Abhishek Banerjee, smallcase Manager & CEO, and Founder of Lotusdew Wealth and Investment Advisors believes that the rising costs are the biggest threat to corporate earnings in the next financial year (FY25).
In an interview with Moneycontrol, he also alerted that one needs to closely watch margins as a key factor in the next financial year (FY25) to estimate EPS growth.
The chartered alternative investment analyst possesses over a decade of experience in asset allocation, portfolio construction, and quantitative investments, and sees more upside risk to the market.
Do you see a great value in the large-cap private financial space?
It is currently reported that 40 percent of India's GDP is funded by government spending. As a result, Public Sector Undertakings (PSUs) are becoming more prominent and are seen as worthy competitors to the private sector. There is a shift in capital formation from credit-led growth to subsidy-led growth, with schemes such as PLI, credit subvention, and direct benefit transfers becoming more prevalent.
In this context, it is expected that private financial companies may find it more challenging to grow than in the past. Furthermore, PSUs have ample room for improvement in terms of efficiency, while private companies in India are already quite efficient. Due to these factors, it may be possible to find deeper value in large-cap financial companies in the future.
Do you think the US Federal Reserve will give a signal about Fed funds rate cut in the March policy meeting?
Inflation is sticky and so are job numbers. Initial estimates put in as many as rate 6 rate cuts that were expected to start as early as February. Now we have pushed those estimates to as far as August and as low as 3-4 rate cuts. Though the Fed's stance has not materially changed, what we are seeing is increasing focus from the Fed on not being too early to cut.
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In fact, on March 19, we saw Japan end its negative rate policy which provides evidence that at least one G7 central bank is not thinking about cuts. In this context, people were expecting mega cap tech stocks to correct, people thought that they grew due to cheap money. While that is true, they are larger and are amazing cash flow machines which won't lose momentum if rate cuts shift by a few months. Hence, where we stand now, I don't think we are looking at cuts or signals of it in March.
Do you still see signs of euphoria in the equity markets even after recent correction?
The correction is shallow. Technically, it is not a correction. Correction is a term used when markets fall by at least 10 percent. Hence, this is a pullback at the best. March is usually seen as a month of rebalancing and reallocating their wealth.
We often see people booking profits to pay for tax-saving instruments as a way to tap into their wealth. We don't see yet any structurally different fundamentals for India.
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I don't think people will wait for election outcomes as opinion polls are clear about the lack of anti-incumbency. Hence, I see more upside risk. That said, there are many unseen risks, especially in developed market bonds that could easily escalate or any kind of conflict could spread to other parts of the world.
What is your take on the MF stress tests and has it been fully factored in by the equity markets?
I believe that stress tests only evaluate how individual funds would perform, without taking into account the possibility of everyone being under stress. In my opinion, such tests offer more transparency on specific situations concerning AMC (asset management company), but they cannot predict how everyone will act as a whole. A stress test is a regulatory measure that regulators use to understand the impact of any adverse actions taken by an intermediary on the retail market. However, it cannot determine what will happen in the case of a retail flight, which is an industry-wide issue and not specific to any particular AMC.
Do you see any factors that can hit earnings and economic growth in the next financial year?
The biggest threat to companies is rising costs. However, many are hesitant to increase prices to maintain their market share. This means that although the top line might continue to grow, the growth may not be as profitable as before, despite record profitability.
In the next financial year (FY25), we need to keep a close eye on margins as they will be a key factor in estimating EPS growth. Additionally, as economies become more digitized and asset-light, the impact of depreciation on earnings will play out differently than in traditional years. Therefore, free cash flow will become a dominant factor in ratios like PE (price-to-earnings) and PB (price-to-book value), where asset-light models will differ from asset-rich companies of the past.
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.
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