In an interaction with R Venkataraman, Chairman of IIFL Securities
We expect sustained momentum in India's robust economic growth, coupled with increased government capital expenditure in the lead-up to the elections, asserts R Venkataraman, Chairman, IIFL Securities.
What themes will be under your consideration for the year 2024?
The easing in commodity prices is poised to boost profit margins for companies heavily reliant on commodities. Despite a struggling Electric Vehicle (EV) penetration rate, with 2Ws at a stagnant 4.5 per cent and PVs down to 1.7 per cent from 2 per cent a few months ago, gas utilities present an attractive entry opportunity following a de-rating. The gradual improvement in the tax-to-GDP ratio and anticipated FII bond inflows—resulting from the inclusion of Indian government bonds in the JP Morgan Bond index—will likely contribute to sustained low interest rates.
Sectors such as cement, construction, and building materials are expected to flourish. Additionally, the power sector, grappling with shortages and venturing into green initiatives, is poised for positive developments. The anticipated monetary easing in 2024 is expected to drive growth in internet stocks.
Are the overall earnings for the September quarter aligning with your projections? Do you anticipate a stronger second half of FY24 compared to the initial half?
The earnings for the September quarter were in line with our projections. The Q2FY24 saw an aggregate Sales/EBITDA/PAT growth of 1 per cent, 40 per cent and 51 per cent, respectively on a YoY basis, but only 0 per cent, 2 per cent and 0 per cent, respectively QoQ, for a sample of 483 companies out of BSE 500. Sequential PAT momentum was strong in cap goods, defence and real estate. Banks, autos, real estate, cement and OMCs reported a good set of numbers, while IT saw a muted quarter. FMCG, retail, and consumer electricals saw poor volume growth owing to softness in demand. Oil and gas companies have reported a sharp uptick in margins.
Overall Debt/EBITDA has improved marginally, with defence, automobiles and travel seeing some reduction while metals, retail and cement see some increases. Overall, ROE has also seen only marginal improvement on a YoY and QoQ basis, but sectors like OMCs and travel have expanded sharply, while metals and chemicals contracted. FMCG volume growth may have troughed. We believe the second half of FY24 would be stronger as the strong GDP numbers coupled with the festive season and stronger earnings are likely to keep the indices at elevated levels.
Do you foresee the ongoing IPO surge persisting until the final quarter of the present financial year?
The Indian equity market has experienced a remarkable upswing in IPO activity during the ongoing fiscal year, defying global economic uncertainties and highlighting the resilience of the Indian economy. In FY24, approximately 50 IPOs have been observed, propelled by robust economic conditions and improved financial dynamics in India. IIFL has consistently demonstrated a commendable strike rate of 95 per cent in its IPO recommendations for the current fiscal year, yielding an average listing day gain of around 42 per cent.
We expect sustained momentum in India's robust economic growth, coupled with increased government capital expenditure in the lead-up to the elections and heightened foreign investment, is poised to continue fostering a surge in IPO activity during the final quarter of this fiscal year.
Is there a possibility of witnessing an interest rate reduction in the first half of 2024, given the prevailing economic conditions in the United States?
The demand for labour in the United States continues to outpace supply by 2.4 million workers. In light of this scenario, there appears to be no immediate necessity for an interest rate cut, as the economy has demonstrated resilience in defiance of anticipated challenges. We anticipate the U.S. economy to sustain its robust performance, with inflation aligning with the Federal Reserve's target. Consequently, we do not anticipate any hurried adjustments to interest rates by the Fed.
What are your predictions for the equity markets in 2024, and what factors do you believe will bolster the equity market's performance?
Three months ago, our analysis pointed to the growth potential and favourable returns in small caps relative to large caps, with large caps showing reasonable valuations. However, the gaps in performance and valuation have now narrowed. Excluding oil and financials, the Nifty stands at 25x growth in one year, nearly 10 per cent higher than the peak observed in October 2021. Despite global monetary easing, there is a possibility of the delayed impact of tightening measures. Brent crude, after a brief surge to USD 95/bbl in October, has now eased to USD 76/bbl, even amid supply cuts and geopolitical tensions in the Middle East.
The government's emphasis on capital expenditure, robust capacity utilisation in manufacturing, double-digit credit growth, and moderation in commodity prices are anticipated to provide support to manufacturing and investment activities. Maintaining a positive outlook on the Indian market, we expect the Nifty to reach the 21,500 level by the budget. Any minor corrections should be viewed as buying opportunities, and we recommend adopting a strategy of buying on dips.