Insights

In today's era of knowledge economy and seamless connectivity, we are increasingly being burdened with an overload of information. Solicited or unsolicited information is inundating us through various channels like newspapers, magazines, television, e-mails, websites etc. It is important to breakthrough the clutter and get timely actionable advice which can be executed

ICICI Securities is dedicated to provide objective, independent and actionable research to our clients across various asset classes to help them make informed financial decisions. Our approach is a mix of top down and bottom up where we track the macro indicators to identify investment themes that are playing out. At the same time, we do extensive product research to ensure that we only advise the best in class products to our clients in each asset class. This approach ensures that we identify not only the correct investment theme but also the most suitable product to invest in the theme.

The best minds in the organization sit across the table every month to track the domestic and global macro environment in our meeting after monthly investment committee to ensure that we are up the curve in spotting investment themes to invest or avoid. Our investment committee consists of research heads from our institutional equity, retail, and I-SEC PD along with business heads of the ICICI Securities, Private wealth and retail business. This is further supplemented by inviting a renowned fund manager from the industry. This committee meets with a single point agenda of tracking the macro–economic environment and identify trends which can give actionable advice to our clients.

The investment committee is complemented by our stringent research across equity markets and different product classes.

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Direct Equity

Our experienced and award wining research team of over 40 analyst offers timely and unparalleled company and industry insight on base of rigorous analysis. It is one of the widest coverage in domestic industry, with active coverage on about 200 companies across 16 sectors in large/mid/small cap universe. Another key aspect of our research is the monthly and thematic reports on various sectors, keeping the client up-to-date with the latest developments in the sector.

Our team is grouped into smaller teams, specializing in particular industry and sectors. This sector focus allows the analyst to maintain detailed level of knowledge of key drivers of each sector.

Each recommendation is backed by rigorous and in-depth analysis of not only the company's financials but also the management quality and depth, competitors and other external factors impacting the stock price. This ensures due weightage to both qualitative and quantitative factors. Regular interaction with company managements and various other stakeholders help our research analysts develop view on stocks and equip them to foresee upcoming trends well in advance to benefit our clients.

Our fundamental equity research combines expertise with innovative strategies to offer broad range of products including Model Portfolios, Monthly investment strategy, Equity tracker, Pick of the week, sector specific monthly reports, event and result updates and detailed company report.

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Mutual Funds

We research mutual funds through a proprietary research methodology which evaluates the schemes and AMC across a wide range of parameters. These parameters are further supplemented by our view across different sectors as well as alignment with our overall investment theme in our investment committee. Some of the parameters used to filter and select mutual funds are portfolio risk and liquidity, risk adjusted returns, returns across various market cycles, past performance of the AMC in the asset class etc. The fund selection is further backed by interaction with the fund managers of the selected schemes on an ongoing basis to monitor their portfolio strategy and performance.

Managed Accounts

Selection on the PMS platform covers the following four broad parameters:

Research & Fund Management – Our selection process includes evaluating the qualification and experience of the investment and research team and their ability to conduct primary research and identify multi-baggers for clients.

Performance evaluation – Consistency of performance across market cycles and performance relative to peer group (PMS / MF) is evaluated for the scheme and the fund manager

Investment Strategy – The suitability of the investment strategy to client portfolios as well as its compatibility with I-Sec's investment outlook is considered along with the resilience of the strategy across market cycles.

Risk control guidelines – We evaluate the risk controls and guidelines followed by the selected scheme and AMC

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Alternate Investments

Fund selection for alternate investments encompasses the following main themes:

Investment theme and strategy – Since alternate investment funds are usually longer-tenure products, we evaluate the theme of the fund in terms of novelty, suitability to the client's portfolio and availability of the proposition through other investing platforms.

Strength and experience of Investment Team – Alternate investment funds usually hold concentrated portfolios of 8 – 12 underlying investments of a tenure of 3 – 5 years, the selection and management of the underlying investments becomes crucial to performance. In our evaluation of the fund, we place strong importance on the background and experience of the fund team in investing, managing and exiting such deals and their ability and incentives to work together as a unit.

Portfolio construction and implementation strategy – The fund's ability and process of sourcing deals, evaluating them, investing in them and eventually, exiting them directly impacts investor returns – making this factor an important one in our evaluation.

Background and expertise of Fund House – The presence and experience of the parent group / fund house is also considered since it impacts the fund's ability of raise money from investors, and also, source, negotiate, manage and exit underlying investment deals.

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Asset linked Debentures

Since structured products can be customized to take a specific view on any asset class, our selection framework comprises of the following two parameters:

Product Strategy – The prime parameter for selection of a strategy is its fit with our in-house investment outlook so that an investor in the product is able to successfully play out the view on an asset that has been taken.

Issuer profile – Structured products are issued in the form of asset-linked debentures, our evaluation process ensures securities available only from issuers of a high credit quality and issuing and repayment track record.

