As India Inc moves towards normalizing its margins after a remarkable fiscal year 2024, analysts are keen on observing revenue growth trends as we venture into the second half of the fiscal year, which coincides with the vibrant festive season. Harish Krishnan, co-chief investment officer and head of equity at Aditya Birla Sun Life Asset Management Company Ltd, emphasizes this shift in focus during recent discussions.
Despite significant foreign inflows into China, fueled by extensive fiscal and monetary stimuli aimed at revitalizing its sluggish housing market, investors remain cautious. Krishnan highlights that global investors will be closely monitoring upcoming policy announcements to determine whether China’s focus on domestic consumption can pave the way for sustainable economic growth.
Edited excerpts from the interview:
Outlook for Q2FY25 Earnings Season
The earnings landscape has experienced a remarkable expansion in margins throughout FY24, primarily attributed to a decline in the Wholesale Price Index (WPI) from elevated levels witnessed in FY23, largely due to the Ukrainian conflict. As this adjustment occurs, market analysts anticipate a normalization of margins moving forward. A critical indicator of economic health will be top-line growth across various sectors. Current high-frequency indicators suggest a transient period of sluggishness, resulting in a slowdown in revenue growth for India Inc.
The second quarter of FY25 is expected to remain subdued, particularly in sectors driven by consumption and government capital expenditure, while private capex appears stable. The impact of elections and extreme weather conditions during the first half cannot be ignored, making the upcoming festive season integral to rejuvenating top-line growth. It is noteworthy that FY25 has seen an uptick in earnings downgrades compared to the previous year, making festive season performance a focal point for stakeholders.
Investment Strategy amidst FII Selling
In light of recent foreign institutional investor (FII) selling, domestic mutual funds and retail investors have stepped in to absorb this activity. Notably, large-cap and small- to mid-cap stocks have experienced a 5-6% decline from their peaks. Within our diversified funds, we maintain a strategy aligned with category-wide mandates, ensuring we remain largely invested while also exploring opportunities to enhance our equity allocations during market drawdowns.
China’s Economic Prospects
The recent Chinese market rally raises questions about its sustainability, particularly given the ongoing structural issues stemming from declining property prices. Following years of robust growth, China’s economic momentum appears to be waning post-pandemic. The country has historically relied on manufacturing and export channels to mitigate the slowdown in real estate; however, the underlying issue lies in sluggish domestic consumption. Policymakers must implement significant changes to prioritize domestic consumption. While recent initiatives signal intent to boost this sector, detailed measures are still awaited.
Geopolitical Impact of Iranian Conflict
In the face of geopolitical tensions, such as a potential attack by Israel on Iran, the market reaction is expected to be fleeting, similar to the response seen during the Russian invasion of Ukraine. The primary area of concern remains within oil markets, given the crucial nature of supply lines in the Middle East. Significant disruptions to oil supply could strain India’s economy, heavily reliant on energy imports. Additionally, any prolonged conflict may affect export dynamics due to increased freight costs, impacting profit margins and causing a dip in near-term earnings.
Investment Themes Amid Changing Monetary Policies
In the backdrop of recent rate cuts by the Federal Reserve and other central banks, along with geopolitical uncertainties and upcoming U.S. elections, we are identifying key investment themes. Sectors such as cement, metals, and consumer durables are emerging as potential “dark horses,” having faced years of underperformance. Although immediate catalysts for these sectors are limited, they hold promise for significant outperformance over a three-year horizon. Areas such as IT, pharma, capital goods, and real estate are currently witnessing positive momentum, and any market corrections will present opportunities for increasing positions.
Prospects for Private Capex
Following nearly a decade of stagnation from 2011 to 2020, private capital expenditure is now gaining traction. Prior to the pandemic, capital expenditure among listed Indian companies approached โน6 trillion, mirroring profit pools of the listed segment. Currently, while earnings have surged past โน15 trillion, capital expenditure is nearing โน10 trillion annually. This discrepancy between excess cash flows and capital expenditure creates a unique scenario. We expect a revival in corporate confidence, spurred by the relative stability of the Indian economy and a resumption in strong consumption patterns, to sustain this upward trajectory in private capex.
Fixed Income Investment Outlook
The encouraging trend in debt inflows, particularly following the inclusion of Indian government bonds in the JP Morgan index, reflects growing interest in fixed-income securities. With U.S. policy rates on a downward trend and the Reserve Bank of India signaling a neutral stance, we foresee potential rate cuts in India. While Indian fixed income offers a favorable outlook, it is essential to note that the scope for policy rate reductions here is much more limited compared to the U.S. market. With robust corporate balance sheets and an investment cycle still in its nascent stages, opportunities abound on the credit side for fixed income.
