‘Consumer sentiment seems generally positive’

The recent market correction has meant a reduction in the price-earnings premium of India over other emerging markets from around 20% levels to ~13-14%. The near- term trend of greater investor flows towards developed markets will keep the India premium in check, believes Suresh Soni, CEO, Baroda BNP Paribas MF. This notwithstanding he expects SIPs to continue as an effective and convenient mode of investment with Indian investors having enjoyed the benefits of staying invested in volatile markets and the power of regular investments in equity markets. Edited excerpts:

The NSO first advance estimate of 6.4% GDP growth is below RBI estimate of 6.6% . What does this tell you of the earnings performance for H2 given the tepidity of the Q2 earnings?

We have witnessed some slowdown in gross domestic product (GDP) growth from 6.7% in Q1 to 5.4% during Q2FY25. This was also reflected in muted earnings growth of 6% y-o-y during Q2FY25 for BSE 30 Index. The first Advance estimate of National Statistics Office (NSO) of 6.4% GDP growth for FY25E factors in recovery during H2 to 6.7% vs 6% in H1FY25. The revival in government capex coupled with festival and wedding season should lead to better growth in H2FY25. Consequently, we also expect an uptick in Q3 earnings growth. Consumer sentiment seems to be generally positive with a recovery in the sales of passenger vehicles, tractor sales and real estate while there is some slowdown in two-wheeler and commercial vehicle offtake. With a strong monsoon and record reservoir water level we expect good agricultural production. This coupled with government distribution schemes like Ladli Behna, etc. should lead to good growth in rural India. Overall, rural India seems to be doing better than urban currently. Sectorally, capital goods, financials, retailing, telecommunications, auto and IT are likely to drive earning growth during H2.

Bank quarterly updates show that credit growth might not be ideal in Q3 especially retail loans. Overall credit growth in the fiscal through 13 December was 11.5% down from around 20% y-o-y. Is that a negative for BFSI the largest weighting in Nifty?

The reported 20% growth figure for the previous year is misleading as it reflects the impact of merger of HDFC and HDFC Bank, making its comparison with the current 11.5% growth inappropriate. However, it’s correct that various consumer loan categories are experiencing reduced growth rates. For example, mortgage loan growth has moderated from ~18% to ~12%, auto loan growth has dropped from ~20% to ~11%, unsecured loans, which previously exceeded 25%, are now growing at 11%. Further, increase in delinquency rates, particularly in smaller unsecured loans, has further contributed to the slowdown in personal loan disbursements. This trend indicates a cautious lending environment as banks reassess risk profiles amid rising defaults.

Overall, the banking sector is in consolidation phase where larger banks are likely to gain market share.

Despite the slowdown in growth, valuations within the banking sector remain reasonable compared to other sectors. While earnings may be impacted due to reduced loan growth, the overall financial health of larger banks is robust even as they adapt to these changes.

Given Trump’s avowal to reciprocate to trading partners’ high tariffs on American goods, is this an opportunity for India or a negative especially given the likely barriers to H1B visas and by token to the IT sector, another major index constituent?

We will probably get more clarity on this once Trump assumes office on 20 January. An increase in H1B salary levels can potentially impact margins for Indian IT service providers. However, the Indian IT companies have increased local hiring in US over the last 4-5 years and hence proportion of H1B has come down vs 2017–2021-time frame when Trump was in office. Overall, offshoring as strategy for global companies gained momentum after covid and its relevance continues as witnessed by increasing presence of Global Captive Centres in India. For the sector we would watch out for recovery in demand led by return of discretionary expenditure and changing technology landscape driven by the adoption of AI.

New-age companies focusing on domestic sectors such as pharmaceuticals, EMS, and renewable energy are indeed positioned well in the current uncertain global market environment.

Do you feel that new-age firms which are more domestic facing like pharma, EMS, renewables, etc. have more scope in this uncertain global market environment?

New-age companies focusing on domestic sectors such as pharmaceuticals, electronic manufacturing services (EMS), and renewable energy are indeed positioned well in the current uncertain global market environment. Rising domestic demand, supportive government initiative, focus on self-reliance, shift in global supply chains and increased outsourcing are among the many factors which can drive growth for the new-age companies. Further, technology advancement and industry 4.0 adoption can lead to further investment in this sector.

