Stock Market Outlook: Is A New High Market Likely Before Diwali? Here is what S Krishnakumar has to say

“If you look at the valuations, with 18 times fiscal year 24, we are probably priced more reasonably than where we were in October 2021, when the correction began. We have consolidated and are in a better position today. Other Asian economies and other emerging markets experienced a significant downturn and earnings downgrades “,
He says S Krishnakumar, Director, Lion Hill Capital.

India is faring much better than its peers and even if you look at the macro data, it appears that India has been much more resilient. Is this trend likely to continue?

Over the next six months, you would see further weakening of global macros in terms of growth and further tightening and this should have some impact on India from a global demand and export demand perspective.
We see that there may be some weakness in terms of growth that will take effect in the next six to nine months, but that said, India is a much more domestic growth story. We should comfortably be able to have 6-7% growth this year and return to 7% growth in FY24-FY25. A temporary weakness will come in the second half of the year, but this is also well priced by analysts’ expectations.

India is doing well. Ratings have gotten a little premium. We saw the downgrades begin last quarter. Will there be any further downgrades? For IT stocks, the FY24 overhang may not be that big, and many commodity and energy games are already out of order too. What’s your take on EPS downgrades in the future?

Even a year before the FY24 earnings number which is very relevant to us, today it was closer to Rs 980 to Rs 1000 and today, after all this turmoil from Ukraine and other inflationary pressures and tightening, we still have a number of earnings. closer to Rs 1,000 for FY24.

Back to recommendation stories

While the energy basket and the metals basket could reduce earnings, we are a heavy consumer of these metals and commodities and therefore the user industries will have an increase in earnings substantially from a margin perspective. I see that overall we would continue to deliver a good earnings CAGR of 14-15% over the next three to four years, which will support a market return along those levels. If you look at valuations, with 18 times fiscal year 24, we are probably priced more reasonably than where we were in October 2021, when the correction began. We have consolidated and are in a better position today. Other Asian economies and other emerging markets experienced a significant downturn and earnings downgrades.

Valuations once again reflect below-normal growth potential as India has been able to sustain its growth throughout the turbulent two to three years. I think we deserve this kind of valuation award for the region and emerging markets.

It has a lot to do with how other countries have been ignored by investors, which makes valuations seem a little more premium than we were, but on an absolute basis and compared to India’s valuations, which it is about 17 times ahead of the year. I’m at 18 times. This is not a very significant market expense. We should remain cautiously optimistic and use market corrections to enter the market.

Should I read between the lines and understand that a new high is coming for the Indian markets because we are 3-4% away? Is it likely to happen before Diwali?

As I told you, in the short term, current macros globally are getting more restrictive and we have a bit of a tightening cycle going on in the US and the European region, impacting demand and a bit of a recession yes. is starting up.

We expect a small decline in global growth in the near term, which will have some impact in India. I may not be able to give you an idea if a new high is possible for Diwali. If you have a two to three year horizon, we should definitely see a lot of positive returns for investors led by many large sectors like banking, etc.

You’re saying internal growth looks strong. Is it a good time to look at works like real estate works and home construction works, as the whole industry is coming out of a long-term hiatus?

Interest rates have remained weak in this cycle for the past two to three years and we hope that rates do not rise significantly and affect demand on the housing side. We see a very robust recovery in real estate demand on the residential side.

Commercial real estate activity also underwent a strong recovery as uptake was significantly high after the Covid emergency. There have not been many new supplies in the past couple of years and we are seeing that many developers are taking action on commercial development as well. The real estate sector is a large space that should be secular bullish for the next decade.

If you look at all the real estate supply industries, be it furniture, paint, pipe, PVC pipe and interior players as well as flooring to other sanitary ware suppliers, there is huge demand. that is waiting to be realized. If you look at the kind of interiors we have, it’s much better than what we had 10 years ago.

I think people are spending a lot more on interiors and home improvement and so this is a great space. Within that, paints are likely seeing much more competitive action after a while of a duopolistic market. So paints may not be the right place to be, but from an evaluation standpoint, other industries including hardboard, plywood and other plastics, etc., would also be good areas to participate in.

Real estate finance is again a big space along with the real estate sector. Banks are a big game and not only NBFCs but banks are quite significantly rooted there as well and this should be another space to look at. Regardless, if you look at the business cycle, when we step into a 7% higher growth rate and some sort of nominal real growth rate of 14-15%, credit growth is already accelerating to 15% in more.

So three, four years of 15% credit growth is something we should see along with some margin expansion for banks as in any cycle, when interest rates go up, banks have good credit-setting power. prices. We see the expansion of NIMs, the increase in cost leverage, the benefits of digitization, and even the increase in fees.

All of these things, coupled with the reduction in the cost of credit and provisions, should see banks double their profits over the next two and a half years. Banks are a big space and a big weight in any investor’s portfolio that we should keep adding right now. These are some things that look interesting at this point as we come out of a low base and enter a period of growth.

What are the best bets in this space and how should those names be identified?

While housing financing is one of the big drivers of credit growth, there will be a major acceleration in corporate credit with the public sector as government spending and the order book of various companies are increasing. Furthermore, the private sector is also entering an investment mode.

In India, the last round of capex ended somewhere in 2010. We are seeing many initiatives, including investments related to PLI, etc. There are multiple drivers for banks and to identify various banks and NBFCs, it is necessary to see how much penetration they have achieved from distribution in terms of pan-Indian presence, a) from a retail point of view and b) it is also important which is the passive side of banks and NBFC.

The differentiating factor will be the type of CASA they have, which is the low cost liability and also the type of low cost deposit generating ability. Banks that offer a broad spectrum of services to the retail banking channel would be able to have a much better liability franchise that will give them a lot of pricing power and the ability to outrun the competition.

It is important to examine the liability allowance of these players to identify or select some of them. In addition to that, what is important at this point is the type of NPL positioning of the banks and the type of provision coverage we have at the moment. If the banks have completed the entire provision and are doing well, then the kind of banks that have fewer net NPAs would be well positioned because we will also get a lot of corporate loan recoveries that have gone bad over the next couple of years. These are the two to three points you would use to look at the banks and NBFCs in which to buy.

Thirdly, in any industry, valuations are very important, in terms of banks’ book price because the bank’s equity determines what you can leverage and lend because capital adequacy and price / book ratio are very important on how banks would offer returns to investors. These are the parameters you would use to filter banks and NBFCs.


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