Daily Voice: Ladderup's Raghvendra Nath bullish on HFCs, does not expect any significant improvement in overall Q2 earnings growth over Q1

Yes, there is a very high probability that the Federal Reserve will initiate rate cuts during the September meeting, as indicated by the Fed Chairman in his latest public statements and at the Jackson Hole meeting. The latest inflation figures for August, which stand at 2.5 percent, suggest a moderation of inflation, bringing it closer to the Fed’s target of 2 percent. Additionally, growth and unemployment data support this trend. The only uncertainty lies in the size of the rate cut—whether the Fed will proceed with a 25 basis point (bps) or a 50 bps reduction. We believe that a 25 bps rate cut is more likely.

Do you see better earnings growth in Q2FY25 over Q1FY25?

Earnings for the Nifty 50 grew by 4 percent year-on-year (YoY) in Q1, marking the lowest growth since June 2020. Excluding oil marketing companies (OMCs), Nifty earnings increased by 9 percent. The automobile, banking, financial services, and insurance (BFSI), and healthcare sectors contributed to this growth in Q1.

We do not anticipate any significant improvement in Q2 earnings growth compared to Q1, as there have been no substantial changes indicating that overall earnings growth will improve sequentially. In fact, we expect earnings growth to align with topline growth, as no further moderation or decline in input prices is anticipated. Given the high valuations in the market, any disappointment on the earnings front may lead to corrections in certain segments.

What is your take on the falling oil prices?

Oil prices have fallen significantly, reaching around $70 per barrel, primarily due to a slowdown in economic growth worldwide. A notable contributor to this decline is the slowing economic activity in China, the largest importer of oil. In its recent meeting, OPEC+ reduced its forecast for global oil demand and postponed its plans to end the production cuts that have been in place since 2022.

The organization now expects global oil demand to rise by 2.03 million barrels per day (bpd) in 2024, down from its previous estimate of 2.11 million bpd. This downward revision reflects ongoing economic challenges, particularly in China, which has significantly impacted oil consumption. OPEC+ is facing challenges in balancing the market as it reassesses demand amid these economic headwinds.

Do you see better growth in housing finance space? Are you bullish on the space?

Yes, we are bullish on this sector, which has strong tailwinds in the form of robust housing demand, regulatory support, and significant investor interest. India faces a substantial housing shortage, particularly in the lower-income segment. Additionally, growing urbanization and government initiatives, such as the Pradhan Mantri Awas Yojana, are providing subsidies and incentives that boost demand. The housing finance market has grown at a healthy rate of 13 percent from FY19 to FY23, reaching Rs 29 lakh crore. Investor interest in this space is also very strong, as evidenced by the recent Bajaj Housing Finance IPO, which received bids totaling Rs 3.24 lakh crore against an offer of Rs 6,560 crore.

Are you accumulating PSUs across segments?

Currently, we have no exposure to the Public Sector Undertakings (PSUs) category due to the significant run-up and price appreciation in this sector. Over the past five years, the BSE PSU Index has delivered a remarkable return of 234 percent, with approximately 80 percent of that return occurring in the past year alone. However, sustaining this growth momentum may prove challenging, as recent earnings reports from some of these companies have fallen short of market expectations. Consequently, we are not inclined to increase our exposure to this segment. Instead, we have been recommending that our clients book profits and trim their positions in PSUs.

Which are the sectors that boost your portfolio from here on?

Economic growth in India over the past couple of years has been strong, benefiting most sectors, and this broad-based growth is likely to continue over the next few years. Rural spending was previously curtailed due to unemployment and inadequate monsoons; however, we expect this demand to rebound amidst above-average monsoons this season, which should provide support to the FMCG and consumer durables sectors.

From a valuation perspective, we remain bullish on the financial sector, particularly some private sector banks. Looking ahead, we believe that high-quality, high-growth stocks will outperform, in contrast to micro-cap or undervalued low-quality stocks that delivered significant returns in the last 1-2 years.

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