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Informist, Friday, Dec. 27, 2024

 

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--IDBI Capital Bokade: Expect Nifty 50 earnings to rise 5-6% in FY26
--CONTEXT: IDBI Cap equity research head Pravin Bokade speaks to Informist
--IDBI Capital Bokade: See modest returns of 8-9% from equity market in 2025
--IDBI Capital Bokade: Expect volatility in equity markets for 3-4 months
--IDBI Capital Bokade: Don't see trigger for economic growth for 2 quarters
--IDBI Capital Bokade: Economic growth may come down to 5.5-6% going forward
--IDBI Capital Bokade: Days of 7.5-8?onomic growth are likely behind us
--IDBI Capital Bokade: Consumption is weak, no pick-up in private capex yet
--IDBI Capital Bokade: Private capex weak as cos don't see demand in economy
--IDBI Capital Bokade: Consumption is weak as wage growth has been poor
--IDBI Capital Bokade:Govt needs to do 'heavy lifting' amid current slowdown
--IDBI Capital Bokade: Govt likely to miss budgeted capex target for FY25
--IDBI Capital Bokade: Expect govt spending to pick up pace in FY26
--IDBI Capital Bokade: See FY26 capex budget 10-12% more than for FY25
--IDBI Capital Bokade: RBI should cut repo rate 25 bps in Feb to aid growth
--IDBI Capital Bokade: CRR cut in Dec to have miniscule impact on economy
 

 

By Anshul Choudhary

 

MUMBAI – The slowdown in earnings growth of Indian companies may continue for at least two more quarters as there is no immediate trigger for economic growth, Pravin Bokade, head of equity research at IDBI Capital Markets & Securities, told Informist in an interview. Bokade's weak outlook for this financial year stems from the view that the government is likely to miss its budgeted target for capital expenditure as its spending in the first half was slower, primarily due to the General Election, the Budget, and the monsoon.

Bokade is also concerned that capital expenditure from the corporate sector has not risen significantly this year and consumption is likely to remain weak as wage growth in the previous few years has been disappointing. Considering this, Bokade said India's economic growth is likely to come down to 5.5-6% going forward, and added that the days of 7.5-8% growth are likely to be behind us.

 

This slowdown will affect corporate earnings as well at a time when further expansion in margins is unlikely, he said. Bokade expects the earnings of Nifty 50 companies to grow only 5-6% in 2025-26, while consensus estimates show the earnings for FY26 may rise around 13%.

 

Bokade expressed concern that high valuations, at a time when the economy is slowing down, will make it difficult for equity investors to earn high returns in 2025. He expects volatility in the market for the next three-four months amid uncertainty around US president-elect Donald Trump's policies once he assumes office in mid-January, and as market participants react to subsequent quarterly earnings. He expects modest returns of 8-9% from the market next year. So far this year, the Nifty 50 has risen over 9?ter rising 20% in 2023.

 

Looking at the slower pace of capital expenditure this financial year, he is positive that the government will pick up its pace of spending on capital expenditure in the next financial year and may even raise this expenditure by 10-12% from this year's budgeted amount of over INR 11 trillion. However, he is worried that the government may somewhat limit spending to achieve its target to lower fiscal deficit, which may hurt economic growth. The government aims to reduce its fiscal deficit to 4.9% of GDP this financial year and lower it further to 4.5% by March 2026. 

 

"When your government itself is withdrawing demand from the economy, how do you expect the economy to grow," Bokade said. "When the government says they have to control the fiscal deficit...then, we are probably moving towards slow grinding in the economy." 

 

Looking at the recent correction in the market, Bokade argued that the market is likely to have realised this problem of growth. "Market is going down because of a variety of factors: there is no support from the government, no liquidity pumping from the RBI, no reduction in borrowing cost. When your industry is slowing down, companies are not growing...someone should be there to support, that is not happening," Bokade said, and added that the household sector is unable to support growth due to lack of adequate wage growth. The Nifty 50 has fallen over 10% in three months to close at 23750.20 points on Thursday, after touching a lifetime high of 26277 points on Sept. 27.

