Earnings Growth: Monetary Easing, Soft Commodities to Drive Indian Market Outperformance: GV Giri

“Also, monetary easing is starting and will happen globally, so that’s all the more reason to expect India’s cost base to behave more favorably, so perhaps the profit growth It can be 15%,” he says. GV Giri, IIFL Values.

What should we expect from the markets over the next 12 months. I mean, in 2023, we saw almost 19% to 20% return from the Nifty. So far in nine months, Nifty is up 19%, clearly well above the averages we’ve seen. Do you expect it to normalize over the next 12 months or that this streak of outperformance could continue?
GV Giri: Well, we’re at almost 22x a year from now and from this level we shouldn’t expect massive outperformance unless there’s reason for big earnings improvements. We have achieved year-on-year earnings growth of around 12% and perhaps it could reach 15% if raw materials remain weak. Now we have had Israel and Lebanon fighting and we have had Russia-Ukraine continuing and we have had the Saudis cutting and the rest of the OPEC members also cut production, nothing has saved crude oil from threatening the $70 level on the way down. So it could be quite good for the earnings of Indian companies, which typically react very positively to soft commodities. Additionally, monetary easing is starting and will occur globally, so that’s all the more reason to expect India’s cost base to behave more favorably, so perhaps earnings growth could be of 15%. There might be a bit of a drawdown, although I really don’t think the Indian story requires any sort of drawdown, it will probably continue to command a premium. Therefore, I would expect the market to advance approximately 12% from current levels, between 10% and 12%. Now whether this is an outperformance or not, you can decide by looking at the other markets. I think it would be superior performance.

But this 12% return that you expect, do you think it will be more skewed towards large caps now outperforming small and mid caps or do you expect much higher returns from this mid cap category than from large caps?
GV Giri: See, the MSCI Index and the MSCI Small Cap Index, the standard and small cap indices, are heavily discounted compared to the MSCI Mid Cap Index and it’s the same story about the 22-23x multiple for large and small companies. cap versus the 39x mid-cap multiple. .

So, I think there is a problem with the specific list of stocks that are included in mid-cap companies. Most of them are overpriced compared to their sector peers in the large and small cap categories. Therefore, I think the mid-cap index will underperform the other two. As far as small caps go, we did some analysis some time ago, which I’ll be able to share with you later, that suggests that in any period of strong or weak growth, small cap earnings per share on average are almost double that of large-cap EPS earnings, meaning we have good reason to expect small cap index to keep pace with the large cap index over the next 12 months.

Among sectors, if you look at it, NBFCs are one of your favorite topics, but given that there is an expectation of rate cut, don’t you think that in the short term it could have a financial impact on NBFCs?
GV Giri: NBFCs tend to perform very well when a rate cut cycle begins and many things support this. There are also some indirect factors. For example, gold is doing well. If gold does well, the value rises, which supports the situation.

Additionally, the NBFC’s own borrowing cost base declines, making loans more attractively priced. People buy more things. Consumption accelerates. Mortgages are accelerating. Therefore, several things will work in favor of NBFCs, especially in relation to banks and in relation to other sectors and Growth of NBFCs in itself has been good overall. Even if you take the higher quality NBFCs like Bajaj Finance and Chola, there is really no need to lower the risk curve and look at the growth rates. It is like 25-30% even after a slowdown in an economy where the nominal GDP growth rate is only 8.5%, so it is 8.5% and 25%.

So if you have such a big growth advantage in NBFCs, coupled with this monetary easing and the expectation that yields will come down, then NBFCs, even though some of them may be a bit expensive, will outperform.

Cement is also one of the favorite subjects of the IIFL. But in the last two years we have not seen any significant increase when it comes to prices. Yes, demand has been increasing, but given that prices are continually weak and the competitive intensity in the sector is too high, what are the reasons why you are optimistic about the issue? cement sector?
GV Giri: Number one, the competitive intensity is high, but at the same time, consolidation is also occurring and the big players will become much more dominant than before. Number two, if you look at the greatest demand for cement, it’s coming from real estate and if you look at the inventory levels in residential real estate, if you look at the Knight Frank data or one of the other major databases, you’ll see that the inventory levels They’ve gone down in the last four or five years, from about three and a half years of inventory to about a year and a half of inventory and you can’t really get below one, one-and-a-half years because you take so long to build and, therefore, progressively, if interest rates are going to be lower than they have been and sales of final real estate products will continue to have some type of momentum, the intensity of new construction will be much higher.

Therefore, there will be a much more powerful pull of real estate demand when it comes to cement than we have seen in recent years.

And then the rest of the space, infrastructure and other things that create demand for cement continue at a rate well above GDPN. Look at the government’s capital expenditure, 17%, which is twice the NGDP growth rate. So I think cement has also been besieged by all these other conversations about increasing competition and all that, that’s partly due to price. And lastly, if you look at the recent period, elections and monsoons have depressed recent demand. So, I think all of this should come to fruition in the next three months and we should see a much above-normal rally in cement.

What is your opinion on metals and what about power supply units? Because lately sectors like defense, etc., are under pressure. They have come out of maximums.
GV Giri: I will talk first about the metals and then about the defense. As far as metals go, they don’t really react to rate cuts as much as they do to immediate supply and demand.

Immediate supply is still preserved, but demand is weak. In fact, with crude oil falling and energy costs remaining low, metal supplies will be reasonably strong on the energy side.

So, I don’t expect metals to go up immediately, but metal stocks are going up much faster than metal commodity prices themselves and that, I think, is what’s going to happen over the next 12 months.

We will see that metals will outperform, that should be one of the sectors, maybe not the main sector, but one of the sectors that will outperform. And we also see some reaction from the Chinese government and central bank to try to stimulate their economy and we see what happened to crude oil and other commodities when China’s GDP data was released.

So, I think there is reason to say that in the next 12 months, efforts to stimulate the economy in China will continue and at some point there will be some movement in their economy and metals will also recover. And with that, metal stocks will lead the way.

On the defense side, on election day, we literally downgraded the entire equity sector by one or two notches per share, and defense is also one of the sectors where we took the ax. Now, I think defense is a little overrated because it is very difficult for any Indian company to become a global defense supplier or a large defense exporter because the cycle to get a product accepted is very, very long, like four to five years. , whether it is an export market or the Indian market we are talking about.

And the Indian defense forces typically like the best technologies and developing them and reaching parity with international suppliers is a multi-year cycle. So, I think it will be more about smart Indian companies buying property in foreign markets, where the companies buying are already suppliers of international defense demand, such as NATO demand or other Asian demands.

It seems unlikely to me that an Indian company will become very important in defense exports in the next three or four years. I think that sector and PSUs in general have some disadvantages. PSU banks are one space where we have been much more negative compared to private banks where we have been neutral to positive and I think that call has worked well and there is more to come.