Saion Mukherjee, Head of India Equity Research at Nomura, states in an interview with Moneycontrol that the primary concern for earnings estimates in FY24 and FY25 arises from a potential deceleration in overall economic growth, given that profitability indicators in most sectors are currently at high levels.
A growth slowdown later in FY24 can present a 5-15 percent risk to FY25 earnings, he feels.
Nomura is of the view that select NBFCs have outperformed the market YTD, in the expectation of peaking of the rate cycle. "We think the expectation of a reduction in funding cost for NBFC may be overdone and there are potential risks to a cyclical slowdown. We prefer banks over NBFCs," says Saion.
However, he is negative on discretionary consumption. Segments like Autos have outperformed the broader market YTD. There is downside risk to earnings due to a potential demand weakness and valuations are at a significant premium to pre-pandemic levels, he believes.
Q: Are we entering into broad-based rally or is the equity market looking overvalued after the recent sharp rally?
India market is currently valued at 18.7x one year forward earnings. The valuations are towards the higher end of the historical range of 14-19x. We don’t think the market is excessively valued as of October 2021. The market has gone through a period of consolidation since then. The market valuation is supported by a strong recovery in corporate earnings, improved macros and sticky domestic flows in our view.
Banks and corporate India have strong balance sheets, the external balance looks reasonable with a cooling down of commodity prices and a rise in services exports. The domestic flows have surprised us positively and remained robust despite a long period of weak market returns and rising interest rates particularly on the back of rising and sticky SIP flows.
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We argue for Indian markets to trade towards the higher end of the historical range at ~17-19x one-year forward earnings. Our bull and bear case Nifty target for March 2024 is 22,080 and 16,792, and we are exactly in the middle of this range. We are thus Neutral on India from AEJ's perspective and have a selective bottom-up approach.
Q: Your take on corporate earnings?
We think the corporate commentary on earnings so far is comforting. Mostly the consumer and financial companies have provided an assessment of the quarter. In consumers, the companies are witnessing a gradual recovery in rural demand. Though price increases are no longer a lever for margin expansion and sales/promotion/advertisement spends are on the rise, the EBITDA margin is still likely to record improvement supported by a fall in raw material prices.
In financials, we are seeing strong growth in credit growth across most companies. The outlook on credit cost remain sanguine and we are not expecting a material negative surprise on NIM (net interest margin).
Q: Do you see major earnings upgrade after Q1FY24?
We expect Q1FY24 to be positive primarily for domestic-oriented sectors. Financials and Oil & Gas which contribute the most to aggregate corporate earnings, are likely to report strong earnings in Q1FY24. For FY23, these two sectors contribute ~50 percent to Nifty100 aggregate earnings.
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For Banks on the back of ~20 percent+ core PPOP (pre-provision operating profit) growth YoY, we are forecasting 62 percent earnings growth YoY for our coverage universe with most banks recording strong double-digit earnings growth.
In Oil and gas space, oil marketing companies are likely to witness strong earnings due to high marketing margins. We also expect strong double-digit earnings growth YoY for commodity-consuming sectors.
Currently, the street is expecting ~20 percent earnings growth in FY24 and 15 percent growth in FY25. The key risk to earnings estimates is primarily from slowdown in broader economic growth as profitability metrics across most sectors are already at elevated levels. A growth slowdown later in FY24, can present 5-15 percent risk to FY25 earnings.
Q: Do you expect 25 bps hike in fed funds rate in July policy meeting? Also do you expect inflation at 2 percent in coming months?
The recent inflation print in the US is comforting. Our US economics team believes that a disinflation process has started. We are forecasting a last 25bps increase in the policy rate in July 2023.
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We expect the US headline CPI to remain ~3 percent in the rest of 2023 and move towards 2 percent in 2024. We are not forecasting inflation print to go below 2 percent in 2024. Nonetheless, moderation in the growth rate towards the end of 2023 and a downward trend in inflation shall lead to rate cuts in early 2024 as per our US economics team.
Q: Do you see US entering into recession towards end of this calendar year? Also, will it be minor or major?
At present, we are forecasting a mild recession in the US towards the end of 2023. The GDP growth is likely to be negative over Q3 2023- Q1 2024 as per our US economics team.
Q: Your take on the consumption and financials sectors?
We are positive on the financials sector. We think the earnings visibility is strong and valuations are not demanding. Bank earnings can surprise on the upside, with strong NIM and asset quality. Downside risk to earnings from a cyclical downturn is limited in our view.
Indian banks are very well-placed to capitalise on broader economic growth with banking system NPLs (non-performing loans) at the lowest levels in 7 years (with all-time high provision coverage), and bank capitalisation levels & sector RoAs (return on assets) at all-time highs.
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Select NBFCs have outperformed the market YTD, in the expectation of peaking of the rate cycle in our view. We think the expectation of a reduction in funding cost for NBFC may be overdone and there are potential risks to a cyclical slowdown. We prefer banks over NBFCs.
On consumption, we are negative on discretionary consumption. Segments like Autos have outperformed the broader market YTD. There is downside risk to earnings due to a potential demand weakness and valuations are at a significant premium to pre-pandemic levels.
We are selectively positive on consumer staples where we expect demand outlook to remain stable with possible recovery in rural demand, support to earnings from a fall in input costs and valuations close to pre-COVID levels.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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