"We don’t believe the IT sector is a strong buy now at an aggregate level and bottom up picked stocks will hold key for outperformance," Unmesh Sharma, the Head of Institutional Equities at HDFC Securities said in an interview to Moneycontrol.
He is of the view that Nifty IT index is fully valued leaving minimal room for any re-rating and hence returns would be in line with the delivered earnings.
Furthermore, HDFC Securities is relatively more bullish on consumer discretionary than staples. "Consumer durables have been reporting healthy growth numbers which are expected to sustain led by near term growth drivers," said Sharma with more than 20 years of experience in the capital markets.
Have you lowered your GDP forecast for the current financial year?
Q2FY25 GDP print came significantly below estimates at 5.4% YoY (HDFCB estimates 6.3%), led by lower manufacturing growth as well as a contraction in mining output. Further, urban consumption slowed down impacting GDP growth adversely. For H2FY25, we anticipate pick up in momentum driven by an expected increase in government spending and rural demand growth (led by strong agricultural performance in Rabi season). While we expect an improved economic performance in H2FY25, we have revised GDP growth forecast downwards for full year FY25 to 6.5% (from 6.8% previously), factoring in a subdued performance of Q2FY25. We see downside risk to these numbers on balance.
Are you bullish on the consumer discretionary sector? Is the staples sector to be avoided now?
We are relatively more bullish on consumer discretionary than staples. Consumer durables have been reporting healthy growth numbers which are expected to sustain led by near term growth drivers. Further, with a moderation in inflation, apparels and retail are expected to witness relatively better demand in future quarters than previous 12 months. Having mentioned this, it is imperative to consider valuations before picking a name for investing.
On the staples side, we observe that the rural consumption demand is gradually recovering led by healthy Kharif crops. It is expected to gain momentum with improved Rabi output as monsoon this year has been above long-term average and reservoir levels are strong adding to the optimism. So, we believe staple companies with rural salience will be benefitted. Additionally, FMCG companies with a winter season-oriented portfolio will have a better second half of the year led by intense winter, as per La Nina phenomenon. Hence, one should be selective in picking FMCG stocks.
Do you expect high single-digit growth in earnings in the second half of FY25, compared to flat or negative growth in the first half?
For HSIE coverage stocks, aggregate earnings declined by ~1.5% YoY in H1FY25. Furthermore, we estimate H2FY25 to deliver high single digit earnings growth (~8%) led by banks, power, pharma, and industrial/infra sectors. Government spending and rural consumption pick-up remain key monitorable.
Do you anticipate healthy earnings growth in the IT sector only in FY26? Is it a strong buy now?
We believe IT sector has shown early signs of revival in last couple of quarters as demand environment improved marginally led by BFSI segment. Deal value to revenue conversion has improved and deal leakages have reduced. Deal bookings were robust reflecting optimistic medium-term outlook of clients with a focus on AI, digital and cloud migration. In our view IT sector will register a high single-digit earnings growth in FY25 rising to mid-teens growth levels in FY26. Additionally, we opine that Nifty IT index is fully valued leaving minimal room for any re-rating and hence returns would be in line with the delivered earnings. So, we don’t believe the sector is a strong buy now at an aggregate level and bottom up picked stocks will hold key for outperformance.
Do you foresee the beginning of interest rate cuts by the RBI in the February or April meeting?
Consumer price Index (CPI) rose to a 14-month high of 6.2% in October 2024 from 5.49% in September 2024 crossing the upper limit of RBI’s inflation target band (i.e., 6%). This increase in inflation was led by higher food prices which rose to 10.9% (led by vegetables and edible oils). While inflation could moderate for November 2024 (data yet to be released) led by softening vegetable prices, we believe current inflation print closes the door for a rate cut in December policy. Further, a weaker-than-expected GDP data has increased the possibilities of a rate cut in February meeting of RBI. Hence, in our view RBI would wait for inflation to soften and come in the desired range before jumping on to kick start a rate cut cycle in February 2025.
Are you concerned about inflationary pressures that could delay the rate-cut cycle?
In our view, recent inflation data of October month (CPI: 6.2%) led by high vegetable and edible oil prices is playing its role of delaying rate cut cycle. Hence, we don’t expect a rate cut in December policy meeting. RBI would be more comfortable in starting rate cut cycle when inflation is within its targeted range (with an upper cap of 6%). With Kharif crops harvesting in November/December 2024, we expect food inflation to moderate from October peak. Weaker than GDP data for Q2FY25 and expected moderation in inflationary pressures would make way for a rate cut in February policy meeting of RBI.
Will the market find it difficult to reach fresh highs in the rest of FY25?
During Q2FY25 earnings season, we have witnessed a downgrade in aggregate earnings for FY25 (~2.3%) and estimate for FY25 growth for coverage stocks now stands at a subdued 3.7%. Hereon, we believe banks and rural consumption pickup may lead to some downside support to aggregate earnings. However, there is not much material upside risk to aggregate earnings except from government spend and maybe some rural uptick. Nifty 50 index currently trades at 20.2x FY26E leaving limited upside potential. Hence, in our opinion while markets won’t fall off a cliff but will be earnings driven. So, one should expect a rangebound market and generating returns without relying on bottom-up stock picking would be tough.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.
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