Do you expect the first-quarter numbers to be strong overall, or do you foresee the top line flickering a bit? Some believe FY25 should be okay in isolation, but the numbers for FY24 versus FY25 may not show a significant move.
Shibani Sircar Kurian: When looking at markets and earnings, you’re right that FY24 was a great year, with Nifty EPS growth of almost 24%, surpassing consensus expectations at the start of the year. Overall, earnings delivery was extremely strong. On this base, for FY25 and FY26, a mid-teens earnings growth expectation is still strong given the growth we’ve seen. While earnings growth is likely to be mid-teens, the overall growth trajectory remains strong.However, top-line growth has been muted, driven largely by margin expansion. Moving forward, the pace of margin expansion in FY25 compared to FY24 should be lower since the benefits from commodity prices and input costs were already realized in FY24. Therefore, top-line growth needs to return, making the revenue growth trajectory important. Sectors such as automobiles, industrials, and domestic-facing sectors like banks and manufacturing should maintain stable growth. IT is a sector to watch due to muted earnings expectations, though the first half is usually strong for this sector. Overall, most domestic-facing sectors should deliver strong earnings for FY25.
Let’s talk about late-stage cyclicals in the real estate space. Kajaria has rebounded significantly, crossing previous highs of around 1,265. This coincides with management’s recent commentary that the worst might be over. How do you view valuations in the tile sector?
Shibani Sircar Kurian: The building materials segment, specifically tiles, has underperformed despite significant real estate growth. Typically, when real estate sales pick up, demand and volume growth in building materials follow with a lag. Organized players have gained market share over time, and as real estate sales translate into later stages involving interiors, demand for tiles and other materials increases. Although volume growth has been muted recently, we expect it to pick up due to strong real estate momentum. Margins have improved due to lower input costs, and as volume growth increases, operating leverage will drive further margin improvements. Valuations in the building materials sector are currently more favorable than in the real estate developer space, given the sharp run-up on the developer side. Therefore, we are positive about the building materials sector. What about the oil and gas space? It seems there is still value despite some OMCs having run up significantly.
Shibani Sircar Kurian: Valuations in the oil and gas sector are favorable. We expect oil prices to remain range-bound unless geopolitical tensions arise. Our allocation prefers gas transmission and utility companies due to significant volume growth potential. The share of natural gas in the energy basket is increasing, making this segment structurally positive. On the OMC side, despite some volatility in refining, marketing margins are holding up well. If oil prices remain range-bound, valuations appear reasonable.
How do you see the valuation gap in the cement space, with stocks like UltraTech at over 100 dollars a tonne and others like Mangalam at 25 dollars a tonne? Will this gap narrow, and where will the money flow, to mid-tier or larger players?
Shibani Sircar Kurian: The cement sector has seen significant consolidation, benefiting larger players who have gained market share. This trend is likely to continue, marginalizing smaller players. Despite strong demand driven by investment-led growth and real estate, pricing actions have been muted. Input costs are benign, so margins are holding up well. For the sector’s profitability, pricing is key. Over the long term, consolidation should lead to improved pricing and profitability. Larger players are well-placed due to market share gains and M&A activity.