budget 2024 expectations: Earnings, Budget to drive market; risk-reward favours largecaps & midcaps vis-a-vis smallcaps: Shibani Sircar Kurian

If we look at what is making the market nervous, there is talk of STT being hiked in the Budget to curb F&O. Jefferies and Morgan Stanley have put it in writing this morning. Then, there is talk of recommendation papers on how to curb F&O. There is the NSE margin list that has come out. However, the very good liquidity positions from SIP, EPF, and the insurance money are cushioning the falls. We are in a very interesting market. How are you looking at it?

Shibani Sircar Kurian: It is a very interesting market at this point. On one hand, the liquidity from flows into mutual funds such as ours remains fairly strong and the SIP data corroborates that as well as the net equity flow data that you saw come out for the month as well. On the other hand, of course, we will have to wait and see what are the changes that are proposed from a regulatory perspective across various parameters.

However, when you look at the overall financial savings pie in India and the proportion of equity in that pie, on a relative basis, India remains fairly small and therefore the room for expansion in terms of investments into equities as a medium for long-term wealth creation remains fairly intact. Secondly, from a market perspective, we have seen a fairly great run in the market. Post-election, we have seen the market move up once the government formation was done and therefore with this sort of market move and with valuations where they are, it is normal to expect some degree of near-term volatility. But when you just take a step back and think about the market, the very factors that have been driving the market are intact whether it be in terms of macroeconomic parameters, or corporate earnings and we are now stepping into the Q1 of FY25 earning season and flows as we were discussing. So, in this context when we look at the market, we have to look at valuations and in that context, as we have been saying clearly the risk-reward at this point seems to be favoring the largecaps and some of the larger midcaps vis-a-vis smallcaps and microcaps where valuations have been stretched on a relative basis as well as in comparison to their history.

Now, if you look at it from a market perspective, we do believe that the earnings trajectory for FY25 and FY26 are still fairly intact, and mid-teens earnings growth in the context of almost 24% earnings growth for Nifty last year which is FY24 is a very good outcome and therefore earnings will be the driver for markets and in the near term we will have the Budget to watch out for in terms of the policy direction that the government is taking.

There is talk that in this Budget, the government may boost investment in shipping, opening up and setting up yards, ship repair, and ship buildings. This space has not seen a very specific focus from the government so far, development of ports, etc. What are your thoughts here? Half a dozen stocks could be impacted. But what do you think of it?
Shibani Sircar Kurian: Yes, while it is difficult to say specifically which segment on the infrastructure side the government will focus on, the overall tone in terms of policy will remain in terms of investment-led growth. In the past, we have seen focus on roads, railways, and maybe the focus ships towards ports and shipyards in terms of freeing up bottlenecks and therefore leading to overall growth and making India a manufacturing hub of sorts.

The government and the overall Budget, the way the finances look, there is adequate opportunity and adequate fiscal room for the government to continue to spend on infrastructure and investment-led growth. Remember the fact that RBI dividend of almost 2.1 lakh crores has come in also gives them the room to not only look at investment-led growth but also look at possibly taking measures to boost demand at the bottom of the pyramid and mass consumption which is also something that is going to be important to watch out from a budget perspective.

So, two things – one, the overall infra space and the investment-led growth will possibly continue. We will have to wait and see what allocations are made to specific industries and segments, which we will get to know shortly, and the second factor of course will be what happens in terms of rural as well as allocations to boost demand at the bottom of the pyramid.

Which area of the market in your view is most attractive right now on risk-reward basis?
Shibani Sircar Kurian: So, from our perspective, if you look at risk-reward, there are two sectors that we are focusing on where valuations we believe relative to their history, these sectors are trading at fairly reasonable multiples. The first segment is the private sector banking pack or some of the larger banks where we believe that if you look at the improvement that has happened both in terms of balance sheet as well as return ratios over the past few years is not reflected in terms of valuations.