Among the issues highlighted, Bokade said government spending is the easiest to fix. He said private players are unlikely to spend on capital expenditure as they are not seeing demand in the economy. In such a scenario, the government needs to do the "heavy lifting", he said.

The Reserve Bank of India could also support growth by reducing interest rates, which would help pump money into the economy, he said. He added that the RBI's decision to cut the cash reserve ratio by 50 basis points at its December meeting was a positive step, but it would add only INR 1.16 trillion into the economy. Considering the size of the Indian economy, the effect of the cut in CRR would be miniscule, he said.

 

VALUATION PROBLEM
For 2025, he said the selling pressure from foreign investors may not ease soon if yields in the US remain high, especially at a time when valuations are high after strong returns in five years. The rise in US bond yields after Donald Trump was elected president poses a risk that outflows from the Indian market may continue, he said. Foreign portfolio investors sold Indian equities worth nearly $13 billion in October and November, which means the net investments of FPIs so far this year in Indian equities are only $1.6 billion till Friday, compared to $24.10 billion in the entire previous year.

"Why would FIIs come back to India if they are getting almost 5% safe yield in the US, and they are also losing on exchange rate with (the) rupee almost crossing 85 (a dollar)," Bokade said. Since the beginning of October, when markets started falling in India, the yield on the 10-year bond in the US has increased over 70 bps to settle at 4.52% Friday. During the same time, the rupee has depreciated 1.8% to 85.27 per dollar.

Gains have been much higher in the broader market. The Nifty Smallcap 250 index has risen 26% so far this year after gaining 48% in 2023, while the Nifty Midcap 150 has given returns of 23% this year after gaining nearly 47% last year. Such a steep rise has made several analysts cautious of small-caps and mid-caps and Bokade too echoed a similar concern.

"There is no denying the fact that there is a lot of froth in small-cap and valuation is extremely high. Many companies are trading at around 80-100 PE, which was unthinkable in the past," Bokade said. Considering these high valuations, Bokade expects broader market indices to consolidate for some time. He raised some concerns that flows from retail investors might come down if the market does not rise for some time. "...If they (retail investors) see returns not that high compared to FD (fixed deposit) rates, then probably flows should start tapering out," he said. 

Despite expectations of modest returns, he sees opportunities in companies that are doing niche business and in sectors with low competition. He is bullish on power transmission and distribution companies as they are expected to gain from the government's plan to make large investments in the coming years. Further, he expects some turnaround in cement companies once they start getting orders in the second half of this financial year, which were deferred in the first half.

Higher capital expenditure by the government is likely to benefit banks, which are available at much better valuations, he said. "...when the government starts doing capex, the money will flow to the people and the demand for credit will increase...," he said. In the financial sector, he expects non-banking financial companies to benefit once the RBI begins to cut interest rates.

Among others, he expects fast-moving consumer goods companies to take more time to show earnings growth. Both urban and rural demand have been hit as income levels have not grown in tandem with inflation, he said. Bokade pointed out that FMCG companies have struggled to increase their volumes by even 1-2?spite India's economy growing at a much higher pace.

 

Globally, he said a shift in power is underway as China is a risk to the dominance of the US in the global economy. He acknowledged that China's economy is slowing down but pointed to superior innovations being carried out in the country, along with several investments by China across the globe, which are likely to benefit the country in the coming decade. 

 

"China's economy is slowing and there is a problem in real estate...but in other industries, there is a lot of innovation happening in China. Now, Trump can impose lot of duties on China, but they have started manufacturing in Europe, Hungary, Poland," he said. "If Trump is not there (in the US), it is a matter of time for most Chinese companies to capture US market as well."  End

 

US$1 = INR 85.49

 

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Edited by Avishek Dutta

 

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