Markets
Nifty earnings growth estimate for FY26 looks tough: Kotak MF's Nilesh Shah
Summary
- The good news is that the uptick in earnings will be delayed in India by a quarter or more but will not be deferred forever, Shah said.
Higher government spending, and wedding and festival season uptick in sales could enable Nifty to notch the Street estimated earnings of ₹1,059 per share in the current fiscal. The real worry is the FY26 Nifty 50 EPS estimate of ~ ₹1,200-1,250, an 18% growth over that in FY24, which looks tough, given an estimated 5% earnings growth in the current fiscal, believes Nilesh Shah, managing director (MD) of Kotak Mahindra Asset Management Co. (AMC). He still feels, though, unlike in China, in India the earnings growth has compounded at a much higher clip in the past decade and that foreign investors will have room for both the economic giants in their portfolios. On Trump as president, he feels India should convince the US about replicating benefits of sourcing quality generic medicines from India at affordable cost across other industries, by partnering with us.
The US elections are over. What impact do you see on EMs such as ours based on Trump's potential noise surrounding immigration and tariffs?
I recently met the CEO of a US firm. I want to share his prognosis on President Trump's victory. President Trump will carry the learnings of the first term in the second term. Focus on the composition of the team to sense the direction of the government. Wait for the actual implementation of policies post-January 2025 rather than go by election rhetoric.
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Tariffs will be as much about economics as geopolitics. India should lobby to create a win-win situation, such as how the US benefits from sourcing quality generic medicines from India at an affordable cost. We need to convince President Trump that partnering with India can be replicated across many other industries, and will benefit the US with lower costs and a reliable supply.
Foreign institutional investors (FIIs) are selling like there is no tomorrow. There is supply of paper at the same time (qualified institutional placement, initial public offering, private equity selling) which is not being absorbed because of the FII selling. Do you see a change sooner or later or have poor earnings and potential slowdown affected their sentiment?
The September quarter data did have some weak numbers on cement volume, auto sales, diesel consumption, etc. Did rains, the Shraddh period, and lower government spending in H1FY25 drive this, or were there more significant issues? The jury is still out there. The festival season has reversed some of the trends. Auto sales are up, albeit with a heavy discount. Apparel sales are up on a lower base. The wedding season is about to start. Government capex has to move from ₹69,000 crore a month in H1FY25 to ₹110,000 crore a month in H2FY25 to achieve budgeted capex. We estimate December and March quarter results to reverse the trend of below-expectation results in September 2024 quarter due to festival, wedding and increased government spending.
If China, fearing US future actions, announced more stimulus do you think the diversion from India could continue?
If China's stimulus results in investor interest in emerging markets passive funds, then for every 27 cents going to China, 20 cents will come to India. If China's stimulus results in investor interest in active funds, the flows will go to China. I am confident that investors recognise that after a 30% rally from the bottom, the Chinese CSI 300 is still trading at the 2007 level, and the earnings growth of the CSI 300 is 10% in renminbi terms in the last 10 years. Nifty 50, on the other hand, after an 8% fall from the top, is trading at the 2024 level and has compounded earnings by 166% in rupee terms in the last decade. CSI 300 is now trading at a premium to its previous decade's average valuation, while the Nifty 50 is trading below its last decade's average valuation. Investors will indeed have space for China and India in their portfolios.
H1FY25 may have been impacted by the elections which crimped government expenditure. What sense are you getting on H2 in terms of demand and corporate earnings?
The Q1FY25 Nifty 50 EPS (earnings per share) came at ~ ₹287. Q2 FY25 Nifty 50 EPS is expected at ~ ₹269. H1FY25 Nifty 50 EPS will be ~ ₹556. The H2 Nifty 50 EPS estimate is ~ ₹503. With increased government spending, wedding season and just concluded festival season, that number doesn't look out of reach. The real worry is the FY26 Nifty 50 EPS estimate of ~ ₹1,200-1,250, which looks tough. The good news is that the uptick in earnings will be delayed in India by a quarter or more but will not be deferred forever.
Is private capex likely to pick up or will the government lead still rule?
The central government's budgeted capex at ₹11.11 trillion for FY25 is much smaller than private capex. We see greenshoots in the renewable energy, IT, real estate, power sectors, etc. Technology disruption and next-generation interest in traditional business also weigh on private investment as much as ease of doing business. We believe private capex will remain measured in H2FY25. More reforms are needed on land, labour, farm and judiciary to improve the investment climate. There is also a need to improve “inspector raj" to sustain ease of doing business to facilitate more investment.
Is there any structural change in the way demand is playing out in rural or urban areas?
Multiple changes are happening in the consumption sector due to consumer preference (ties to Modi jackets), technology (feature phone to smartphone), innovation (beauty and healthcare supplements), aspiration (luxury brands), logistics (quick and e-commerce), value-for-money quest (cheaper products with quality), and distribution (modern retail) across both rural and urban India. It is a competitive world, and the brand alone doesn't give the right to win.
If economic growth slows, and market pullback persists, is there risk to systematic investment plans (SIP) flows?
The Reserve bank of India (RBI) report on household financial sector investment estimated the total flow in mutual funds (MFs) between FY21 and FY23 at ₹4 trillion. Currency in circulation went up by ₹9 trillion. As long as investors believe that SIP will give a better return than cash, there is a chance that SIP flows will be sustained. More than 100,000 mutual fund distributors and their employees are raising financial awareness among Indians. At Kotak MF, we have entered Asia's book of records for imparting financial awareness to more than 75,000 Central Board of Secondary Education (CBSE) teachers. Our regulator, Securities and Exchange Board of India (Sebi), has guided us in launching an investor awareness campaign on a scale unprecedented globally. All these efforts give us confidence that SIP flows will be sustained.
Which sectors are you sanguine on and which will you avoid?
We had warned about valuation concerns in low-floating stock counters across public sector undertakings (PSUs), small and medium enterprises (SMEs), microcaps, and sectors like capital goods, consumer durables, and infrastructure. Finally, the correction has been set in those stocks.
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We are watching quality over momentum, reasonable valuation over expensive valuation, and high-floating stock over low-floating stock companies. On a bottom-up basis, the market outperformers will be found among private banks, IT, pharma, telecom, consumer staples, and cement sectors.
Retail sentiment as seen in IPOs of Hyundai, and Swiggy was not too upbeat. Is MF buying in these papers a risky bet?
The MFs are not in for subscribing to the IPO only to sell on listing day as a majority of retail and high networth individual (HNI) investors are prone to doing. Our investment in an IPO is on a longer term basis if we can get a decent size.
