'Investors should consider small and midcaps only if they can handle volatility and have a longer investment horizon.'
Sectors with visible earnings growth are facing valuation challenges, while in sectors where earnings growth is not visible, progress remains elusive, according to Shridatta Bhandwaldar, head of equities at Canara Robeco Mutual Fund.
In an e-mail interaction with Abhishek Kumar/Business Standard, Bhandwaldar discusses the potential end-of-earnings downgrades for the information technology sector, noting that upgrades will depend on the US outlook.
What are the major takeaways from the Budget from an equity market perspective?
The Budget continues the theme of fiscal consolidation while also providing benefits across various sectors of the economy.
The 17 per cent increase in capital expenditure is positive for the infrastructure, capital goods, railways, and power sectors. The fiscal deficit target of 4.9 per cent was a surprise.
Other highlights include an increase in capital gains tax rates, with a clarification that further increases are not expected, and no tax changes for tobacco and insurance, which is favourable for these sectors.
Now that the elections and Budget are out of the way, what factors will dictate the market's direction from here on out?
The market will move back to tracking the basics: Corporate earnings growth and the interest rate cycle.
With the earnings season underway, attention will shift to global and domestic cyclical sector performance.
After last year's over 20 per cent Nifty earnings growth, moderation is expected this year.
The extent of this moderation will be a crucial data point for the market.
How do you see the first quarter (Q1) results that have come out so far? Is the IT sector starting to see a turnaround?
Q1 corporate earnings growth has been muted so far, with single-digit profit growth for Nifty companies.
For the ongoing quarter, consensus expectations range from high single-digit to low double-digit growth.
The IT sector appears to have bottomed out, but recovery will depend on the pace of discretionary spending by US clients.
Earnings downgrades have halted this quarter, but there is no visible earnings upgrade yet.
IMAGE: Shridatta Bhandwaldar.
Photograph: Kind courtesy Canara Robeco
How do you see 2024-2025 (FY25) panning out in terms of corporate performance?
The market performed strongly in 2023-2024, driven by a 24 per cent profit growth for Nifty 50 companies, with even higher growth in the broader market.
This was despite revenue growth being in single- to low-double digits for Nifty.
The sharp rise in profits was a result of meaningful operating margin expansion as commodity prices corrected.
For FY25, we expect earnings growth to consolidate, with low double-digit top-line growth and limited margin expansion.
Consensus estimates suggest Nifty earnings per share growth could moderate to 12-14 per cent.
However, we are structurally constructive on the earnings growth cycle over the next two to three years, foreseeing continuity in business and credit growth, a shift from public to private capex, and an ongoing real estate cycle.
Which sectors are better placed from a valuation and growth perspective?
We are in an interesting phase where domestic cyclicals such as automotive, industrials, real estate, financial, hotel, hospital, power, and defence exhibit strong earnings but face valuation challenges, except for financial.
Conversely, consumption, IT, and chemicals have valuation comfort but are still experiencing elusive earnings growth.
Which sectors or themes will benefit from higher capex and agri-spending?
Beneficiaries of increased capex include railways, defence, power, industrials, and electronics manufacturers.
Agrochemical, chemical, consumer durables, and fast-moving consumer goods sectors will benefit from increases (if any) in agriculture and rural spending.
We are at a point where domestic cyclicals in manufacturing show healthy growth but face rich valuations, while FMCG, consumer durables, and agrochemicals have fair valuations but modest earnings growth expectations.
How should investors go about their asset allocation in the present market scenario?
Asset allocation should be based on individual risk appetite and investment horizons.
We advise caution against being overly optimistic, given current broader market valuations.
Largecaps present a better risk/reward balance. Investors should consider small and midcaps only if they can handle volatility and have a longer investment horizon.
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Feature Presentation: Rajesh Alva/Rediff.com
