Bajaj Finance, HUL could give over 10% return in long term; Siddhartha Khemka explains

The 1QFY23 corporate earnings have been healthy so far, despite being a mixed bag with a miss in heavyweights, such as Reliance Industries and Tata Motors.

The overall earnings growth in 1QFY23 has been subdued and led solely by BFSI, aided by credit cost moderation and healthy loan growth.

However, the spread of earnings has been decent with 68% of our coverage universe either meeting or exceeding profit expectations.

Cement, Auto, and Metals posted a YoY earnings decline while IT and O&G reported flattish YoY earnings for the quarter.

As the benefit of the recent moderation in commodity costs start accruing in 2HFY23E, we expect other sectors to contribute too.

As of 31st Jul’22, 31 Nifty stocks reported a sales/EBITDA/PBT/PAT growth of 29%/9%/15%/12% YoY respectively, single-handedly driven by BFSI. Of these, 12 companies each surpassed/missed our PAT estimates.

Excluding BFSI, profits would have declined 1% YoY. Heavyweights, such as Reliance and Tata Motors, which posted weaker-than-expected performance, dragged the Nifty earnings. Excluding RIL and Tata Motors, Nifty profits rose 9% YoY v/s expectations of 6% growth.

Sector-wise
1) The quarter was a mixed bag for IT companies with our coverage universe reporting overall revenue growth of 1.9% QoQ. Tier II companies posted better growth at 3.1% QoQ than the 1.7% growth for Tier I companies.

Amid heightened concerns over the weakening macro environment, the management of most of the companies are not seeing any impact on the pipeline. The majority of the companies delivered good deal wins and highlighted a strong pipeline.

2) Growth momentum has remained strong for Private Banks over 1QFY23 propelled by healthy trends in the corporate portfolio, while growth in retail, business banking, and the SME segments continued to shine.

Lower provisioning costs drove earnings as, despite a modest but in-line 5% PPOP growth, BFSI universe registered a 63% profit growth.

3) Oil & Gas witnessed lower-than-estimated standalone in O2C performance of Reliance that led to 10% miss in EBITDA/PAT. Severe volatility in feedstock prices and high inflation concerns instigated the slowdown in global intermediates and polyester market.

4) Sales growth in Consumers during the quarter was largely fuelled by price hikes, as volumes for Staple companies continued to remain weak, ranging from low- to mid-single-digit growth.

5) Top-line growth for Automobile companies was largely above or in-line, driven by price hikes, improved mix and favorable FX (for exporters). Higher-than-estimated losses in Tata Motors dragged the aggregate Automobile universe performance.

Raw Material (RM) costs, price hikes and operating leverage drove inline/above estimate results for 2Ws, 4Ws and auto components.

Market Outlook:
The market has bounced back smartly in Jul’22 with Nifty-50 rising 9% MoM and almost wiping out the entire YTD’CY22 decline.

The Nifty is now flat for YTD’CY22 and strongly outperforming the global markets despite sharp FII selling seen since Oct’21-June’22.

With this rally, the Nifty now trades at 20x FY23E, comfortably above the LPA and offers limited upside in the near term, in our view.

We reckon the upside from here will be a function of stability in global and local macros and continued earnings delivery v/s expectations.

Bajaj Finance: Buy| Target Rs 8100| LTP Rs 7343| Upside 10%
Bajaj Finance continued to focus on creating a risk-managed superior quality portfolio by diversifying across borrowers, product categories, and geographies.

The approach of ‘acquire and cross-sell’ across payments, loans, deposits, insurance, and investments to the existing customer franchise of ~57m would be a key growth driver in FY23 as well. We model an AUM CAGR of ~25% over FY22-FY24E for a sustainable RoE of 20%-22%.

Hindustan Unilever: Buy| LTP Rs 2649| Target Rs 3000| Upside 13%
HUL continues to place the building blocks for future growth and its pre-pandemic earnings growth was particularly impressive, given the weak mid-single-digit growth posted by its staple’s peers over the same period.

Signs of incipient earnings growth recovery are getting better fuelled by a possible good monsoon, fertilizer subsidy, and gradual reduction in commodity costs from the decadal high levels and recovery in premium personal care portfolio.

Once the ongoing high material cost environment abates, we believe HUVR could revert to mid-teens earnings growth.

(The author is Head – Retail Research, Motilal Oswal Financial Services Limited)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)