ETMarkets Smart Talk: Progressive Budget, normal monsoons & strong inflows will further re-rate markets: Amnish Aggarwal

The Nifty saw a 6% cut on results day with BJP failing to secure a full majority, as was priced in by most investors.

However, the following day, with TDP and JDU pledging their full support to the BJP-led NDA, markets managed to recoup half of the losses of the previous session.

Over the next few sessions, as the Modi 3.0 cabinet was announced, the Nifty hit a fresh all-time high and has been continuing its upward journey.Although BJP does not have majority on its own, the NDA Govt has retained the key ministers with their portfolios – Home, Finance, Commerce, Defence, External Affairs, Roads, and Railways. This is adding to investor optimism as they see policy continuity going ahead.We expect the NDA government to sustain focus on capex-led growth around PLI, Roads, Ports, Aviation, Defence, Railways, and Green energy, given a 20 bps lower fiscal deficit in FY24 (Than RE), normal monsoons, and Rs 2.1 lakh crore dividend from RBI.We believe a progressive budget, normal monsoons, and strong inflows will further re-rate markets.

What is your take on the Fed decision and possible rate trajectory?
While holding interest rates steady at 5.25% to 5.5%, the Federal Reserve has now signaled that there will be only one rate cut in 2024. Even as inflation has eased in the US, the Fed does not want to loosen policy yet.

We had begun the year with the expectation of three rate cuts, and markets globally had priced that in. However, markets now seem reconciled to lesser rate cuts and volatility in inflation and growth.

In India, the Reserve Bank of India kept the repo rate unchanged at 6.5% for the eighth consecutive meeting. Food inflation is playing spoilsport in getting the inflation target of 4%.

Global food prices are inching up; however, we believe normal monsoons should cushion its impact in the coming months. RBI could cut rates in 2H25, following in the footsteps of the Fed.

The next big event that markets will track is Final Budget 2024. What are your expectations from the big event?
The Budget is expected to be progressive, but we could see a rise in populism. We expect the NDA government to increase its focus on farmers, rural and urban poor, and the middle class.

This will be done to mitigate the impact of recent electoral reversals driven by new social engineering and freebies, keeping an eye on assembly elections in states of Maharashtra, Haryana, Jharkhand, J&K and Haryana in the coming 6-8 months.

We anticipate an increase in outlay for rural development and the bottom end of the pyramid. Additionally, sustained spending on infrastructure and new initiatives like green energy and electric vehicles (EVs) is expected.

There may also be some relief for the middle class in terms of taxation. Higher subsidies and increased outlay on agriculture for modernization, along with changes to the Minimum Support Price (MSP) policy and MGNREGA payments, are also anticipated from the budget.

How should one play small & midcaps in Modi 3.0? There are mixed voice some say that largecaps likely to do better while some are looking at moderate returns from broader markets. What are your views?
The BSE Smallcap and Midcap indices have risen by 57% and 61%, respectively, in the last 12 months, which is more than double the movement of the Sensex/Nifty and BSE 100.

Mid and small caps have gained in the last two months of the rally, demonstrating market confidence in the economy and the strong breadth of the market.

However, since India has returned to a coalition government after 10 years, challenging reforms related to PSU divestment, GST, labor laws, and modern retail/e-commerce might take a back seat.

While this is unlikely to impact near term sentiments, incremental re-rating in PSU, PSU Banks and Infrastructure sectors may happen at much moderate pace going forward, in comparison to past few years.

Meanwhile, the NIFTY is trading at its 15-year average PE ratio with a projected 14.9% EPS CAGR over FY24-26.

Our 12-month base case NIFTY target is 25,816, compared to the previous target of 25,810. Investors may find large-cap stocks more favorable.

Given higher liquidity, large caps will also be the bigger beneficiary when FIIs make a comeback.

Which sectors are on your buy list and sectors could see some profit-taking after the recent rally?
We remain positive on Auto, Banks, AMCs, Capital Goods, Defence, Hospitals, Pharma, Cement, Aviation, and Discretionary Consumption. In our model portfolio, we have increased weights in Capital Goods, Telecom, and Cement.

Major Private banks are trading at multi-year low P/BV, and the risk-reward seems favorable. We have slightly increased weight behind HDFC Bank as the incremental LDR (loan-to-deposit ratio) is ~80-82%, and sustained growth will improve valuations from current lows.

On the other hand, generic pharma players will benefit from benign API prices and stable US pricing, while domestic growth remains intact. In capital goods, we have increased our weight in L&T.

We believe the strong government focus on infrastructure development across segments will provide robust growth for L&T.

We retain an underweight position on IT services as the recovery in IT services is being delayed in Western markets.

Additionally, we are underweight on oil & gas, although we remain positive on Reliance Inds due to its business like JIO Platforms, retail and New energy.

We are almost through with the first half of 2024 – how do you see H22024 for India Inc. in terms of earnings?
Q4 FY24 aggregate coverage sales, EBIDTA and profit before tax grew by 4.8%, 9.5% and 8.8% YoY respectively as margins expanded 86 basis points YoY and 67 basis points QoQ. Ex-BFSI sales, EBIDTA and PBT grew 4.7%, 7.3% and 8.8%. Ex-Oil and Gas sales, EBIDTA and PBT grew 6.7%, 12.1% and 13.6%.

Travel, Chemicals, HFC and Media had the maximum beat in sales while Telecom and Oil and Gas were significantly below estimates.

There were 24 rating upgrades and 18 rating downgrades, Auto/Anc got 6 upgrades, Capital Goods 5, Oil and Gas 5 and Consumer 3. Metals, Capital Goods, Travel and Building material had 3, 4, 2 and 2 downgrades respectively.

Going ahead, we see FY25 NIFTY EPS (earnings per share) to be driven by Consumer, Metals, Cement, IT and telecom.

What is the biggest risk this bull market faces?
– India is not under single party majority rule after a decade
– Budget and expected increase in populism
– Geopolitical uncertainties in Middle East, Ukraine
– Delay in rate cuts by the Federal Reserve
Bull Case, we value NIFTY at 5% premium to 15-year average PE 20.2x and arrive at bull case target of 27,102 (27,100 earlier). Bear case, Nifty can trade at 10% discount to LPA (10% earlier) with a target of 23,235 (23,229 earlier).

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)