Daily Voice: Axis Sec's Neeraj Chadawar sees limited scope of earning downgrades in these 4 stocks

The paint sector is reeling with increased competition from new players (Birla Opus) and like other consumer companies, it is seeing slowdown in urban India. Typically, when there is slow down in consumer demand it takes time to see a recovery, there will be festive and wedding boost in H2, but given H1 was tepid the overall performance for the year FY25 is likely to remain lacklustre.

Do you still see the market correcting further from here on?

Key Monitorables in H2FY25: Two major global event 1. The outcome of US election 2. November’24 FOMC meeting) are now behind us. The markets have returned their focus to fundamentals, particularly corporate earnings. The Q2 earnings season delivered relatively muted results, with choppy price reactions observed throughout the quarter. Currently, all eyes are on the expected earnings recovery in the second half of FY25, driven by anticipated increases in government capital expenditure (CAPEX), post-monsoon activities, numerous wedding days, and a pickup in rural economic activity.

As we look ahead, it’s important for the market to closely monitor several developments. These include the results of the upcoming state elections, potential policy changes in the US market, signs of revival in the Chinese economy, the direction of US 10-year bond yields, oil prices, and market flows. These events are expected to keep the Indian equity market volatile and it could respond in either direction based on the developments.

In the near term, some allocation is likely to shift towards China based on the recent development. Nonetheless, we continue to believe in the long-term growth story of the Indian equity market. With increasing Capex enabling banks to improve credit growth, we believe it is well-supported by a favourable structure emerging. However, with current valuations offering limited scope for further expansion, an increase in corporate earnings will be the primary driver of the market returns moving forward. Hence, bottom-up stock picking with a focus on ‘growth at a reasonable price’ and ‘Quality’ would be keys to generating satisfactory returns in the next one year.

Do you think the RBI will start cutting interest rates only February onwards?

October 2024 inflation print is higher-than-expected where the food inflation was the biggest spoiler. Now all eyes on the December 2024 MPC meeting where the GDP forecast for FY25 remains critical. Given the recent development in the US market and higher-than-expected inflation print in the domestic market, the possibility of rate cut in the domestic market has pushed to February onwards.

Do you expect consumer spending to improve significantly in second half of FY25?

We are cautious about the potential improvement in consumer spending for the second half of the year. While rural areas are gradually recovering, urban areas are starting to experience a slowdown. Although there may be a slight boost in spending due to the festive season and weddings, it is unlikely to significantly impact overall earnings for FY25. The main factors contributing to the urban slowdown include high food inflation, decreased savings, rising rental costs, and increased EMI payments, which are straining budgets. Additionally, there is heightened competition from new-age companies primarily targeting urban markets.

Have you started buying in the consumer space?

In the current context we prefer the following companies in consumer space – Ethos in the luxury segment, Trent in fast fashion business, Varun Beverages based on geographical expansion and DOMS industries as niche stationary consumption play. In all these counters we see limited scope of earning downgrades.

Do you think the full year earnings estimates cut may not be significant, though September quarter numbers were weak?

Some earnings moderation was seen during the ongoing earnings season which was slightly below the expected line. Based on the 45 Nifty companies result, our FY25 Nifty earnings see the downgrade of 1.5 percent to Rs 1,065 level. Now we foresee 7-8 percent earnings growth for FY25. The recovery is expected in the second half of the current financial year as compared to the first half.

Which sectors are looking really attractive to buy now?

Largecap private banks, telecom, selected consumption, IT, and pharma provide more margin of safety in the near term.

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