Published on December 30, 2023
Sumit: For FY24, we may see earnings growth in the low 20 per cent levels for the Nifty. Thereafter, over a longer period, we believe that the Nifty can deliver anywhere between 12 and 15 per cent earnings growth. Whether we look at Nifty specifically or India Inc. broadly, there are some challenges prevalent today. Global growth is slow and hence sectors that are globally linked are facing headwinds.
Similarly, rural economy now may not be in best of shape, and businesses linked to the rural side are facing growth challenges. However, we believe we are in a sweet spot where there is policy stability. Similarly, investment cycle in the country is reviving too, and it is only a matter of time before we see a bounce-back in rural part of the country as well.
Naveen: Our earnings projections for Nifty 50 in FY24 and FY25E stand at 935 and 1056, respectively, reflecting a growth rate of 18 per cent and 13 per cent. The tailwinds for earnings have been the consistent uptick in quarterly earnings, which led to earnings upgrades. Post Q2FY24 quarterly earnings, our FY24/25E earnings estimates saw an upgrade of almost 1 per cent, which is perfectly healthy, considering the past challenges when earnings often faced downgrades post-quarterly earnings.
The sound balance sheet quality of corporates is a significant positive that helped corporates manage stable earnings profiles. While the earnings trajectory too appears stable, a global recession could play the spoilsport and cause a medium-term slowdown in 2024.
Sailesh: Earnings growth is expected to be in mid-teens for both the FYs with a potential upside in FY24. The current year earnings have been supported by fall in commodity prices, leading to lower input cost offsetting the slower revenue growth. The rural demand, which has been subdued, is expected to improve on the back of pick-up in economic activity across multiple segments and should aid better demand. For FY25, we need to monitor the global growth trajectory, which is likely to be subdued, as well as the impact of waning tailwinds from lower input costs.
Sumit: The slowdown in revenue growth has also been a function of fall in commodity prices as well as a slowdown in the rural economy. Soon, we’ll start seeing those lower commodity prices in the base and the rural economy also heating up. By FY25, we believe revenue growth will be at least similar to profit growth.
Naveen: Demand in travel, leisure, hospitality, and some durables has been robust. However, staples have remained sluggish due to multiple factors, ranging from rural slowdown to higher intensity of competition in the sector. Despite these trends, the demand scenario continues to be reasonably strong on an aggregate basis. High-frequency indicators, such as credit offtake, power consumption, E-way bills, and GST collections, among others, have remained robust. Thus, we believe that a reasonably healthy demand scenario will continue to sustain on an aggregate basis.
While challenges may arise from a potential global economic slowdown, without such headwinds, the Indian economy is poised to maintain its growth trajectory.
Sailesh: Revenue growth in near term had been impacted by multiple factors, such as growth slowdown, weaker demand due to inflationary pressures and ‘K’ shaped or uneven recovery impacting the lower income groups. However, we are witnessing improvements on all these fronts. Revival in investment or capex cycle from decadal lows, cooling of inflationary pressures, bottoming out of weakness in rural demand, etc., are instances.
Overall, while revenue growth has been muted, we expect improvement from these lows in the coming quarters. Risk aversion due to global factors and election-led uncertainty are factors that need to be monitored.
Sumit: On the offshore side, I still see a lot of pockets where they are not fully invested into Indian markets. They are still underweight as compared to what they should be. So, over a period, as India continues to be significantly larger as a percentage of world GDP — today we are fifth largest and over a few years, we should be third largest — the relevance of India will keep getting higher and consequently, FII flows into the country also should get better.
On the domestic side, I would believe that overall allocation to equities as a percentage of total financial savings is still not very large. Can this percentage keep getting better as India gets into very strong cycle, is what needs to be seen. Having said that, is it going to be without the volatility? Not really. These flows keep reacting to market in short term. But if one were to think about investments or flows from a three- to four-year perspective, I am confident that we should continue to get domestic and international flows.
Naveen: DII flows have been relatively strong, led by SIP flows. SIP flows have crossed $2 billion on a monthly basis. Thus, the market remains stable even when FIIs turn net sellers, as DIIs act as counterparties. 2024 will be a fascinating year. As we anticipate a decrease in interest rates rather than an increase, we can expect an increase in equity allocation. In this scenario, India could get higher allocations as India’s weight in global indices has been rising over the years. Thus, it is possible that FIIs will continue to be net buyers for another year.
