economic growth rates: Manufacturing, private capex and exports are drivers of corporate earnings over medium term: Saion Mukherjee, Nomura

Saion Mukherjee, MD & Head-Equity Research, Nomura, says: “As we look forward to the medium term, both economic growth rates and earnings growth rate should be quite resilient. In fact, we are talking about how 12-17% earnings growth in the medium term for India is very much possible. we are constructive in that sense and therefore, would be sort of engaging in buying more as and when we get opportunities in the market which can happen this year.”

Paint the big picture for us. What are we staring at in 2024 after what has been a phenomenal fag end of the past year?
Saion Mukherjee: Yes, clearly India’s micro and macro are looking quite okay at this point. I think the key variable that we are linked to is how the global macro settles going forward. Particularly towards the later half of 2023, the narrative significantly changed. Even as we as a house at the start of 2023 were very cautious looking at a deep recession sometime in 2023 in the US, the growth has remained quite resilient and our views have also changed. We are now looking at a mild recession. We are talking about being slightly cautious compared to Street expectations,which is probably a complete soft landing. We are dependent on how the US or the global economy shapes up. So to that extent, we may see volatility in the stock, particularly after a very strong rally of around 20% that we have seen last year.

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But having said that, as we look forward to the medium term, both economic growth rates and earnings growth rate should be quite resilient. In fact, we are talking about how 12-17% earnings growth in the medium term for India is very much possible. we are constructive in that sense and therefore, would be sort of engaging in buying more as and when we get opportunities in the market which can happen this year. We can see volatility given that most of the expectation on macro currently is on a higher side.

In spite of that also, there will be two big events. In the first half, there will be our own elections and in the second half, the US elections as well. Do you think the markets – and not just for us, but across the globe as well – would be hugely volatile around these events? There is a precedent of the state elections and the way we shot up after that….
Saion Mukherjee: Coming to elections in India, assuming that we will have a continuity of the government and policies. I think that is the base case that we will work with. In general, from a global perspective, given that the deficit levels across most markets are quite elevated, in an election year, the governments tends to spend a lot more. Macro risks can come through, particularly if inflation remains quite sticky and the yield starts to move higher. So that is one risk that one has to deal with in 2024, given a very, very busy election calendar.

You did touch upon earnings growth. In light of the fact that it is an election year, there is potentially a pickup in private capex and exports. Which are the individual sectors that could be potential beneficiaries of this?
Saion Mukherjee: When you talk about the earnings in the short term, if you look at just the next couple of years, at least in the benchmark indices, financials are the big contributor to earnings over the next couple of years. Given the balance sheet size, we do not have many credit cost issues as such to talk about, even in case suppose we see somewhat of a slower growth than what the base case is. So when I look at the next couple of years, financials as a space would be the important driver. And that is where we have a fair amount of visibility.

Now, from a slightly medium term perspective, the key for India and that is what I think the policy is all geared up to support local manufacturing. So what we are expecting is a pickup in local manufacturing and that should also lead to improvement in private capex, which has been a bit subdued for a very long time.

We are seeing some signs of a pickup, but it has been subdued for a fairly long time. But going forward, as we see traction in manufacturing, our expectation is that we will also see a very strong pickup in private capex. So manufacturing, private capex exports, would be the drivers of corporate earnings over the medium term. Of course, this would have a ruboff effect on consumption as well as we go forward.

Okay, fair enough. Let us also get in a sense then as to what the outlook is in terms of the inflationary factors working itself into mass consumption. I believe that your reports are talking about how the slowdown will bottom out with low inflation and interest rates. But is there any sort of worry or a concern when it comes to inflationary pressures for consumption as a pack?
Saion Mukherjee: There are some near-term risks, particularly on food prices for instance. So there can be those volatility but structurally, inflation is headed lower. If you look at our call globally, we are talking about slower growth across most of the economies versus where the street is. We are not that bullish on China either. I am expecting that inflationary pressures would not be a problem this year. And to that extent, it should help mass consumption.

Mass consumption has been struggling, especially if you look at the rural real income has been quite weak since the pandemic. And I think, as the inflationary pressures is that part of the economy which has been struggling may see some signs of bottoming out and gaining some traction.

What is your outlook as well in terms of the policy thrust, when it comes to private capex? When it comes to manufacturing, infrastructure, investment as a whole, do you think that expectations are riding high that a lot could emerge from this budget or even just down the line for the year ahead in terms of announcements for these individual sectors?
Saion Mukherjee: I think there is definitely we are seeing policy thrust which is sort of factored into the prices to some extent, I would say. Therefore, one has to really pick and choose there. As a theme, manufacturing as a percentage of GDP is just around mid-teens at decades low actually and the government intends to take this up to almost 20% plus.

Now this is probably not going to happen in a very short period of time but then incrementally we will see manufacturing as a percentage going higher. And the ratio of manufacturing to gross capital formation by the industry is almost at a historical peak.

The moment we see manufacturing picking up it would lead to the private capex actually growing at a faster clip. So that is what we think would happen eventually but I must admit that many of these themes and stocks have already rallied quite hard in the last year or so and hence to that extent I think one needs to be selective but as a theme I think if you get an opportunity as and when you see correction in some of these stocks I think this makes a you know very good investment case from a medium-term perspective.


In continuation to that besides the overweights what are the underweights that you have in the current market?
Saion Mukherjee: As far as the sectors where we are underweight currently, I would say, in industrials the valuation looks pretty stretched. Industrials, defence are some of the names where we appreciate the medium-term story but we would wait for the right price point to get in there. Similarly we find consumer discretionary holding long-term prospects. We are relatively cautious given the run-up in the stocks that we have seen.

There has been a very strong affluent spending or pent-up spending . That should start to slow down and therefore one can be relatively more cautious here. Finally, we are still cautious on IT services and we think that we are not seeing any major pickup in discretionary spending for that matter and if we see a slower growth in the US. we will continue to see earnings getting cut and therefore that is another space we would be relatively cautious on.

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