Trupti Agrawal, Fund Manager- Equity at WhiteOak Capital Management, believes the Budget 2024 will unlikely be a deal breaker for any particular sector. It should be seen as a continuation of previous years’ budgets, with broad themes focusing on infrastructure upgradation and higher allocations towards housing, sanitation, and green energy. In an interview with Mint, Agrawal shared her views on Budget expectations and market outlook.
We have always believed that in the very near term, it is impossible to predict the market trend, hardly any different than a coin flip.
Over the long term, markets worldwide have tended to deliver returns that are more or less in line with nominal GDP growth rate plus dividend yield.
India’s nominal GDP growth rate is expected to be in the low double digits going forward, and similar would be our expectation for the market return in rupee terms.
What makes India such an exciting market is that it offers the highest alpha generation potential compared to any sizeable equity market around the world.
While there are strong opportunities across the market capitalisation spectrum, India has diverse mid and small-cap segments, which are relatively less researched and hence more inefficient, thereby providing higher alpha generation potential.
The key near-term challenges at any point in time include any uncertainty related to the evolving global geopolitical situation, a sharp reversal in global markets and any sharp spike in oil prices.
The last few Budgets have stressed sustainable growth while signalling policy continuity with a thrust on public capex, enhancing the ease of doing business and boosting exports and manufacturing.
The consensus view is that there is broader alignment among NDA coalition parties on most economic policies and governance, implying continuity of policy framework and a pro-growth agenda similar to the past decade.
The Budget is likely to be characterised by (1) continued growth in capital expenditure, (2) a targeted increase in revenue expenditure to support various core central social sector schemes and (3) a broadly stable tax structure with a continued focus on fiscal discipline.
The Budget is unlikely to be a deal breaker for any particular sector.
It should most likely be seen as a continuation of previous years’ budgets, with broad themes focusing on infrastructure upgradation and higher allocations towards housing, sanitation, and green energy.
There are also expectations of more focus on social sector schemes, which could be sentimentally positive for the consumer-oriented sectors. India is benefitting from several secular tailwinds.
A potential multi-decade growth opportunity is unfolding as per capita incomes rise, creating inflexion points for various categories where India is at the lower end of the consumption curve.
Additionally, the country is experiencing rapid digitalisation of services, supported by increasing internet penetration and formalisation on the back of crucial ongoing structural reforms.
The government is undertaking steps to indigenise manufacturing while upgrading the country’s infrastructure, which is ably supported by a banking system that is at its healthiest in over a decade.
There is also a strong thrust on structural reforms, which is likely to foster a favourable growth-productivity dynamic.
There are a host of sectors that will benefit from the above tailwinds. Thus, it is important not to overemphasise budget-related themes but to focus on the structural tailwinds that will support India’s growth over the long term.
Overall, given the fiscal room available with the government, it is largely expected that the FY25 Union Budget will be balanced, broadly catering to various stakeholders' requirements.
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FY24 reporting season ended with a positive surprise, leading to a 20 per cent year-on-year (YoY) growth in earnings for the full year.
As per consensus expectations, Q1FY25 earnings growth is likely to moderate, between 8-10 per cent YoY growth.
Most sectors are likely to report modest growth, with the consumption sector still facing some headwinds, while the capex-oriented sectors are likely to report strong execution for most parts.
It is expected that banks will report decent credit growth but may face margin headwinds.
IT services may see seasonal strength and ramp-up in deals, while the pharma sector will likely witness continued stability in the US business.
The market will likely focus more on the outlook and commentary provided in these sectors, as the positives in earnings print may already be in the price for many sectors.
Expectations are of revenue growth to improve moderately in FY25 versus FY24, driven by large cost take-out deals ramping up and stability in discretionary spending.
While clients’ decision-making timelines are still elongated with stringent hurdles on RoI (return on investments), deal pipelines seem to be healthy, driven by clients' cost optimisation initiatives and improved conversion compared to last year.
Growth would improve gradually with the normalisation of discretionary spending at subdued levels.
Financial Services is a structural long-term theme in India, given the extent of under-penetration compared to the developed world and several emerging market peers.
The industry is an amalgamation of several heterogeneous yet interconnected sub-sectors (like banks, non-banking financial services companies, mutual funds, insurance, fintech, stock-brokers, wealth managers, etc.), many of which are expected to grow faster than the overall economy over the long-term.
The landscape of financial services is fast evolving in India and immensely benefitting from the digital public infrastructure created by the government.
Having looked at financial services even outside India, the team believes that India has one of the most sophisticated and evolved financial services systems from a management capability as well as a regulatory standpoint.
We think that India’s financial system is on par with the developed world and among the best in the emerging market world.
The banking sector is witnessing robust credit growth, improving deposit formation trends, strong asset quality performance and healthy return ratios.
The sustained underperformance of the private banks for the last few years despite strong ROE (return on equity) delivery has made their valuations attractive in the context of their historical multiples as well as on a relative basis versus other opportunities in the market.
At WhiteOak, our investment philosophy is that outsized returns are earned over time by investing in great businesses at attractive valuations.
To be considered great, a business should possess the following attributes: (a) superior returns on incremental capital, (b) scalable, and (c) well-managed in terms of execution and corporate governance.
Our team is very stock selection-driven. We do not make top-down thematic or sectoral calls, as those are fraught with risk without adding to returns in our view.
Having said that, given our philosophy, there are certain sectors where the team might find more attractive opportunities compared to other sectors from a bottom-up perspective.
At present, the team finds a greater number of opportunities in private sector financials, health care, speciality chemicals, IT services, industrials, and certain consumer discretionary industries.
India’s macro-fundamentals and growth story remain strong, with expectations of an earnings growth trajectory in the low-to-mid teens over the next few years.
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Disclaimer: The views and recommendations above are those of the expert, not Mint. We advise investors to consult certified experts before making any investment decisions.
