Memorandum and Contribution Agreement) carefully before investing.

General Disclaimers: 

• This communication is confidential and privileged and is directed to and for the use of the recipient only.  
• The information and opinions contained in this report/ presentation have been obtained from sources believed to be reliable, but no representation or warranty, express or implied, is made that such information is accurate or complete.
• Information and opinions contained in the report/ presentation are disseminated for the information of authorized recipients only and are not to be relied upon as advisory or authoritative or taken in substitution for the exercise of due diligence and judgement by any recipient. 
• The information and opinions are not, and should not be construed as, an offer or solicitation to buy or sell any securities or make any investments. 
• Nothing contained herein, including past performance, shall constitute any representation or warranty as to future performance. 
• The client is solely responsible for consulting his/her/its own independent advisors as to the legal, tax, accounting and related matters concerning investments and nothing in this document or in any communication shall constitutes such advice. 
• The client is expected to understand the risk factors associated with investment & act on the information solely on his/her/its own risk. As a condition for providing this information, the client agrees that Rockstud Capital, its Group, or its affiliates makes no representation and shall have no liability in any way arising to them or any other entity for any loss or damage, direct or indirect, arising from the use of this information. 
• This document and its contents are proprietary information of Rockstud Capital and may not be reproduced or otherwise disseminated in whole or in part without written consent. 
• The information and opinions contained in this document may contain “forward-looking statements”, which can be identified by the use of forward-looking terminology such as “may”, “will”, “seek”, “should”, “expect”, “anticipate”, “project”, “estimate”, “intend”, “continue” or “believe” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, including those set forth under the Disclosure Document/Offer Documents, actual events or results or the actual performance may differ materially from those reflected or contemplated in such forward-looking statements. 

Regulatory Disclosures:  

• All clients have the option to invest in the above products/investment approach directly, without intermediation of persons engaged in distribution services.
• This document, and its contents, especially the Performance related information, is not verified by SEBI or any regulator. 
• Rockstud Capital and/or its associates, the authors of this material (including their relatives) may have a financial interest by way of investments in the companies covered in this material.
• If any recipient or reader of this material is based outside India, please note that Rockstud Capital may not be regulated in such jurisdiction and this material is not a solicitation to use Rockstud Capital services.