What we should expect from the markets over the course of next 12 months. I mean, in 2023, we had seen a return of almost 19% to 20% from the Nifty. Nine months so far, Nifty has run up 19%, clearly much ahead of the averages that we have seen. Do you expect it to normalise over the next 12 months or this bout of outperformance can continue?
GV Giri: Well, we are at almost 22 times one year forward and from this level, one should not really expect a massive outperformance unless there is a case for large earnings upgrades. We have built about 12% earnings growth Y-on-Y and maybe it can go up to 15% if commodities stay soft. We have had Israel and Lebanon now fighting and we have had Russia-Ukraine go on and we have had the Saudis cut and the rest of the OPEC members also cut production, nothing has saved crude from threatening the $70 level on the way down. So, it could be quite good for Indian companies’ earnings, which are typically very positively reactive to soft commodities. Also, monetary easing is starting and will happen globally, so that is one more reason to expect that the Indian cost base will behave more favourably, so maybe the earnings growth can be 15%. There might be a bit of derating, although I do not really think that the India story calls for any sort of derating, it will probably continue to command a premium. So, I would expect the market to do about 12% from the current levels, 10% to 12%. Now whether that is an outperformance or not, you can decide by looking at the other markets. I think it would be an outperformance.
But this 12% return that you are expecting, do you think it will be more skewed towards largecap outperforming now versus the small and midcaps or do you expect much higher returns from this mid-category versus largecap?
GV Giri: See, the MSCI index and MSCI Small Cap index, standard and small cap indices, are at very big discounts to the MSCI Mid Cap index and it is the same story about 22-23x multiple for the largecap and smallcap versus the midcap multiple of 39x.
So, I think there is a problem with the specific list of stocks that are included in midcaps. Most of them are too expensive compared to their sector peers in largecap and smallcap categories. So, I think the midcap index will underperform the other two. As far as the smallcap is concerned, we have done an analysis some time back, which I can later share with you, which suggests that in any period strong growth period or a weak growth period, the smallcap EPS earnings on average are almost double that of the largecap EPS earnings, so that means that we have a good case to expect the smallcap index to keep pace with the largecap index in the next 12 months.
Among sectors, if you look at, NBFC is one of your preferred themes, but given the fact that there is a rate cut expectation that is there, do not you think on the short term, it could have a financial impact on the NBFCs?
GV Giri: NBFCs typically behave very well when a rate cut cycle starts and many things support that. Some indirect factors are also there. For example, gold does well. If gold does well, the value goes up, so that supports.
Also, the NBFC borrowing cost base itself comes down, so loans become more attractively priced. People buy more stuff. Consumption accelerates. Mortgages accelerate. So, a number of things will play in favour of NBFCs, relative to banks especially and relative to other sectors and NBFC growth itself has generally been good. Even if you take the upper-quality NBFCs like Bajaj Finance and Chola and you do not really need to go down the risk curve and look at the growth rates. It is like 25-30% even after a slowdown in an economy where the nominal GDP growth rate is only 8.5%, so where is 8.5%, where is 25%.
So, you have such a big growth advantage in NBFCs, plus this monetary easing and expectation of yields coming lower, then NBFCs, even though some of them might be a little bit expensive, will outperform.
Cement is also one of the preferred themes of IIFL. But for the past two years, we have not seen any meaningful increase when it comes to prices. Yes, demand has been going up, but given the fact that pricing is continuously weak and the competitive intensity in the sector is too high, what are the reasons that you are bullish on the cement sector?
GV Giri: Number one, competitive intensity is high, but at the same time, consolidation is also happening and the big players are going to get much more dominant than they have been. Number two, if you look at the biggest demand for cement, it comes from…
Read More: earnings growth: Monetary easing and soft commodities to fuel Indian market