India looks attractive over the long term, says Deepak Ramaraju, Senior Fund Manager at Shriram Asset Management Company. He predicts a phase of consolidation until further clarity on the inflation trends and stability in the interest rate cycle in the US.

Historically, the equity markets turn volatile in a range before the rate hike cycle ends.

He expects the EPS growth in the range of 10-12 percent during FY24. El Niño, sluggish global demand, muted rural consumption, lower discretionary spending, volatile commodity prices, higher credit cost will be the key factors to impact earnings, Ramraju shares with Moneycontrol in an interview, backed by his diverse experience of over 22 years managing four equity-oriented funds and one debt fund for Shriram MF.

Excerpts from the interview:

Do you see significant upgrade in earnings for the financial and, to some extent, for the auto sector?

In Q1FY24, we saw a healthy performance by banks in loan growth, stable asset quality though NIMs (net interest margin) were under pressure. The credit cost will continue to remain high for the time being, which will have impact on NIMs. Also, we may see that banks with low-cost deposit base will do well in this environment.

For financials, mobilising deposits obviously is more challenging in higher interest rate scenario. Earnings upgrade is unlikely in the financial sector for the time being.

Coming to the valuation for auto sector, it continues to be expensive; currently trading at more than 2x Standard deviation on trailing basis. Q1FY24 earnings have been mixed. It is unlikely to witness earnings upgrades amidst tough competitive scenario, slowdown in export market, availability of semi-conductors and volatility in commodity prices. Though new launches / face lifts can keep the consumer enthusiasm, but the real earnings upgrade will be tough. The rural spending will continue to be stressed due to El Nino and the urban discretionary spending have been selective.

Do you see downside to consensus EPS growth estimates of 14-15 percent in the rest of the financial year?

We expect EPS growth in the range of 10-12 percent during FY24. El Niño, weaker global demand, muted rural consumption, lower discretionary spending, volatile commodity prices, higher credit cost will be the key factors to impact earnings.

Also read: Shankar Sharma among 23 who are barred from selling Brightcom shares

What keeps you bullish on India?

For the next decade, India remains one of the fastest-growing economies globally, especially when major European economies are entering recession. Even the World Bank expects India’s GDP growth to be over 6 percent in FY24 (Global Economic Prospects Report), 6.4 percent in FY25 and 6.5 percent in FY26.

The key positive factors are:

1) Growth orientation

a) RBI’s focus is on balancing inflation and growth; improving asset quality of the banking system, stable forex reserves.
b) Government spending has been the key growth driver in selected sectors like infrastructure, defense, renewable energy, digitization etc.
c) Make-in-India, China one and PLI schemes – These will continue to attract FDI in key growth areas, ensures job creation, boost exports and these are the strategic frontiers of the countries growth in the next decade.
d) Reduced dependency on imports – Blending of ethanol, EV boost, green hydrogen will be transformative to reduce our dependency on imports

2) Improved governance

a) Indian economy has turned more formal with implementation of GST and industry-specific reforms. This enables more accountability and dissemination of tax collection into focused government spending.
b) A digitally revolutionised economy by UPI and UIDAI has been a boon to the growth and transformation and this will lead a long way for future growth in an accountable manner

The key possible risk factors:

1) Formation of coalition government at the Centre after the 2024 elections. The probability is low in our assumptions.
2) Any geo-political tension similar to Russia-Ukraine war, China’s reforms etc.
3) Unabated rise in inflation (including crude price as India is net importer) implying a tighter monetary policy
4) Maybe another factor is India’s forex reserves, and stability of INR(currency) during uncertain scenarios

Do you expect higher interest rates in the next calendar year as well?

The MPC (Monetary Policy Committee) has kept the interest rates unchanged at 6.5 percent (three times in a row). The CPI has been on a declining trend since January 2023. However, soaring vegetable prices-led inflation in July to 7.44 percent, much higher than expected. Due to the rise in vegetable prices, the RBI even raised inflation forecast for FY24 to 5.4 percent (5.1 percent earlier).

Also read: A question of values: How Jio Financial Services stacks up against rivals

The RBI announced an additional CRR to 10 percent of the incremental net demand and time liabilities between May 19 and July 28, 2023. Earlier, the RBI had announced discontinuation of Rs 2,000 notes and banks had higher deposits and this step is in the right direction to suck out liquidity from the system.

The government is taking the steps to keep inflation under control:

a) Government agencies have been instructed to sell tomatoes at cheaper rates
b) The government has imposed a 40 percent duty on the export of onions till the year end.
c) Ban export of non-basmati rice. Due to erratic rainfall, production of rice can get impacted

Globally, the US and the UK are witnessing lower inflation continuously over the past few months. Major European economies such as Germany and the Netherlands have entered recession.

Also read: FILA-backed Doms Industries files draft papers with SEBI, to raise Rs 1,200 crore via IPO

In this backdrop, it is unlikely that the central banks will keep the interest rates higher for long. I think the interest rates likely to cool down in next calendar year.

Do you expect a significant increase in demat accounts going ahead?

We have seen a significant growth in new demat accounts which now stand at 123.5 million. This indicates more retail investors coming into the equity markets are attracted by the returns. The millennials are relatively well informed on the risk of equities as an asset class and equities are meant for wealth creation in the longer term.

Regulator’s, institutional participants and the exchanges’ ad campaign and education efforts have also helped create awareness on long term investing in equities. Also as the economy matures, we will see more participation from retail investors. As a result, we can expect the number of demat accounts to increase.

What are the factors that must have been priced in by the market?

The factors that have been priced in by the market are softening of interest rates from FY25 onwards and withdrawal of monetary tightening. Also, return of NDA led Government at the Centre in 2024. What’s not priced in the markets are any possible crisis similar to Lehman’s or the subprime kind of events due to higher credit cost, China’s economic fallout or a coalition government in 2024 elections.

How long do you think the consolidation will continue?

India looks attractive over the long term but will be in consolidation phase till there is clarity on the inflation trends and stability in the interest rate cycle in US. Moreover, valuations are stretched at present. Historically, the equity markets turn volatile in a range before the rate hike cycle ends. So we can expect the markets to be in a range and volatile in the near term.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.