“Even though India is standing tall amidst global economic downturn and state of recession prevailing worldwide, it cannot remain decoupled from the global events. In a widely integrated global economy, there is bound to be a cascading effect,” Ajit Banerjee, Chief Investment Officer, Shriram Life Insurance Company told Moneycontrol in an interview.
He feels the key challenges today remain the slowing down of the domestic economy and impact of probable global recession.
Banerjee, who has more than three decades of professional experience in diversified industries across various geographies believes the banking sector with a cleaner and stronger balance sheet looks very positive for FY24. Edited excerpts from the interaction:
Have you spotted any trend in the December quarter results? Which sector do you think has provided a great support to the earnings season?
Based on the report prepared for a sample size of more than 3,000+ companies, the aggregate revenue has increased by 17.4 percent on a YoY basis in December 2022 quarter but the revenue growth has decelerated from 36 percent as reported in June 2022 quarter.
Net profit increased by 5.3 percent in the third quarter, helped by a strong performance of the banking and finance companies. Net profit had increased by 38.8 percent in the year-ago quarter. Excluding banks and finance companies, the sample’s net profit fell by 10.5 percent, a second consecutive quarter of decline showing the increasing burden of interest costs and depreciation amid slowing revenue growth.
On the sector front, it was a mixed bag. Financial and automobile companies declared profits above markets broad expectation whereas metals, oil and gas, cement, retail, telecom, and media were below expectations.
Do you think the new age companies are still a high risk bet despite their increased focus on improving profitability?
Whilst the focus of some of the new age companies has shifted towards generating profits and positive operating cash flows and taking the much-required cost rationalisation, this has to be demonstrated on a sustainable basis over multiple quarters and valuations have to get attractive enough which would once again lead to investors getting confident on their business model and start investing. As of now it’s still on a high-risk bet.
Do you feel that SIP will become a big supportive factor for the market in years to come?
SIP money is predominantly a long-term investment which stays in the market over multiple market cycles. Today, it is estimated that retail participation is close to 25 percent in the domestic markets which is at an all-time high. While FII flows are fair weather friends, but retail investors have proven to hold on to its positions even in times of distress like the latest one.
Hence with increase in disposable income at the hand of investors, we can possibly see a higher allocation to SIPs which, in turn, will become a big supportive factor for the market in the years to come.
Is inflation still a considerable factor for the equity market, given it has been moving southwards? Do you expect the inflation, by any chance, to reach 4 percent for India and 2 percent for the US in coming quarters?
I believe the prevailing inflation level is still a considerable factor at this point of time for the equity market unless it comes down to goods and services segments. The input cost, working capital cost would also remain high and therefore the sales price will remain elevated. This would be a deterred factor for mass consumption to pick up.
Equity market cannot thrive long on K-shaped economic recovery. However, having said that, we are seeing improvement in mass consumption levels which is a positive sign.
There are some global uncertainties and supply chain constraints which remain; hence it looks a bit difficult to reach 4 percent & 2 percent inflation levels in coming quarters for India and US respectively. The respective central banks, unless they are convinced that they have been successfully able to win the war over inflation, rate cuts won’t start happening.
But we will most likely witness declining trends in inflation level going forward provided we have normal monsoon and other supply side pressures and global headwinds easing up.
Is the China re-opening really a tailwind for emerging markets?
The China reopening will have a mixed impact on emerging markets. On the one hand, with the world’s second-largest economy opening up after a self-imposed shut down of more than two years, there would certainly be a revival of demand and supply world-wide across goods and services which will be positive for emerging markets.
But on the negative side, as valuations in the Chinese market are looking very attractive compared to EMs and specifically India so a lot of FII outflows have started happening and will continue leading to some interim drop in market levels.
Do you see any big threat to economic and earnings growth in upcoming financial year (FY24)?
Even though India is standing tall amidst global economic downturn and state of recession prevailing worldwide, it cannot remain decoupled from the global events. In a widely integrated global economy, there is bound to be a cascading effect. Whilst a huge domestic market helps in creating demand and absorbing the same also, your external facing sectors suffer. Therefore, the key challenges today remain the slowing down of the domestic economy and impact of probable global recession.
While the valuations for Indian equities look reasonable compared to its long-term mean, many foreign equities like China and Vietnam have become cheap. Thus, the market could continue to see an arbitrage play between Indian and foreign equities. Focus from here on will be on earnings growth, as that will be the most critical factor to driving performance.
One sector, on which you are bullish as a theme for FY24
The banking sector with a cleaner and stronger balance sheet looks very positive for FY24. There is a time lag between the lending and borrowing costs to start impacting the banks P&L account, by virtue of which they raise the lending rates faster with increase in repo rates than pass on the increase in their borrowing rates which improves their financials.
The NPA levels are also at all-time low and there will be a time lag by which fresh loans will start converting into NPA for which fresh provisions have to be made, hence we can bet on the banking sector for FY24.
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