Which sectors or themes are you focused on, and which ones will you avoid?

There are a couple of themes which we find very exciting. We see energy and energy transition to be a decadal theme. Growth of manufacturing in India, adoption of AI and increasing data centres are driving demand for energy in India and globally. We are seeing strong demand for companies providing technology in the transmission and distribution space given increasing complexity led by a shift from thermal to new sources of energy. We see healthcare and technology as structurally long-term stories. Given the slowdown in global GDP, we see headwinds for global commodities and in consumption we are witnessing some slowdown in urban consumption.

Mutual funds have absorbed the selling by foreign institutional investors (FIIs) but the primary issuances likely mean more supply than demand. Given that our market valuations aren’t exactly cheap what does this forebode for markets?

Domestic institutional investors (DII) investments have set a historical record at ~$63bn for 2024 while the flows from FIIs is negligible. Overall corporate India has raised ~$30 billion (January-November period) from initial public offer (IPO)/primary share issuances which indicates that overall institutional buying has been more than double the overall primary issuances. One also needs to consider that some part of primary flotations is also absorbed by retail. However large primary supply leads to a lower magnitude of purchases on the secondary side. With the recent correction, the price-earnings premium of India over other emerging markets has come off somewhat from around 20% levels to ~13-14%. In our view the near-term trend of greater investor flows towards developed markets will keep the India premium in check.

We believe that Indian investors have seen the benefits of both, staying invested in volatile markets and the power of regular investments in equity markets.

If we are in an extended correction, do you foresee any threat to SIP flows or is it structural so we might see some hiccups at worst?

We have seen SIPs growing at a record pace in recent years. There are more than a 100 million SIP accounts in Indian mutual funds (as of November 2024). We have seen healthy increases month-on-month in SIP registrations in recent years. At ₹13.5 trillion, SIP assets represent 20% of overall industry assets under management (AUM). We believe that Indian investors have seen the benefits of both, staying invested in volatile markets and the power of regular investments in equity markets. SIPs are now more broadly accepted and widely understood as a convenient and efficient manner to invest in equity markets which also aligns with the monthly cash flows/salaries of most investors. We believe that given the low penetration of mutual funds, SIP growth is structural.

RBI might find its hands tied because of the Fed likely cutting rates twice this year against four earlier. How can that impact markets?

Firstly, from a purely RBI standpoint, the current inflation trajectory put out by the central bank suggests that the mid-point mandate for the monetary policy committee (Consumer Price Index-based inflation at 4%) is unlikely to be achieved in H1FY26. Further, the dollar strength is causing some pressure on other currencies including the rupee. This phase is unlikely to see a material easing unless India has severe growth pangs, which appears unlikely. On an assumption of a normal monsoon, we expect rate-easing cycle to be a H2FY26 phenomenon. However, RBI will maintain adequate liquidity to support credit flow to the economy, as was evident in the recent Cash Reserve Ratio (CRR) cut.

Coming to the global viewpoint, we need to see the implication of the US President-elect on tariffs, etc. which could potentially be inflationary as the Republican administration rolls out their policy. The US Federal Reserve as you point out, appears more guarded currently on inflation which does suggest that the Fed rate easing is likely to be more back ended.

Private capex isn’t picking up as desired while government spending is bound to slow relative to what we saw post-pandemic. Any comment?

Private sector is spending money, though not all of it is in greenfield projects. We have seen multiple sectors (steel, cement, and renewables, to name a few) where managements have gone in favour of “Buy” in the “Make versus Buy” decision. From a corporate standpoint, that is capex but from an economy standpoint, it may not mean capex as no material fresh investment may be going in, though one would see operationalising of such assets lead to employment generation, recirculation of financing, reduction in industrial sickness in the case of Insolvency and Bankruptcy Code (IBC) settlements, etc.

The Union government’s spending had been a little slow in the current financial year because of election/ code of conduct dynamics. Sequentially, we do see a pickup but there may be a little bit of a shortfall to the full-year target of ₹11 trillion put out in the Union Budget given the higher ask rate for the balance months. What we need to consider more is the state capex as nearly 14 states cumulatively announcing nearly ₹1.5 trillion of women welfare schemes (ladli-behen, gruha-lakshmi, lado-lakshmi, etc.) which may squeeze out some state ammunition towards capex in lieu of this revex (revenue expenditure).