September quarter earnings' growth may drop to zero: Marcellus' Saurabh Mukherjea explains why

The Indian capital markets may see its earnings growth drop to zero in the September quarter, according to Saurabh Mukherjea.

The founder and chief investment officer at Marcellus Investment Managers was talking to Moneycontrol as part of Samvat 2081 conversations.

He said that an earnings slowdown was evident in the June quarter and it became more evident in the September quarter earnings reports.

This is part of a multi-quarter earnings slowdown, Mukherjea told Moneycontrol, and this is happening due many reasons including the high-base effect.

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The other reason, he said, is the government's pullback on capex spending.

Mukherjea said: "For reasons I can’t fully put my finger on, government capex seems to have throttled off big time... Also, consumption has been weak for a couple of years and it seems to be weakening further."

"So, a combination of factors (have contributed to the slowdown) such as weak job creation in the private sector, especially in the IT services sector, although it (job creation) seems to be reviving; interest rate hikes causing households to spend bigger and bigger portion of their income paying EMIs rather than spending it on consumption; and the government fiscally consolidating," the expert added.

He elaborated on the effect of the combination of tightening monetary and fiscal conditions, and expects the slowdown reversing only when the central bank starts cutting rates, which many expect to start from December this year. The rate cut's effect would then start playing out in the economy by next Diwali or Diwali 2025, according to him.

In a recent poll done by Reuters, a slim majority of economists forecast that the Reserve Bank of India (RBI) may cut rates by 25 bps in December this year to bring the policy rate down to 6.25 percent.

Mukherjea said, "Whenever a central bank hikes rates by 200 to 250 bps, with a year to 18-month lag, the economy slows down. The hikes of 2022 and 2023 are biting in 2024. Consumption growth has slowed down pretty much across the board, not just a big ticket, even small ticket consumption growth has slowed down."

On the fiscal tightening, he pointed to the government's efforts to reduce budget deficit, which is causing a considerable dip in the capex spending.

He said, "I'm still perplexed at the scale of the government capex pullback that doesn't sort of square with the numbers in the budgeted allocation that the Finance Minister (Nirmala Sitharaman) announced on July 24. The scale of the government capex pullback is well in excess of the budgeted outlays and I'm still in the dark as to why there's been such a savage pullback. Maybe the government knows something about tax collections which I don't."

He added, "This (the capex pullback) in turn is contributing to the earnings slowdown because a big part of the index's earnings growth was PSE (public sector enterprises) and this whole contractor economy showing EPS growth."