Expert view: Achin Goel, Vice President at Bonanza Group, points out that the Nifty 50 is trading at about 19 times its one-year forward EPS (earnings per share), which is at par with its 15-year average. He expects a nearly 5-6 per cent growth in the Nifty 50 by year-end. In an exclusive interview with Mint, Goel discussed the impact of the US Fed rate cut on the Indian stock market and the areas of opportunities for investors.
The Indian stock market has been shining so far in 2024, where the Nifty 50 has given about 15 per cent this year so far, strongly driven by resilient domestic flows of $4 billion in August itself and over $23 billion till-date this financial year, the fourth-highest India has witnessed in a year.
While on the other hand, FIIs (foreign institutional investors) have been neutral to the market. The Nifty 50 has been gaining since June as the markets celebrated the installation of the new NDA government.
The September series started positively as the index reached an all-time high closing, crossing the 25,000 mark, driven by improved optimism around Indian equities.
Further, liquidity remains robust, with strong DII (domestic institutional investor) flows significantly surpassing FII flows, anticipating a strong festive season backed by rural revival and potential interest rate cuts.
Currently, Nifty is trading at about 19 times its one-year forward EPS (earnings per share), which is at par with its 15-year average. We can expect a nearly 5-6 per cent growth by year-end from hereon.
Despite global recessionary pressures and geopolitical challenges, Indian markets have shown remarkable resilience, nearing all-time highs and solidifying India's position as the world's fifth-largest economy.
The current landscape presents significant opportunities, supported by structural solid drivers for long-term growth. India's political and regulatory environment remains stable and investment-friendly.
With the ambitious goal of achieving 50 per cent cumulative installed power generation capacity from non-fossil fuel sources by 2030, the government's focus on renewable energy is set to intensify, necessitating the addition of 50 GW of renewable energy capacity annually for the next five years with an allocation of approximately ₹28,352 crore, which is up by 50 per cent compared to the previous year at ₹18,945 crore.
Additionally, the aggressive allocation of ₹11.11 lakh crore in the Budget towards infrastructure, particularly in roads, highways, railways, and water treatment, shows the potential for continued growth in these sectors.
These factors make a compelling case for continued investment in these areas in the coming quarters and years.
The Nifty IT index reached a record high in August 2024, boosted by expectations of a potential rate cut from the US Federal Reserve.
We believe a US rate cut will enhance tech spending, particularly in sectors like BFSI, which is crucial for Indian IT companies.
Lower interest rates typically lead to increased tech spending, which benefits Indian IT companies, which derive a substantial portion of their revenue from the US market.
Recent data indicated a rise in consumer confidence in the US, which could signal a healthier economic environment conducive to tech spending.
However, despite the positive outlook, there are concerns regarding potential slowdowns in US economic growth, which could impact tech spending. We believe the immediate outlook for IT stocks is favourable.
Still, underlying headwinds persist in the US economy, such as household debt hitting record highs of $17 trillion in March 2024, weakening consumer spending, etc.
While the Nifty IT index is currently at a record high and supported by rate cut expectations, the long-term outlook will entirely depend on the Fed's timing of the rate cut and to what extent the US economy will revive.
Amongst the large-cap IT stock, investors can look into Infosys as it has reported stellar all-round performance in Q1FY25, surpassing its rivals in key metrics such as constant currency revenue growth and margins.
It reported a 3.6 per cent quarter-on-quarter (QoQ) growth in revenue to $4,714 million, while in CC (constant currency) term, it rose 2.5 per cent year-on-year (YoY).
Net profit increased by 7.1 per cent YoY to ₹6,368 crore, beating consensus estimates. Infosys also raised its revenue growth guidance for FY25 to 3-4 per cent from the previous 1-3 per cent, signalling better IT spending by clients.
In the midcap segment, Sonata Software looks promising as its focus on securing large deals and acquisitions and expanding its client base shows its commitment to growth and innovation.
Sonata's efforts to leverage AI and new technologies like Microsoft Fabric will help It achieve significant revenue growth in the future.
Banking stocks have not been on the investor’s radar year-to-date, and Bank Nifty has underperformed Nifty 50. We have seen that over the last four quarters, private banks' margins have declined to 30 to 50 bps. Private banks have a higher CD (credit-deposit) ratio of an average of 87 per cent.
Kotak Mahindra Bank, IndusInd Bank and HDFC Bank have CD ratios of 83.77 per cent, 87 per cent, and 103.55 per cent, respectively, because of high advance demand and low deposit availability, which led banks to go for expensive deposits and increased cost of funds.
Expensive deposits impact margins adversely, and to mitigate that impact, banks are moving for high-yield advances, creating fear that asset quality will be adversely impacted in the upcoming quarters. The fear also impacts the growth of advances as banks opt for a cautious approach.
All these factors are affecting the growth and profitability of banks, and due to this, private bank stocks like Kotak Mahindra Bank, IndusInd Bank, and HDFC Bank have been underperforming over the last year.
HDFC Bank: HDFC Bank is focused on enhancing deposit growth amid challenges, aiming for a deposited credit strategy.
The bank plans to improve branch distribution and customer engagement while maintaining stable deposit pricing.
It seeks to reduce its credit-deposit ratio to pre-merger levels, which impacted credit growth adversely, and that will support NIMs (net interest margins) positively in the upcoming quarter.
IndusInd Bank: Advances growth was moderate due to a decline in MFI (microfinance institution) loans, while non-vehicle retail loans grew faster.
Vehicle business is expected to improve with the timely onset of the monsoon. Operating metrics were soft due to higher expenses and credit costs, which compressed profitability.
Kotak Mahindra Bank: Retail credit growth moderated due to regulatory restrictions on digital onboarding and credit card issuances.
Deposit growth stagnated, with the CASA ratio declining due to robust term deposit growth. Margins contracted from rising costs and lower yields.
Asset quality deteriorated, particularly in unsecured retail, leading to higher slippages and credit costs.
There is little change in the number of upgrades and downgrades. Prices are a little high, but a slightly higher valuation is justified, given India's macroeconomic stability.
In the past two to three years, the industrials, PSUs, real estate, and those types of equities have dominated the markets, and with good reason—the government's capital expenditures have been extraordinarily robust, most likely 20 per cent or more.
In contrast, government spending on revenue expenditures was rather modest.
Over the last three to four years, the economy's consumer sector has only grown at a CAGR of 3-4 per cent. Even still, based on the GDP numbers, we think that it is headed south.
This time, the distribution is a little more equal, with the industrial and durable sectors seeing a particularly robust rise in earnings. We observe the two primary areas of earnings momentum.
The US Federal Reserve’s anticipated shift in monetary policy, highlighted by Jerome Powell’s comments, has already had a notable effect on global markets.
The probability of a 25 basis point (bps) rate cut by the Fed in September 2024 is high and appears largely priced into the markets.
As such, its immediate impact on the Indian stock market might be limited.
However, should the Fed implement a more substantial 50 bps cut, this could drive a notable initial rally in Indian equities, particularly in sectors sensitive to global liquidity and interest rates.
Export-oriented sectors, including IT and pharmaceuticals, may benefit if the rupee remains stable or depreciates, as a weaker rupee would enhance the competitiveness of Indian exports.
Conversely, a deeper rate cut might indicate significant concerns about US economic growth, potentially causing increased market volatility.
While a modest rate cut may not drastically shift market dynamics, a more aggressive reduction could temporarily boost growth stocks in India and impact sector-specific performance.
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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.