Equity Markets Overview & Investment Strategy :

Due to below then expected corporate earnings for the March quarter, elevated inflation trajectory, anticipation of a faster-than-expected rate hike by the Reserve Bank of India (RBI) amid weak global cues, Indian equity indices ended on negative side in April

Sharp selloff was seen in IT, Realty and Financial services sectors whereas sectors like Energy, FMCG & Auto outperformed the markets.

FII's were net sellers in equities to the extent of INR 171 bn. in Apr vs. INR 411 bn. in Mar while Mutual Funds bought equities worth INR 47 bn. in April vs INR 224 bn. in Mar.

Mkt Cap to GDP is currently higher than long term average of 77.15. While we have a long term positive view on equity, there is an expectation of heightened volatility due to high valuations, rising geopolitical tensions and hawkish measures from RBI & global central banks to control the rising inflationary pressures, both in developed and emerging economies.

Source: NSE, MOSPI, Motilal Oswal, ICICI Securities Research

1. The Indian equities markets rose in early April, but several factors led to the trend reversing swiftly and markets closed in the negative zone for the month of April. The factors that led to correction in markets are sharp rise in U.S. Treasury yields & the U.S. Dollar index and constant selling by FIIs.

2. Market confidence was further hampered by weak global cues owing to concerns about global growth, increasing inflation, and expectations of tighter FED monetary policy.

3. Going forward, we expect Nifty earnings to grow at CAGR of 21.5% in FY21-24E and 25.7% in FY21-23E. We are valuing NIFTY at 20,000 i.e. 23x PE on (FY23-24E) average EPS of Rs. 870/share.

4. Indian markets are expected volatile over the short term and the future trajectory will remain guided by factors such as: 1) Rising Crude oil prices led by geo political tensions 2) trajectory of global inflation and interest rates 3) domestic macroeconomic factors and central policy actions and 4) RBI Monetary policy.

5. Due to the combination of global growth in CY 22 and expected domestic recovery in FY 23, allocation should be added to telecom, Infrastructure, and Engineering sectors. Also incremental buying can be considered in IT and leaders in BFSI.

6. The deployment should be based on the risk profile of the client and the investment horizon:

a. Ideally a staggered approach across 3-6 months or at a 5-10% correction from the current levels (i.e. Nifty 15500-16000) should be adopted for building a quality portfolio across mutual funds and PMS schemes.

b. Fresh Allocation to Mid- cap/Small Cap Funds (upto 10% of equity portfolio) should be considered with a medium to long term (4-5 years) time horizon through the SIP/STP route.

c. Mutual fund focused on Contra/Value style of investment and Factor based strategies with factors like momentum/quality should be considered for fresh deployment at the current market levels.

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Select Sectors Commentary :

Cement

1. In the current quarter Q4FY22, the impact of higher fuel prices were not visible as the cement players utilized low cost fuel inventories. Further, benefit of excise cut on fuel and stricter control over other fixed overheads helped the companies improve margins sequentially

2. While the long-term demand outlook stays intact, the near-term cost headwinds may lead to some moderation in the demand. The current cement prices are hovering at Rs. 30/bag higher than the exit rate of Q4FY22. If it sustains then it should help the company to mitigate the cost inflation impact in the forthcoming quarter

IT

1. For Q4FY22, IT companies reported dollar revenue growth in the range of 0.7%-4-7%.

2. All IT majors have hired (on net basis) more than last two year combined net additions, which is reflective of underlying demand

3. On Margin front all the companies are facing margin pressures due to continued high attrition and elevated employee costs.

BFSI

1. Large private sector banks have witnessed strong advances growth (15-20% YoY), pedaling disbursement in MSME and retail segment.

2. Despite steady deposit base and better credit deployment, margins have marginally declined depicting aggression in yield offering

3. Jump seen in profitability (30-50% YoY) primarily led by lower provision.

4. Asset quality concerns seems to be behind with steady performance in restructured pool

FMCG

1. The sales growth in FMCG companies have been entirely led by pricing growth considering Volume growth is adversely impacted by down trading to smaller packs, grammage reduction negative consumer sentiments (rural regions) due to inflation

2. We believe commodity inflation would continue to pressurize gross margins for atleast two quarters. Similarly, topline would see 10 15 growth in next few quarters largely driven by prices.

Auto

1. The key trend across Auto OEM results declared so far is expansion in gross margins and consequent comprehensive beat on operating margins profile which was much contrary to our expectations (QoQ gross margin decline). This was primarily led by better product mix, high share of exports, low discounting in market space, higher spare parts revenues as well as adequate price hikes to absorb the commodity led raw material costs increase

2. Both Bajaj Auto and Maruti Suzuki reported good set of numbers. Management commentary was optimistic on demand outlook with some pressure seen on the gross margin profile going forward.

Pharma

1. The universe (12 coverage companies) is expected to post YoY growth of ~7% to ~Rs. 44,593 crore

2. The I-direct Pharma universe witnessed a mixed quarter with the phase of smooth going in the first half (decent domestic traction, normalizing scenario on input cost inflation and logistics) almost undone by headwinds such as Russia-Ukraine crisis and Covid wave in China.

