In FY24, “earnings growth is expected to be in low to mid-teens and valuations are at fair levels from a 10-year average perspective,” Sandip Bansal of ASK Investment Managers told Moneycontrol in an interview.
The Associate Director at ASK feels that globally, the market will take cues from geopolitics including the course of the Russia-Ukraine conflict and the impact of elevated interest rates (Fed funds rates are at highest levels in over 15 years).
Bansal, who has over 18 years of experience in investment and fund management, says the worst for margins in FMCG space is behind, which will enable good profit growth in few pockets.
Increasing penetration, premiumization and digitization remain key drivers for value creation in the overall FMCG sector in the long term, he believes. Edited excerpts:
What are you views on banking space given the recent news?
Last year saw significant improvements in most sector metrics like credit growth, margins, and credit costs; yet the re-rating of multiples was seen mostly in previously not-so-favoured names in PSU segment. This year, credit growth is likely to moderate, margins might be slightly lower while asset quality could remain benign.
So fundamentally the sector is positioned to deliver steady earnings growth, though the markets may reward only select names where valuations are comfortable given their growth potential.
Do you think FY24 is going to be a great and far better year for the equity market than FY23?
In FY24, earnings growth is expected to be in low to mid-teens and valuations are at fair levels from a 10-year average perspective. Markets will take cues from a few key events.
Globally, it will be how geopolitics plays out, including the course of the Russia-Ukraine conflict and the impact of elevated interest rates (Fed funds rates are at highest levels in over 15 years).
Domestically, it will be the monsoons, over which we now have a looming El Nino scare when we have already been dealing with a rural slowdown for a while now. There will also be focus on multiple state elections in FY24 and the general elections in early FY25.
What are your thoughts on FMCG space, since it was the second biggest gainer in FY23?
For Staples, on the demand side, some green shoots have been visible lately in rural areas, though it is still too early. A good rabi crop will help. However, a weak monsoon could play spoilsport later this year. Margins for the sector have bottomed out, as raw material costs and inflation are now declining. So, low to mid-teen profit growth is possible.
On the discretionary side, each sub-segment has its specificity but there are some concerns of an urban slowdown. While realizations might not rise much, in specific segments volume growth can be mid to high single digit given base effects.
The worst for margins here is also behind, which will enable good profit growth in few pockets. Increasing penetration, premiumization and digitization remain key drivers for value creation in the overall FMCG sector in the long term.
Is it the best time to focus on pharma sector?
Pricing pressure in US generics and USFDA regulatory issues, have put Indian pharma companies in a downward spiral over last few years. Also, many are sitting on a fairly large US revenue base, making it difficult to sustain growth. Increasing capital and operating costs make the business case for incremental capital allocation to the US market weak.
Speaking of RoW (rest of world) markets, many are commodity dependent and are also prone to forex fluctuations. So, better business models are ones with larger share of India-centric profits, a steady growth market of low double digits.
The other interesting sub-segment is API and CRAMS. APIs have witnessed massive spread compression with pricing pressure along with high input cost inflation and supply chain disruptions. CRAMS was impacted due to a virtual standstill in new molecule development during covid times. Business prospects are now changing at the margin and valuations have also corrected.
Do you think the Federal Reserve is likely to turn cautious about raising interest rates given the elections in 2024?
While one could argue that the decision to choose between growth and inflation is a political one, a lot could happen between now and elections in November 2024. US unemployment at 3.4 percent is at its lowest levels in decades and core inflation remains elevated.
The Fed’s narrative is to stay in tightening mode till the job is done and with inflation currently at 6 percent+, there is a long way to go. While 2 percent inflation target might not seem realistic and inflation could stay higher for a long time, the Fed is likely to stay the course for now.
Also, if the Federal Reserve, in March, signals about interest rate tightening cycle coming to an end soon, do you see a big rally in technology stocks?
Global IT services sector growth is likely to moderate to 5-6 percent over next two years from 7-8 percent over last two years. BFSI, about one-third of Indian IT revenues, has segments like mortgages, real-estate and investment banking which are rate-sensitive.
There has also been slowdown in Hi-tech and US retail. Elevated rates for a long period could continue to impact the demand emanating from these sectors. Further, some of the leading global IT services players focused on the digital space have tempered down their growth expectations for this year.
So, while easing cost pressures provide some tailwinds to the sector, it is difficult to argue for a big rally.
Do you think China’s plans to take over Taiwan is a bigger risk on the global front?
The US has a stance on the issue and any flaring of tensions between the two largest economic and military powers of the world is surely a big risk.
Will the RBI take a pause in April but maintain ‘withdrawal of accommodation’ stance?
Markets expect a pause. However, the last CPI at 6.5 percent (versus 5.7 percent in December), surprised on the upside, driven by higher cereal prices and sticky elevated core inflation. The next print will be released in March. While monetary policy works with a lag and RBI might want to see how the inflation trajectory evolves, a 25bps hike and RBI maintaining its stance cannot be ruled out.
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