Daily Voice | Positive on consumption space, rural demand likely to pick up this year, says Anand Rathi

Anand Rathi of Anand Rathi Group

Anand Rathi, chairman of the eponymous financial services firm, expects FY24 to be the year of small and mid-cap companies, which, he says, will record better earnings performance than the big boys, the largecaps.

Despite a possible slowdown of GDP growth in FY24 from the previous year, the corporate performance would be better, says Rathi, who has spent more than 53 years in the heat and dust of the market. "Despite the possibility of slower income growth, we expect consumer demand to turn around, maybe at the cost of lower saving rate."

The veteran, who set up the AnandRathi group in 1994, also expects a better year on the rural demand front, which has been a concern. The rural demand has bottomed out and could be better than it was in the last fiscal, he says. Edited excerpts of an interview:

Which are the sectors that will see no major stress in the coming quarters and are better for investment?

While we expect modest volume growth deceleration for the listed corporate sector during the current financial year, we do not see major stress building up in any of the sectors. In the last couple of years, the investment-oriented sectors have outperformed the consumption-oriented sectors.

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Anand Rathi

Founder & Chairman|Anand Rathi Group

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While we remain positive on investment-oriented sectors from a medium-term perspective, a higher cost of funds, lack of traction in corporate investment and a slowdown of global demand are factors which can result in near-term underperformance of these sectors.

At the same time, despite the possibility of slower income growth, we expect consumer demand to turn around, maybe at the cost of a lower saving rate. In particular, we think the rural demand has bottomed out and may record better growth in the current financial year over the last financial year. So, we are more positive on the consumption-oriented sectors.

Despite the significant improvement in India's external current account position, we see continued challenges for the export-oriented sectors due to a slowdown in global demand, rising protectionism among India's trade partners and elevated geopolitical uncertainties. Consequently, we prefer domestic demand-oriented sectors versus export-oriented sectors.

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Do you expect better growth numbers for FY24 than FY23?

The growth rates for FY23 as well as Q4FY23 were better than expected. We have also noticed an upward revision of India’s growth expectation for FY24 by certain agencies. We expect India's GDP growth for FY24 to be 6.2 percent, which would be 100 bps lower than the growth rate registered during FY23.

While it is possible that the growth rate for FY24 will be better than what is currently expected but we do not see the rate surpassing the growth rate for FY23.

Your earnings growth expectations for FY24 after reading FY23 numbers?

Corporate earnings growth for FY23 has been worse than what was expected before the start of the year. At the same time, the main disappointment came during the quarter ending December 2022 and in some sense the results for March 2023 have been better than expected for several corporates.

Perhaps more importantly, the earnings disappointments were mainly limited to a few sectors, including global cyclicals such as iron and steel, non-ferrous metals and oil and gas.

Earnings of the healthcare sector were also disappointing. At the company- level, there were also a few disappointments some of which were due to corporate actions such as mergers and acquisitions. Beyond these sectors, the earnings performance of most sectors in FY23 was in line with expectations.

Currently, the consensus is expecting 15-20 percent earnings growth during FY24 for the bellwether large-cap indices. The expectation is that mid and small-cap indices would record better earnings performance as compared to the largecap indices. Therefore, despite the possible slowdown of GDP growth in FY24 versus FY23, the expectation is that corporate performance during FY24 would be better than FY23. Our expectations are broadly similar to the consensus expectation.

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Do you think the market has bottomed out and is ready for the next leg of the bull run?

Despite considerable volatility, it is important to notice that the Nifty50 made a new high in the middle of October 2021 and after that until November 2022, no new high was made. Once again, after making a new high in early December 2022, the market remained largely in the corrective mode. Consequently, since the middle of October 2021, the market has effectively been flat with significant volatility.

At the same time, both macroeconomic and corporate fundamentals for Indian companies have improved in the recent past. Domestic liquidity flow towards the equity market continues to remain buoyant. After turning hugely negative during 2022, the cross-border portfolio investment flows have turned positive again during the current financial year.

Despite the significant rally since the start of the current financial year, the valuation multiples for most bellwether indices remain lower than the average during the last five years and only marginally higher than the long -term averages. Therefore, while the Indian equity market does not look extremely cheap, the valuations are not highly overstretched either.

In view of the fact that the Indian equity market has been in the consolidation zone for nearly two years, all three medium-term drivers of the equity market — fundamentals, liquidity and valuations – are reasonable, we do see a strong possibility of a rally in the Indian equity market from a medium-term perspective. However, given the strength of the recent rally and the generally volatile nature of the equity market, a modest correction in the near term cannot be ruled out.

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Do you expect a surprise in the upcoming RBI policy review?

On the policy front, we expect the RBI to maintain the rate pause during the policy. With the growth forecast of the RBI for FY24 being higher than the consensus, we do not expect any further revision in the GDP forecast during the policy announcement despite the fact that the growth rate for FY23 has been better than expected. The RBI, however, can scale down the inflation forecast for FY24.

While formally the RBI has not changed the policy stance from liquidity withdrawal and tightening to the neutral zone, effectively with rate pause, the RBI has moved from tightening to the neutral zone. Also, the extent of surplus in systemic liquidity has come down significantly despite certain shorter term factors boosting liquidity in the recent past. Therefore, the compulsion for the RBI to withdraw liquidity has come down. In view of the above, the RBI changing the policy stance from tightening to neutral during the next policy meet cannot be ruled out.

Do you expect rural demand to pick up during the remaining months of 2023? 

Corporate commentaries, while announcing the results for the quarter ending March 2023, seemed to suggest that the worst of the rural demand is already over and there are some signs of green shoots. Broad macroeconomic indicators, including the demand for consumer staples doing better than durables and pick up in two-wheeler demand, also seem to suggest the same.

Consequently, we do believe that the rural demand would do better in FY24 versus FY23.

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