3. On the company's front, Divi's Lab, Biocon, Ipca and Sun Pharma are likely to report 10%+ YoY growth.

Logistics

1. Q4 has been a mixed quarter. For Exim containers (on both ports, rail front) January saw growth at 4-7% range (MMT, YoY) while February reported a flattish performance (on a high base). March, on the other hand, reported 0- 10% de-growth in volumes (higher end-de-growth for port sector). Overall, Exim container volumes saw a flattish performance both on the port and rail front (YoY).

2. However, domestic containers, on the other hand, reported 25% volume growth, led by newer initiatives taken by Concor.

3. Leading the growth in march was Surface sector, which grew 9% (E-Way bills) and showed secular growth during the quarter
Source: ICICI Direct Research

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Debt Markets Overview & Investment Strategy :


Key Highlights
1. The repo rate stands revised to 4.40%. The standing deposit facility rate will stand 25 basis points below that at 4.15% and the marginal standing facility rate will be at 4.65%.

2. In addition, the RBI has hiked the cash reserve ratio by 50 basis points to 4.5%. This will withdraw about Rs 87,000 crore from the banking system

3. The MPC also decided to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.

4. These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.
The MPC notes that

5. Since the MPC's meeting in April 2022, disruptions, shortages and escalating prices induced by the geopolitical tensions and sanctions have persisted and downside risks have increased.

6. Heightened uncertainty surrounds the inflation trajectory, which is heavily contingent upon the evolving geopolitical situation.

7. International crude oil prices remain high but volatile, posing considerable upside risks to the inflation trajectory through both direct and indirect effects.

8. Core inflation is likely to remain elevated in the coming months, reflecting high domestic pump prices and pressures from prices of essential medicines

9. Domestic interest rates are likely to gradually inch up due to concerns of higher inflation from the rebound in economy activities coupled with supply chain issues and sharp rise in freight costs. The shorter end of the curve is expected to re-align with normalization in the interest rates.

10. RBI has hiked reverse repo rate by 40 bps and CRR by 50 bps in May policy meeting as the inflation number in April at 7.79%, was higher then RBI expectations due to increase in prices of both agricultural and industrial products.

11. The focus o RBI will be focused on taking hawkish measures like withdrawal of liquidity from the system and hike in rates in the next few MPC meetings to bring down inflation below 6% in the current financial year.

12. The Government also has taken measures like banning exports of wheat for controlling the domestic price, which has increased sharply in the last few months, tracking global prices.

13. Global central bank also have increased rates to control inflation which had been multi decadal high due to supply disruptions caused by the ongoing Russia – Ukraine conflict.

14. In a rising interest rate environment with steep yield curve, the duration risk needs to be calibrated at regular intervals. Hence Money Market and Arbitrage fund which offer tax efficient returns are ideal for short term parking upto 6-9 months.

15. The yields in 3-5 years AAA corporate bond segment have hardened sharply in the past few months and are trading around 7-7.25%. Hence, exposure to corporate bond with roll down strategy or target maturity Fund in 3-5 year willl offer decent yields with an investment horizon of 3 years and above.

16. Also, Blended/Medium Term fund with a balanced exposure to decent quality AA and AAA assets is also likely to generate good carry returns with a time horizon of 3 years and above.
Source: RBI

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Gold, Crude Oil and Currency Views :

GOLD

1. Historically, Gold has had a negative correlation with equities and debt, and hence adding allocation to Gold in the portfolio can result in optimum portfolio diversification.

2. Gold prices decreased by 2.1% MoM in Apr'22. Strengthening of dollar is a negative for gold performance

3. We continue to remain bullish on Gold from medium to long term perspective. Any dips in prices should be used to increase allocation. We continue to recommend (5% in core allocation) through Sovereign Gold bonds and (5% tactical allocation) through ETFs.

Source: World Gold Council, Bloomberg | Returns till 1 year are absolute; > 1 year are CAGR

CURRENCY

1. Rupee depreciated by -0.8% while the dollar index went up by 4.7% in last one month

2. Rupee slipped in April owing to increase in Crude Prices and FII withdrawals from Indian markets.

3. We expect currency to remain range bound around current levels. However, rising crude price can be a key downside risk. Crude prices trading above 100 USD is a concern from CAD and fiscal deficit perspective. Also, further withdrawal of funds by FPI's from Indian markets will put further pressure on the currency.

Source: Bloomberg, RBI | Returns till 1 year are absolute; > 1 year are CAGR

CRUDE OIL

1. Crude Oil prices went up by 2.3% in last one month and has rallied by 38% since January'22.

2. The movement Oil prices will heavily depend on the degree of sanctions imposed on Russian oil exports and increase in supply by OPEC countries.

3. However, despite the loss of supply from Russia, steadily rising output from other producing countries, coupled with slower demand growth, especially in China, is expected to fend off an acute supply deficit in the near term

4. We expect Crude to trade around the elevated levels of 100-110 over the next few months.

Source: Ministry of Petroleum & Natural Gas, Bloomberg | Returns till 1 year are absolute; > 1 year are CAGR

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