Divam Sharma, founder and fund manager at Green Portfolio PMS, expects capital goods, infra, and pharma companies to see a decent earnings growth of over 15 percent in FY25 but is not too optimistic about IT and banking.
For banks, the fatigue would mainly be on account of contraction in the net interest margin, and for IT, it the slowdown in its main market – the American BFSI – would continue to hurt.
In an interview to Moneycontrol, Sharma, a chartered accountant with more than 13 years of investment experience, said the market could see a “meaningful correction” but a deep correction was unlikely. Edited excerpts:
What do you make of the provisional numbers announced by several corporates?
Deposit growth has been stronger than credit growth for private banks, according to provisional earnings. Deposits have been a large challenge to the banking sector and as a result, net interest margins have contracted.
Several companies on our radar have received PLI incentives. These are companies in sectors ranging from telecom to food. This shows that capex spending and revenue targets are duly being met.
Banking and IT players are the early ones to announce results. Extrapolating the results of these two sectors and forming an opinion of India Inc based on the same would be premature, in my opinion.
Do you think the earnings momentum will remain strong in the current financial year? Over 15 percent earnings growth?
Yes, however, IT and banking will show fatigue, mainly because of the contraction in net interest margin for banks, and for IT, it would be because of the slowdown in their main market — the American BFSI.
Capital goods, infra, and pharma companies are likely to exhibit above 15 percent earnings growth. Public and private capex spending have benefitted the capital goods industry and this trend is keeping up. For infra, order execution faces no major hurdles and it should record its best quarter. For pharma, the US generics market seems stable, which is advantageous.
Are you bullish on the aspirational consumption theme?
We like the aspirational consumption space as India will be one of the highest contributors to the middle-class population in the world over the coming decade. This has also to do with rising income levels among the middle and upper middle-class and an increase in UHNIs.
We have seen a steep rise in consumption patterns across luxury automobiles, travel, electronics, etc and we will continue to see the emergence of bigger and more luxury brands coming out of India.
Do you think valuations will remain stretched? Is a deep correction possible this fiscal?
Globally, there are several headwinds but amongst all the economies, India seems to be relatively more immune to these. Domestic consumption and constant fund flow have supported earnings and markets post-COVID.
If inflation were to trend up, given China’s reopening along with continued production cuts by OPEC, we could witness a meaningful correction.
The possibility of a deep correction is unlikely, given the liquidity remaining on the sidelines. DII and FII data have been positive. Much of the FII which left is yet to come into the market.
Price-to-earnings of the BSE 250 smallcap index was 18x in March 2023 and remains elevated at 30x. If valuations were to further elevate, the probability of a sharp correction would increase.
Will the IT sector look better after the March quarter earnings?
Certainly. Major players like Accenture have come out with 1-3 percent growth for the 2024 calendar year given how poorly their end-client sectors are performing. Slower deal flow and deferment of revenues are short-term headwinds. Valuations look expensive, and given the forward guidance, these valuations are not justified.
Do you see external headwinds for India’s growth in the current financial year?
How the companies have dealt with the Red Sea situation will be an interesting area to study during the Q4 results. Higher crude prices could contribute to inflation, which the RBI is wary of. Higher inflation as a result of higher crude prices or crop shortages could impact the margins of India Inc. China is witnessing a sharp industrial expansion after being in a slump for the best part of last year which is pushing the price of commodities.
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