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‘Q2 earnings in line, expect limited changes to current earnings estimates’


What is your view on the Q2 earnings and the consequent Nifty upgrades and downgrades?

The second-quarter (Q2) earnings till now broadly match our expectations, with minor downgrades observed in the IT sector. 

Both public and private banks, which contribute to nearly 40 per cent of the Nifty50 companies’ profit pool, have reported results that are in line with expectations. 

However, there is a potential risk related to further margin contraction in the case of banking companies. 

The consumer category has slightly underperformed due to a slowdown in the demand environment. In contrast, the auto sector has posted earnings that slightly exceed the estimates, thanks to improved profit margins. 

On the whole, we foresee limited changes to the current earnings estimates at this juncture. Downside risks may materialise if we continue to witness a lack of improvement in the consumer demand environment and further weakening in the IT sector.

Can we expect a decent double-digit growth in Nifty this year? What are the short-term challenges for the market?

The prospect of Nifty 50 companies’ earnings achieving double-digit growth in FY24 appears increasingly promising, supported by sound growth in the banking, automotive, and capital goods sectors. 

As mentioned earlier, our main concerns revolve around sluggish consumer growth and uncertainties stemming from a global landscape fraught with the risks of war, inflation, high-interest rates, and a potential slowdown in the United States, all of which can impact our growth.

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Share your views on the Indian IT sector. As interest rates in the US are expected to remain high for a longer period, are the Indian IT players yet to see the worst?

This is something which we have been debating internally and, as of the present moment, our evaluation has left us somewhat disappointed. 

Initially, we held the view that by the third quarter of FY24, we would observe indications of bottoming of growth. However, this prospect appears to be growing progressively more challenging, in line with the prevailing sentiments expressed by most companies’ management. 

A crucial aspect to monitor for assessing the recovery will be the global BFSI sector, which traditionally constitutes a substantial portion of IT companies’ overall business. 

Currently, the BFSI sector remains a bit cautious on tech spending, primarily due to apprehensions related to a potential slowdown in the United States.

What sectors are you positive about for the medium term, say two to three years?

We hold a favourable outlook on the banking and financial sector due to its sustained strong performance in terms of credit growth and encouraging asset quality trends. 

Additionally, when assessing their valuation, they appear reasonably priced considering their growth trajectory and asset quality trends. 

Furthermore, as the economic recovery unfolds over the next two to three years, we anticipate that the banking sector will act as a proxy for this revival and continue to thrive. 

It’s worth noting that the largest private sector bank has faced relative underperformance over the past two years, despite the solid financial performance, leading to a derating of the stock.

In addition to banking, we also have a positive stance on the pharmaceutical sector. 

This sector is emerging from the US generic pricing pressures that have persisted over the last two years. 

The anticipated cost benefits from moderating raw material and other expenses should drive margin expansion, and the stocks in this sector are not overly expensive.

Furthermore, we remain open to exploring opportunities in the engineering and capital goods sector if they experience any weakness in their stock performance. 

We see these companies operating in a robust growth environment, driven by government reforms and a focus on growing domestic manufacturing.

Lastly, we like select insurance companies as their stock valuations appear reasonable. 

We expect these companies to continue growing at a rate of 15 per cent in terms of their VNB (value of new business).

Also Read: FMCG Q2 results review: Sluggish volume growth a worry, does that make the sector an avoid?

Why are FPIs selling Indian equities? When can this trend reverse?

Generalising is a bit challenging, but it’s reasonable to assume that several factors, including global risks arising from current geopolitical developments, elevated interest rates, and the potential for a US market recession, along with the relatively high valuations of Indian equities, have contributed to foreign portfolio investors (FPI) selling off Indian equities.

Structurally though, Indian markets are gaining significance as other major economies, such as China, lose favor among investors. Our economic growth appears robust, stable, and sustainable, which has caught the attention of global investors.

Therefore, the FPI selling related to these factors appears to be more of a temporary nature. 

We anticipate that as our economy undergoes transformation over the next decade, it will attract the interest of many more global investors seeking to partake in our growth story. 

It’s also evident that only a few economies can claim high growth rates, as most grapple with new and emerging challenges, making the Indian market an increasingly preferred destination due to its strong growth prospects.

Also Read: Cautious of headwinds to domestic demand; inflation to average 5.7% in 2023, says Aurodeep Nandi of Nomura

What could be an ideal strategy for investing during these times of uncertainty?

The ideal approach is to adhere to the tailored asset allocation strategy that best aligns with each investor’s risk and return preferences. Over the long term, maintaining the discipline of adhering to a suitable asset allocation strategy has consistently yielded the desired outcomes.

Also Read: Nifty November series outlook: 4 stocks where investors can park their money; do you own?

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Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.

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Updated: 02 Nov 2023, 02:41 PM IST

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