Daily Voice | This fund manager predicts Q2 earnings to be similar to Q1, but focus to be on H2 outlook

Do you see a lot of value in small-caps relative to large or mid-caps?

We continue to see opportunities in smallcaps. Aggregate valuations for smallcap index are in line with the last five years’ average which indicates that there are no broad-based bubbles in the market. Smallcap continues to be a bottom-up story where the central objective is to spot future champions.

Smallcap remains the best way to play sunrise sectors which are small now but would become large in the coming days, as these sectors are unlikely to be well represented in largecaps or midcaps.

Factors like formalisation of economy and manufacturing renaissance through production linked incentives (PLI) is conducive to the growth of smaller companies. Lastly, increasing number of stock market participants is also vetting the appetite for smaller companies leading to new listings and widening the market base for small cap universe.

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Do you expect the trend of more upgrades than downgrades in earnings to continue in the rest of the financial year?

After Q1 results (June ending), we had seen earnings upgrade of 2-3 percent for Nifty and BSE500 companies at aggregate levels. This was largely driven by EBITDA (earnings before interest, tax, depreciation and amortisation) margin expansion as benefit of lower commodity costs came through.

A key positive for Q2 and possibly for Q3 is the low base, as earnings last year was impacted by high inflation levels. Consequently, earnings are likely to grow at 19-20 percent for Nifty50 during Q2 as well. However recent rally in crude prices is a cause of worry and we will have to see how sticky inflation would be for the rest of the year.

What would be the focus area in the September quarter earnings?

The Q2FY24 is expected to be like Q1FY24 but the focus area will be outlook for the second half which has couple of big events lined up. The management outlook on demand going into festivals will be watched out for, coupled with the impact on margins with rising raw material prices this quarter.

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The pick-up in demand for certain sectors like personal care, food and beverages, and automobiles in the festive season will be a key monitorable which, we believe, could help deliver strong numbers for the Q3. On the other hand, higher global commodity prices are expected to put pressure on margins going ahead.

Do you see the possibility of more earnings downgrades in the IT space?

IT companies reported subdued earnings growth in Q1, especially by largecap companies. Q2 is seasonally a strong quarter, however, considering the global macro headwinds, expectations are low for the quarter.

Good part is the strong order announcement by Tier 1 vendors during the quarter which could help build revenue visibility for 2H FY24 and beyond. Consequently, we expect earnings to improve albeit moderately from here on leading to a better FY25 versus FY24.

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Do you expect the possibility of more corrections in equity markets in the short term, given the current global environment?

In the current global environment, we believe the western world is largely at the concluding phase of its rate tightening cycle though there is a widespread expectation among market participants that interest rates would remain stronger for longer.

In our view, though this may have a tampering effect on markets, it is unlikely to lead to a major correction. The recent flare-ups in hostilities between the Hamas and Israel seem to have little direct implications for global equities. However, an escalation in the region involving wider nation states like Syria, Jordan and, most importantly, Iran could mean a spike in crude prices. This can potentially disrupt the equity rally seen after Covid as supply disruptions on crude could lead to a spike in prices which could temporarily cause pullbacks in global growth.

At this level, there are no data points to suggest a wider escalation in the region, especially since the US has firmly rallied behind Israel, condemning the Hamas attacks and promising on-ground support through intelligence and hardware to thwart Hamas activities. The situation would require closer monitoring.

What is your view on the RBI monetary policy?

The RBI in its monetary policy has reiterated time and again about 4 percent inflation target. Further, they are committed towards price stability and anchoring of inflation expectation. RBI seems to be comfortable in terms of activity and growth in domestic economy. They are also very watchful of external events and volatile commodity prices.

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Hence, with above mentioned factors, we believe tight monetary policy stance should continue for longer than anticipated earlier. Hence, we are in for “higher for longer” interest rate regime. We believe RBI would give more weightage to external factors in terms of taking any decision on rates as situation is more volatile and uncertain in global context.

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