As expected, the Q3 earnings season has been sluggish, with no major shocks or disappointments, said Shantanu Bhargava, Managing Director, Head of Listed Investment at Waterfield Advisors in an interview to Moneycontrol. "Corporates have reported a single digit profitability in Q3FY25."
According to him, the potential for enhanced corporate performance in FY26 depends on the speed of government expenditure and the timely implementation of the Rs 11.1 lakh crore budgeted capital expenditure, alongside the recovery in consumption discretionary spends following the recent consumption stimulus measure (income tax cut), announced in the budget.
Despite the anticipated increase in consumption that is expected to revitalize consumer discretionary sectors, Shantanu is maintaining a neutral positioning in portfolios due to the valuations in this space.
What could be the possible risk factors that may impact the growth numbers for FY26 and dampen the equity market sentiment that has changed recently?
Inflation remains a concern domestically, particularly due to the volatility of food prices influenced by income transfer schemes and unpredictable weather patterns. It may significantly impact overall economic stability. The success of sustained recovery is contingent upon effective management of inflation and the timely execution of planned capital investments.
Global factors such as trade tensions, high interest rates, and a potential slowdown in growth may impact our growth figures as well. Slowing growth and deflation in China may produce ripple effects on the global economy, potentially impacting other regions as well including ours. Fluctuations in currency and exchange rates can affect trade and investment flows, presenting a risk to growth.
Despite the presence of these risks, elements such as capital formation, robust government capital spending, and increased monetary easing by the RBI will contribute to the revival of credit growth and support India's economic growth.
These factors notwithstanding, equity market sentiment may be negatively affected by a moderation in trailing 12-month returns. Most retail investors tend to gain confidence to invest more after reviewing past performance, and the current single-digit trailing 12 month returns for Nifty 50 and the recent weakness in SMID space may not seem attractive to them compared to the substantial out-sized returns achieved over the past five years.
Do you expect double-digit earnings growth to return in the next couple of quarters?
As expected, the Q3 earnings season has been sluggish, with no major shocks or disappointments. Corporates have reported a single digit profitability in Q3FY25. The potential for enhanced corporate performance in FY26 depends on the speed of government expenditure and the timely implementation of the Rs 11.1 lakh crore budgeted capital expenditure, alongside the recovery in consumption discretionary spends following the recent consumption stimulus measure (income tax cut), announced in the budget.
Are you taking a bullish stance on the consumption sector after the measures taken by the government?
Urban consumption has been stagnant for some time, and the government's income tax cut was implemented to stimulate consumption revival. The reduction in income tax is expected to enhance consumer sentiment initially, subsequently leading to an increase in urban discretionary consumption, as approximately 1-1.5 crore taxpayers will experience a 4%-6% increase in disposable income. Additionally, the implementation of pay commissions next year will result in wage increases, contributing to further increase in consumer demand.
It is posited that within the consumption sector, particularly in consumer discretionary areas such as consumer durables, autos, quick service restaurants, and travel, there will be significant benefits, whereas consumer staples may experience limited advantages. Despite the anticipated increase in consumption that is expected to revitalize consumer discretionary sectors, we are maintaining a neutral positioning in portfolios due to the valuations in this space.
Most experts expect only one more rate cut of 25 bps in 2025, taking the final repo rate to 6%. Do you agree? And why would it not go beyond a 50 bps cut this year?
The RBI's rate cut supports the government's initiatives to revitalize the economy following a recent transitory slowdown in the past few months. The government has demonstrated prudence & responsibility in its budgetary allocation by maintaining its capital expenditure impulse of 3.1% of GDP, adhering to a fiscal consolidation trajectory of 4.4% of GDP, and providing essential support to consumption through tax moderation for middle-class taxpayers. Following a well-balanced budget, the government required the Reserve Bank of India to work in tandem to stimulate economic growth, and the RBI has responded by announcing a rate cut.
However, inflation targeting is a key focus for the RBI. Moving forward, it is anticipated that the RBI will adopt a data-driven approach and will await a sustainable reduction in inflation before proceeding with further rate cuts. Inflation persists at elevated levels, as indicated by the December 24 CPI print, and further rate reductions will depend on sustained moderation in CPI, trajectory of rupee (weakness may hold RBI back) and uncertainty over tariffs.
Is the growth forecast of 6.7% for FY26 achievable?
The growth forecast of 6.7% for FY26 seems achievable. The fiscal impulse by the government had dropped quite a bit in the first half of the current fiscal year, and with a rebound expected in H2 of FY25 & continuation of the fiscal impulse in FY26, we might see more economic activity coming our way. Even though credit growth had taken a bit of a dip in H1 of FY25, the Reserve Bank of India had rolled out some recent measures, like cutting the Cash Reserve Ratio and now the central bank has gone ahead with a rate cut to further boost liquidity and sentiment. These moves are expected to boost liquidity in the system, which could help kickstart credit expansion and support overall growth.
It looks like the housing sector is bouncing back as evidenced by latest data. This could give a nice boost to industries like steel and cement. Also, the expected capital spending cycle, along with recovery in consumer discretionary spending after the recent income tax cuts, opens chances for GDP growth. Inflation is still a worry, especially with food prices going up because of those income transfer schemes. It could really affect the overall economic stability. So, even though there are still some challenges out there, the mix of fiscal and credit measures, along with recoveries in different sectors and consumption, sets the stage for the economy to bounce back.
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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