After first half of FY24 earnings and expectations for second half of FY24, "achieving FY25 earnings estimates itself will be tough, beating it would rather be a herculean task," Unmesh Sharma - Executive VP, Head Institutional Equities at HDFC Securities says in an interview to Moneycontrol.
Combining rich valuations and uncertainty about earnings growth in FY25, he is of the view that Nifty gains in FY25 will be muted. Geopolitical tensions and brent crude prices remain major risk factors, he says.
On the stocks front, Unmesh with over 18 years of experience in the field of capital markets believes Federal bank, Sobha and BSE are few stocks which offer promise of steady appreciation from current levels.
Q: Is the September quarter earnings season in line with estimates or slightly better than estimates?
Q2FY24 earnings season so far has been in line except OMCs (oil marketing companies) surprising positively on the back of robust refining and marketing margins. This has led to slight upgrades at aggregate levels for FY24 earnings but FY25 earnings remain unchanged. Aggregate earnings growth has been majorly driven by auto and banking sectors in Q2FY24, as per expectations.
Q: After reading first half of FY24 earnings, what is your outlook for second half of FY24? Also have you changed the full year earnings estimates?
H1FY24 earnings of the companies have got benefits of margin expansion and hence YoY earnings growth has been impressive. We believe margin expansion benefits will tend to taper down here on. So, although margin benefits will continue to exist in H2FY24 as well, the extent of benefits will be less pronounced.
As a result, YoY earnings growth in H2FY24 will be lower (around 12-15 percent) in comparison to H1FY24 (>25 percent) as higher base catches up.
Q: Do you think it is the time to increase exposure to new age stocks especially after reading quarterly numbers?
As per HSIE investing philosophy, we stick with stocks which offer value and earnings delivery and stay away from names with lofty valuations and opaque earnings visibility. Accordingly, we didn’t include new age companies in our model portfolio so far, and that has turned out to be a judicious decision.
We believe, this is commendable that new age companies are focussing on profitability as well and not only on growth. Market has proportionately rewarded their stocks as we have seen them appreciating in recent past. This appreciation must be seen in the backdrop of elevated global interest rates and “higher for longer” stance of US Fed.
We are of the view that as global money isn’t cheap anymore, hence valuation of new age companies which are dependent on global flows for growth will remain capped.
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Hence, one must be selective in stock picking in this space and follow strict bottom-up approach to choose only those names which have long term revenue visibility, healthy unit economics, business moat and lower dependence on external money for growth.
Q: What are your three strong stock bets and why?
We believe Federal bank, Sobha and BSE are few stocks which offer promise of steady appreciation from current levels.
We like Federal Bank due to its best-in-class granular deposit franchise, accelerating growth in high yielding products and scaled up Fintech partnerships gearing it to deliver stronger loan growth and healthy RoA (return on assets). At current valuation of 1X FY26 P/ABV, it offers meaningful upside to long term investors.
Sobha has reinvented itself with a clear focus on business growth. A renewed focus on new launches, deleveraging, and profitability augurs well for the company. Valuation of this stock is very supportive given it has underperformed in past and market is yet to assign it its due multiple, given expected growth. It is trading at a discount to long term averages and to its peers. With strong pre-sales growth of recent quarter validating business focus of the company, we believe stock offers decent upside.
In our view, BSE is at an inflection point as it rediscovers itself through its aggressive growth in the derivatives market. BSE is well-placed to get a share of the large options market in India, powered by the new generation of option traders. Launch of new option products have received excellent responses from traders and brokers. Consistent gain in derivative market share and ability to increase price without impacting volume of trades will drive earnings growth. Rapid development of option market in India will enable growth trajectory.
Q: Do you see a slowdown in consumption space?
Consumption space has been witnessing muted volume growth in last several quarters as rural demand is yet to pick up meaningfully. However, companies in this sector have got benefits of margin expansion as commodity prices have corrected in recent quarters.
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In our view, margin expansion has peaked and not much of additional expansion are expected. Given sporadic monsoon this year, topping profitability and rural demand awaiting any significant recovery, consumption space will face headwinds, but it can’t be termed as a slowdown as volumes are holding up. Accordingly, we are underweight consumption and have placed our bets in selected pockets such as premium alcoholic beverages.
Q: Do you expect the IT numbers to remain weak for second half of FY24 given the global economic environment especially in Europe and US?
Given macro uncertainty in western countries and “higher for longer” stance of US Fed on interest rates making money decisively expensive will keep demand environment subdued in H2FY24. Also, as large IT companies have toned down their revenue guidance for FY24, we believe IT sector performance will remain weak in H2FY24 on the back of revenue leakage, downsizing of deals and focus of clients on cost optimisation.
As multi-year deal signings are still very strong, we are of the view that revenue growth will be shifted to later quarters of FY25 at expense of slower short-term executions. Hence, we are marginally underweight on IT services and play this sector through market infrastructure stocks.
Q: Do you expect Samvat 2080 to be much better than Samvat 2079 for the equity markets as the Nifty gained 10 percent in current Samvat? Any major risk factors?
Nifty is currently trading at a rich valuation of 18.2XFY25E, which leaves little room for any valuation expansion, hence any upside, if at all, must come led by earning surprises. Additionally, we believe that margin expansion story for companies driven by commodity cost decline is largely over, and incremental earnings growth levers are limited.
In view of this, achieving FY25 earnings estimates itself will be tough, beating it would rather be a herculean task. So, combining rich valuations and uncertainty about earnings growth in FY25, we are of the view that Nifty gains in FY25 will be muted. Geopolitical tensions and brent crude prices remain major risk factors.
Q: Do you expect the current government to continue at the Centre, in the general elections 2024?
We will refrain from answering this question given its political bent.
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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