Daily Voice | Why this fund manager sees banks, NBFCs contributing to incremental earnings

We are optimistic about both the segments, however, our analysis shows that typically in the early stages of an expanding capex cycle since NBFCs have a quick turnaround time, quality names with healthy balance sheets benefit.

In the later stages, banks tend to benefit, however, since we were in a rising interest rate scenario bank’s have also been posting healthy results and have been a primary contributor to incremental earnings since FY23.

Considering we are in the festive season and entering election period in 2024 we expect both banks and NBFCs will continue to contribute to incremental earnings going ahead. While growth momentum is expected to continue, we expect margins to compress for both as cost of funding rises.

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Do you expect normalisation of credit cycle in FY25?

The banking space sees robust credit growth momentum, driven by continued traction in the retail and SME segments. The management of banks have also been upbeat about the growth momentum.

The banking sector’s capital buffers have firmed up, and asset quality has remained healthy. We believe the capex push by governments and corporates will likely see the robust trend in credit cycle to continue in FY25.

Do you think most of positives have been priced in by the capital goods space or robust returns are yet to be seen?

We are structurally positive on the sector from the medium to long term on the back of ongoing capex cycle and healthy order inflows. Demand has been robust, and managements are upbeat about the earnings growth in H2FY24, so we expect the sector to contribute in earnings growth.

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Do you think the elections would make the market more volatile?

The elections may induce volatility as investors are watchful of the outcome. Typically, a stable government reassures market participants, leading to positive market reactions. While an uncertain outcome may result in increased volatility.

Historically in the past five elections, the largecap index Nifty has trended upwards in the run-up to a general election. The index moved higher in the six months before the elections, with an average return being more than 15 percent.

As the corporate earnings season gets over this week, have you spotted any surprise factor? Also, what is your view on the earnings and have you changed your outlook for 2HFY24?

Earnings in Q2 have been broadly in line with domestic cyclicals continue to outperform. BFSI and auto remain key contributors to the earnings growth. IT services posted a weak performance with cut in revenue guidance in FY24 due to weak macro environment.

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The banking sector continued to witness robust loan growth and steady asset quality. The auto sector surprised on the margins side largely driven by lower commodity costs, better product mix, and operating leverage.

Do you expect the current festive season to be very strong for the corporate earnings season of Q3FY24?

Q3FY24 will likely see robust growth in consumer expenditure and earnings to be skewed due to delay in festive season. We expect BFSI, Auto & Auto-Ancillaries and Industrial capital goods to continue its momentum.

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