Daily Voice | HDFC Securities Varun Lohchab sees a maximum 5% upside to Nifty

The Nifty 50 is currently trading at 20.5x FY25E, which is noticeably higher than average valuation at which the index has been trading historically. This is assuming 16 percent YoY earnings growth in FY25 (HSIE view: 12.5 percent YoY), which has downside risks in our view.

Hence, we believe equity market has already discounted future stability in policies to some extent, which leaves little room for the index to rise further. We may witness an appreciation of around 5 percent from current levels in extreme scenario but beyond that, it would be difficult to sustain.

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Do you expect the RBI to give cues to interest rate cuts plan in today's policy meeting? What do you expect from the governor's commentary?

In our opinion, the RBI will start reducing rates from the second quarter of FY25 after having observed and analysed domestic inflation and global interest rates trajectories.

Which are your top bets after the budget?

As this was an interim budget and policy stance largely remained unchanged, the government's focus continues to be investment-led growth rather than a consumption-led one. Although capex announcements under various ministries were healthy, the quantum of overall capex amount was lower than expected.

Hence, our sector picks post-budget remained the same — industrial, infrastructure and power. Having mentioned this, while picking individual stocks in these sectors, one needs to be mindful of their valuations, as many stocks in these sectors have run ahead of their fundamentals.

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Do you think 2024 will be another strong year for the PSU space?

After a fabulous rally in PSU stocks in 2023, this space is not very inexpensive anymore collectively, so basket investing in this space will not fetch any superior return in 2024.

One needs to carry out bottom-up stock picking in this category hereon, as there are still few stocks which are trading at cheaper valuations while rest are at their fair valuations. Hence in 2024, we will witness stock-specific rallies in PSU space.

Do you expect the government to go for more divestments in the upcoming financial year?

As the government has a steep fiscal deficit target ahead in FY25 (5.1 percent of GDP), any divestment would be of immense importance. It has set itself a divestment target of Rs 50,000 crore for FY25. Having mentioned this, it is worth noting that government revised its FY24 target to Rs 30,000 crore from Rs 51,000 crore estimated earlier due to delay in executions of earlier planned divestments of IDBI Bank, Pawan Hans and Shipping Corporation of India.

Except FY18 and FY19, divestment receipts in the last eight years have fallen short of budget estimates. In light of the above, we believe, FY25 would be a muted year with respect to the execution of the divestments.

Do you see any major threat to equity markets in FY25?

In FY24, Corporate India witnessed margins improvement-led earnings growth. We believe the commodity deflation-led margin expansion story is largely over and hereon, any earnings growth has to be demand-led. At the same time, we observe that urban demand has normalised after registering a magnificent growth post-Covid, while rural demand continues to be muted.

Hence, the demand environment will be a crucial factor to monitor hereon. In addition, if global inflation were to resurge led by commodity demand supply dislocations, it could delay global and domestic rate-cut cycle by a few quarters. So, the domestic demand environment and global inflation are two major threats to equity markets in FY25.

What is your reading of the corporate earnings?

Corporate earnings, so far, have been in line. So far, earnings at aggregate level grew YoY at a healthy mid-teen rate contributed mainly by energy, auto and cement sectors. This was broadly as per expectations.

Do you expect the March quarter earnings to be better than those of the December quarter?

Q4FY23 had witnessed the benefits of commodity deflation-led margin expansion which resulted in higher earnings for the quarter. That will act as a higher hurdle for Q4FY24 earnings. Hence, due to the higher base of Q4FY23, we expect March quarter YoY earnings growth to be a tad softer than those of December quarter in FY24.

Will the the Fed cut rates only in the second half of 2024?

The US central bank in its recent policy meet indicated that “the committee is unlikely to reach a level of confidence on inflation by March meeting”. This was a major pushback against expectation of a rate cut in March. However, the Fed remained confident about elevated interest rates gradually pushing inflation and employment nos. into a comfortable zone.

So, overall, we expect the rate-cut cycle to kick off in June/July policy this year. Additionally, quantum of rate cuts is expected to be 75-100 bps in total for 2024, lower than earlier market expectations of 125-150 bps.

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