Chandraprakash Padiyar, senior fund manager at Tata Mutual Fund, expressed in an interview with Moneycontrol that valuations across market segments have surged, suggesting a potential acceleration of future returns into the current year.
Hence, he says it would be prudent to assume that incremental returns will be lower than past few years.
With more than 22 years of experience in research and fund management, he emphasizes the importance of monitoring the US fiscal deficit and the US 10-year bond yields for their potential impact on global assets, including Indian equity markets.
US Fed rate may not be the key moving indicator going ahead, he feels.
Q: What is your take on the ongoing corporate earnings season? Do you see more earnings upgrades in the coming quarters?
Earnings growth for Q1FY24 to date stands strong in excess of 40 percent for the Nifty companies (25 companies out of 50 have reported to date). Operating margins have improved by a sharp 400bps+ compared to the same quarter last year. Key contributors to this performance are BFSI and Oil & Gas sectors especially oil marketing companies which have been a beneficiary of higher marketing margins on account of lower crude prices.
Adjusted for BFSI/Oil & Gas operating profit growth is stable at around 14-15 percent in line with expectations. Our interactions with companies suggest that there is optimism/hope for a strong festive season starting September 2023.
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From an earnings estimate perspective, the consensus is sceptical of a rebound in demand for consumer goods during the upcoming festive season. We do believe there is a possibility of demand to be better-than-expected for 2HFY24 given the low base of the previous year as well as wealth effect playing out from higher real estate prices and equity markets.
Q: Your take on industrials space...
Order book for most industrial companies is at an all-time high with good visibility of earnings growth over the foreseeable future. With commodity prices correcting over the past 3-6 months, operating margins are also likely to move higher.
However, valuations for majority of companies part of this pack are at above average levels implying it’s a consensus trade now with less upside from valuation going ahead. Earnings growth needs to sustain at similar pace beyond FY25 for stock returns incrementally.
Q: Do you expect NIM expansion to moderate for banks and also contraction in select banks?
On a full-year basis i.e. FY24 over FY23 NIMs for most banks are likely to be stable with an upward bias. Credit growth is sustaining at healthy double-digit and deposit growth as per the latest data is also picking up pace.
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Liquidity in the system is stable with corporate credit demand picking up as well. We expect earnings delivery by banks to continue to be on the positive side specially in an environment where credit cost is likely to be at very low levels.
Q: Is it better to stay away from largecap IT space and be with midcap IT space, especially after reading recent corporate earnings?
One needs to monitor earnings for the upcoming next few quarters to take a final view on the IT sector. As of now earnings estimates are still being downgraded including for midcap IT stocks and valuations are on the higher side.
Our funds are underweight the IT sector and we would remain on the cautious side for the time being.
Q: Do you still expect one more rate hike by US Federal Reserve in rest of calendar year considering the core inflation numbers, though Fed signalled in July policy meeting?
The 10-year bond yields in the US stand at around 4 percent. Much lower than the US Fed rate signalling potential impact on growth in the economy going ahead infact the yield curve in the US has continued to be inverse for some time now.
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Inflation has moderated on account of lower crude and commodity prices. US fiscal deficit has not come down materially post the covid period stimulus. We believe one needs to monitor the US fiscal deficit and the US 10-year bond yields for any impact on global assets including Indian equity markets. US Fed rate may not be the key moving indicator going ahead.
Q: Does it mean the interest rate cut possible only in first quarter of 2024?
As mentioned above US fiscal deficit and the long-term yield curve is the more relevant indicator than the US Fed actions in the near term. Growth in the US till date is better than feared, however this also means that going ahead there is likely to be no major rebound as well.
Growth in a lower-end of the range means that inflation is unlikely to spike materially, and neither is it likely to fall below 2 percent. We are in a no man’s land with stable scenario across macro indicators. For equity as an asset class – current market is taking “No news as good news”. Crude price can change the equation and hence needs to be monitored closely.
Q: Are the Indian equity markets looking overvalued now, considering ongoing corporate earnings and global economic environment?
Indian equity markets are benefiting from stable earnings growth, positive flows from both domestic investors and FIIs. Valuations across market segments have moved higher and one can say that we maybe preponing some returns of the future to current year. It would be prudent to assume that incremental returns will be lower than past few years.
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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