There have been concerns in terms of margin compression, but we believe that we are possibly coming close to a cycle of margin compression, and margins over the next few quarters should start to bottom out and remain stable. The interest rate cut cycle seems to have been pushed out a bit which again aids margins and valuations are fairly comfortable. The second factor and the sector that we are looking out for and possibly where again we have valuation comfort is the entire consumption space, specifically staples. If you look at some of the commentaries that is coming through from some of the staples companies, incrementally it does appear that rural demand is picking up though at a very steady pace, it is not a sharp pickup and recovery.

If you look at in terms of the inflation-led input cost pressures that were bringing down real rural wages, that has started to abate at the margin, and various data points whether it be two-wheeler sales, whether it be MGNREGA employment data seem to suggest that possibly the worst is over from the rural perspective. So, consumers are another segment that we are watching out for. Structurally, however, if you look at our positioning, we continue to remain fairly positive on the entire capital goods, manufacturing, and auto space. However, we are also cognizant of the fact that in pockets there are valuations that have moved up considerably, and therefore incrementally one would have to look at segments and the names within these sectors where valuations are favourable on a relative basis.

Do you feel there is a lot of froth in parts of the market and trimming position is the right way?
Shibani Sircar Kurian: The market risk-reward, as we were discussing earlier, seems to be more favourable for largecaps over mid and smallcaps, so that is something that we are cognizant of. In the medium term if earnings continue to play out the way the market is believing it to be and what the consensus numbers are showing with mid-teens earnings growth for 25 and 26, that earnings trajectory is a fairly strong earnings trajectory in a background of stable macroeconomic parameters.

So, from that perspective in the medium term, we continue to remain positive on the markets. From a sectoral perspective, of course, we have to look at some sectors where valuations offer comfort which is the two sectors that we discussed. Apart from that, we would also keep a close watch on the largecap tech space where again valuations are fairly comfortable and the chemical segment which has again seen a significant drawdown in the last few years because of various global issues which has brought down profitability in the sector. So, one has to be specific in the market in terms of stock picking, look at growth opportunities and keep an eye on valuations.

Would you be a buyer in some of these market infrastructure names if the stocks fall further? I am talking about certain wealth management companies, and some big technology-backed brokerages in the listed space. They have fallen almost 40-50% from the top and some are already on curbs on F&O. Is there merit in getting into some of these names?
Shibani Sircar Kurian: Yes. So, we are keeping a close watch in terms of what the Budget brings to the table in terms of proposed changes. But as we were discussing, if you look at the entire trend of financialisation of savings and equity markets being a dominant part incrementally in the entire pool of financialisation, we believe that there is still a long runway for growth. Of course, we will have to look at it from a stock-specific perspective, but various parts of the entire space offer an opportunity to play that trend of improvement in terms of savings through the equity pie.

The business models as you rightly pointed out are evolving in different ways and therefore that is something that we will watch out for. Of course, valuations in this segment have become rich and therefore we will possibly look at better entry points into the entire space, but structurally we believe that the opportunity set remains fairly intact.

Do you think there is froth in smallcaps or is it that all smallcaps should not be weighed together?
Shibani Sircar Kurian: Absolutely. So, when you look at just smallcap valuations one would say that yes, there is froth, the smallcap index per se is trading at multiples which are of almost 40% premium to their long-term averages. However, we have to look at various segments of the smallcap space in the context of growth. So, while multiples have moved up sharply, remember this entire segment has also seen significant improvement in terms of earnings growth and therefore some of the multiple expansion is possibly reflective of that.

However, within the space, if there is a set of companies that have moved up one because of low float and secondly where fundamentals do not justify current valuations, those are segments where we would be cautious. This debate on small and midcaps is likely to continue given the kind of multiples that the segment trades at, but within the segment, one has to be of course stock stock-specific. There would be pockets of opportunity but there could also be pockets where froth is visible and therefore, one has to be discerning in terms of the kind of stocks that one picks in the space.