We are now coming to the end of the third quarter earnings season. Earnings in general have been subdued except for a few stocks and sectors that have stood out. Results of companies are finally a derivative from the growth of the economy in general and as economic growth has slowed down so has the earnings picture. Out of the 1450 odd companies that have reported results till now the average growth in sales and profits is around 6%.
Among the sectors that have stood out in terms of a generally positive delivery have been companies in Pharmaceuticals, IT to some extent, Automobile companies despite slow growth and Real Estate companies where the growth continues to intrique me at a time of general consumer slowdown and tight liquidity. Banking Sector results have been subdued driven by uptick in NPA’s and tight liquidity which has restricted Net Interest Margins. Commodity sector results especially from Steel and Cement have been subdued driven by lower prices. Consumer companies have borne the brunt of slowdown combined with input cost inflation especially from Palm Oil for many companies. Capital Goods and Infrastructure companies have borne the brunt of several elections in 2024 combined with lower overall government capital expenditure and slower release of payments because of which many companies slowed down execution.
Fiscal and Monetary Stimulus is now here
The personal tax cuts announced in the Union Budget are quite significant and would boost demand for sure in many categories like FMCG, Consumer Durables, QSR space etc. Many do not realize that consumer demand is more about sentiments than actual cash flows. When consumers feel confident they consume more even if the advantage of tax cuts or lower inflation is going to actually come in the future. Many do not realize but for income levels of Rs 12-20 lakhs getting a Rs 80000 to Rs 110000 improvement in cashflows is very significant.
While some argue that the Union Budget is not expansionary due to a lower Deficit Projection for next year it is important to measure the components of the decline in deficit. Capital Expenditure is projected to rise 10-11% from the much lower than expected levels of this year ( which is already reflected in company results) and as such a good number. Most expenditures on subsidies, PM Kisan and other revenue expenditures are projected to be flat next year. As such this makes the Budget very non inflationary and a 4.4% number also frees up resources for the private sector to borrow and invest and also consumers to get loans cheaper. Overall the Budget is positive for growth.
The RBI under the new governor has also seen a significant change in stance. Firstly on the INR policy where the tight leash maintained under the previous governor has been done away with and now RBI is working the way it always used to work i.e. iron out major volatility in currency movements and not trying to control the direction of movement. One of the major reasons for the right liquidity in the banking system and its impact on growth is due to the currency policy of 2024.
Most also do not realize that the Indian GDP actually benefits due to an INR slide as much of our exports are currency and price sensitive while many of the imports are not. As such a 4-5% INR slide has helped domestic manufacturers competitiveness and also boosted export prospects.
Traditionally it was believed that a 5% slide in the INR eventually leads to a 0.3 to 0.35% increase in inflation. Now with the tight leash of the government on fuel prices the impact is actually lesser.
The new governor has also taken significant steps to boost system liquidity which has gone from R 300000 Crores deficit to Rs 70000 Crores deficit now and set to decline further as government spending has also picked up. The Repo Rate has also been cut by 0.25%. While this does not move the needle very significantly it directly benefits borrowers which have loans that are Repo Linked and much of the working capital loans. Overall now Monetary Policy is also turning growth supportive from being restrictive all through 2024.
Combining all these factors and taking into account global growth uncertainty due to Tariff Wars it is very clear that growth in India has bottomed out and we will see a good growth pick up over the next year. The extent of pickup will depend on many factors but it will be still 0.5 to 0.7% above current fiscal year growth. Earnings growth prospects also look much better for next year as compared to the current year.
Nifty had a correction of around 14% from the top, the Midcap Index by 17% and the Smallcap Index by 21%. A lot of froth has now gone out of the markets and many companies across market segments present good investment opportunities. Although the current consensus is negative on Small and Midcaps ( and it is also true that valuations in many segments are still excessive) normally in an easing monetary policy cycle the broader market does well. We will see how the segment plays out as the full year 2025 plays out. Overall market outlook is constructive for 2025. Nifty Returns should be 10-12% for the year as the growth cycle plays out. Small and Midcap Indices could underperform but there are enough stocks and sectors that should do much better.
No need to be excessively bearish
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