Sailesh: India appears to be in a sweet spot on fundamental factors and can become a market of choice for equities. India is witnessing the best of macros in a long time — with better growth, lower oil prices, revival in investment cycle, etc, — and appears well-placed on a relative basis both from geopolitical as well long-term strategy point of view. Earnings recovery will be a key determinant for fund flows. With declining bond yields and India’s relative opportunities, there could be higher interest over the next few years.
2024 will be a fascinating year. As we anticipate a decrease in interest rates rather than an increase, India could get higher allocations as India’s weight in global indices has been rising over the years. Thus, it is possible that FIIs will continue to be net buyers for another year.Naveen Kulkarni
Sumit: Our thought process on investments does not change with events. The whole idea is very simple — buy into soild businesses where opportunity is secular, return on capital employed is very high and management has a track record of navigating external vagaries and improving market share. We do not want to take single-event risk in our portfolios which is why we would like to build portfolios that are long- term. So, at the current point in time, we have businesses where earnings growth is very solid and return on capital employed is also very high — significantly superior to what it is for markets. And in general, we avoid businesses where government intervention is relatively high. So, we follow a bottom-up ideation where strength of the business comes from within rather than the external environment.
Naveen: Political risks have reduced after the State election results. In this scenario, equity allocation should continue, and staying invested in the market will result in better returns.
Sailesh: Equity investing and risks go hand in hand, hence risk-return optimisation is a constant effort across portfolios. Over the years, our focus has been to build sound research capabilities and strong processes, which supports us to navigate any significant shifts in the investment landscape. We believe our core philosophy of focusing on owning businesses at reasonable valuations and taking right stance without compromising on quality or risk management will help us in delivering better investment experience to our investors.
Our thought process on investments do not change with events. The whole idea is very simple - buy into soild businesses where opportunity is secular, return on capital employed is very high and management has a track record of navigating external vagaries and improving market share. We do not want to take single event risk in our portfolios. Sumit Jain
Sumit: Many of these sectors would fall into either manufacturing, consumer, or finance areas. We really believe India’s manufacturing is coming to a point where we can get into a virtuous cycle. Capital goods, consumables and logistics businesses benefit when manufacturing does well. So, this is a broad area where we believe there lies an opportunity. Similarly, the entire premium consumption and finance is another area which we believe should continue to perform. So overall, we believe that businesses that are connected to the domestic economy should do much better than those which are globally linked.
Naveen: Some sectoral bets may continue in 2024, like in PSUs and capital goods. Political stability will aid the PSUs, and they could deliver another year of strong returns as most PSU companies are still priced as value stocks but are now delivering on growth promises. Capital goods, as a sector, is driven by the capex cycle. The capex cycle is getting stronger as we see a pick-up in government as well as private capex. Thus, both PSUs and capital goods sectors will likely be successful in 2024.
As a sector, real estate is slightly overheated and could take a breather. Apart from these sectors, private banks could do well in 2024 as valuations have become reasonable and the capability of absorbing significant flows from DIIs and FIIs has improved. Autos is another sector in a structural uptrend and could deliver reasonable returns. Overall, Banks, PSUs, Autos, Capital Goods, and Power Utilities will be the sectors to watch out for in 2024.
Sailesh: Recent developments, such as lower crude oil prices, fall in US yields, change in interest stance by US Fed and the narrative that there could be political continuity at the Centre (post the recent State election results), have been positive for the equity market sentiment. However, the geopolitical challenges remain and the equity valuations are elevated in many segments.
In the current backdrop, large-caps as a category appear to be relatively better placed in valuation terms and may be able to manage any unforeseen event risk better. From a sectoral perspective, currently PSU banks and select utilities appear to be better placed while valuations have risen sharply in the other sub-segments. The capex cycle, which has just started, is likely to remain an important theme.
Lower crude oil prices, fall in US yields, change in interest stance by US Fed and the narrative that there could be political continuity at the centre are positives. However, the geopolitical challenges remain and the equity valuations are elevated in many segments. Large caps as a category appear to be relatively better placed in valuation terms and may be able to manage any unforeseen event risk better. Sailesh Raj Bhan