Moneycontrol Pro Panorama: The bigger risk investors need to watch out for   

While the Reserve Bank of India’s reports presented an optimistic outlook for households and industry, private surveys are indicating a mixed picture

Dear Reader,

In Monday's edition of this newsletter titled 'It's time to take stock', we wrote about how the March 2023 quarter (Q4 FY23) earnings season is about to be kicked off by India's listed software giants and the earnings outlook. Economic data for the recently concluded month and fiscal year are adding more colour to the earnings outlook.

Electricity generation growth in FY23 is the best since Prime Minister Narendra Modi took office in FY15. Airlines are seeing strong passenger traffic. Bank credit is rising at a healthy pace even if it has decelerated a bit in recent months.

Yet, signs of growth moderation are visible. Rail freight traffic is growing at a slower pace. Freight volumes increased by 3.5 percent in the second half of FY23, much slower than the 10.1 percent expansion in H1 FY23 as our Chart of the Day illustrates. Iron ore, coal and cement volumes are seeing growth moderation.

While the Reserve Bank of India’s reports presented an optimistic outlook for households and industry, private surveys are indicating a mixed picture. An analysis by Centre for Monitoring Indian Economy (CMIE) shows slow improvement in consumer sentiment. In an investor update, FSN E-Commerce Ventures attributed the slowdown in fashion business to a pullback in discretionary spends by consumers. FMCG company updates continue to point to stress visible on the rural demand front.

Automobile sales growth slowed in the March quarter and a private weather forecaster is predicting below normal rains in 2023 monsoon season. “Our dealer surveys indicate that new order inflows at passenger vehicle dealerships have slowed down,” analysts at Nomura said in a note.

The concerns and the turbulence in the global economy have weighed on equity market returns this year — the Nifty 50 index lost 3 percent so far this year. Still, many fear that the market is not fully reflecting the growth slowdown risks. Estimates project better earnings growth in FY24. If the moderation in demand intensifies, then earnings estimates may see a broader reset. That is the bigger risk investors need to watch out for.

"For FY24, consensus is forecasting 20 percent EPS growth (with demand likely to moderate only a little)," Nuvama Institutional Equities said in a note. “We think this could be at risk as demand deterioration is broadening from exports to some segments of domestic consumption.” EPS is earnings per share. The earnings growth projections are for the Nifty index.

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Technical Picks: Redington, Tata Chemicals, TCS and Zinc (These are published every trading day before markets open and can be read on the app)

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R Sree Ram
Moneycontrol Pro