Commendable eschewal of populist schemes: Motilal Oswal Fin Services CEO

The government’s decision to resist any populist schemes ahead of elections and its commitment to bring down the fiscal deficit are commendable, says MOTILAL OSWAL, group managing director and chief executive officer of Motilal Oswal Financial Services. In an email interview with Sundar Sethuraman, Oswal states that buoyant economic activity, declining input costs, and strong corporate earnings growth will keep sentiment positive. Edited excerpts:

What are your thoughts on the 2024–25 (FY25) Interim Budget? Which companies could benefit from the government’s infrastructure push?
 

The Interim Budget primarily focused on fiscal consolidation by maintaining its investment-led spending growth strategy and refraining from announcing new schemes or incentives.

The Centre has targeted a 10.5 per cent nominal gross domestic product (GDP) growth in FY25E and has lowered its deficit targets for 2023–24E (FY24E) and FY25E to 5.8 per cent and 5.1 per cent of GDP, respectively.

However, consumption has not received a near-term push in the Interim Budget, which might act as a dampener to the ongoing consumption slowdown.

Sectors like infrastructure, railways, defence, and industrial have already benefited from burgeoning order books and growing profits after a decade of slumber. This has led to a sharp rise in public sector undertakings (PSUs) and midcaps and smallcaps, which have a higher presence in the above sectors.

This is perhaps the first time a sitting government has eschewed populist announcements ahead of elections. Does it signify the incumbent government’s confidence in returning to office?
 

The resounding victory of the Bharatiya Janata Party in the three key state elections in December had already strengthened the expectation of political continuity after the 2024 elections.

The government’s ability to resist populist schemes or incentives and its commitment to long-term macroeconomic stability are commendable.

Sticking to fiscal consolidation augurs well strategically from the country’s rating perspective.

Will a large shift to fiscal prudence impact GDP growth?
 

It might have some short-term repercussions, but the multiplier effect of capital expenditure spending over the past five years, plus the resounding macroeconomic backdrop, provides comfort for growth.

Given the challenging growth outlook, will any domestic sectors or companies face any headwinds?
 

Rural consumption has been going through a period of lull and moderation for almost two years now. Given the absence of any populist impulse in the Interim Budget, this period of moderate consumption can be prolonged for some more time, in our view.

What are your expectations of market returns this year? Given the recent rally, will further gains be capped?
 

Healthy corporate earnings growth of over 20 per cent for the National Stock Exchange Nifty in FY24, strong retail participation, global interest rates at their peak, and improving foreign flows can drive further upside, in our view.

The Nifty is trading at a 12-month forward price-to-earnings multiple of 19.4x, in line with its long-period average.

How was the October-December quarter (third quarter, or Q3) of FY24 for India Inc? Is it on track to achieve the growth estimates for FY24 and FY25?
 

Q3FY24 corporate earnings scorecard has been in line so far. About 33 Nifty companies that have posted results so far have grown earnings by 21 per cent versus expectations of 20 per cent.

The earnings spread has been decent, with 64 per cent of our coverage universe either meeting or exceeding profit expectations. Yes, we expect we are on track to achieve the growth estimates for FY24 and FY25 as of date.

What is your outlook for broader markets? Will the smallcap and midcap rallies continue?
 

A large part of the broader market consists of sectors that are reviving after a decadal underperformance. These include real estate, hospitality, capital goods, infrastructure, utilities, defence, energy, and PSU.

Also, the rally in the broader market was led by healthy domestic flows. Buoyant economic activity, declining input costs, and solid corporate earnings are keeping investor sentiment positive and will continue to drive the rally going forward.

However, we need to be watchful for the rich valuations and delivery of earnings versus expectations for some of these sectors going forward.

PSU stocks have rallied. What are the reasons for the rally, and will it be sustained?
 

PSUs have seen a long period of underperformance, a book-cleaning spree, and a path to profitability revival in recent years.

With growing profitability, strong balance sheets, attractive valuations, and good dividend yields, the market capitalisation (mcap) of the overall PSU basket has multiplied more than 3x.

Stability in policy and government reforms have also helped in driving the PSU rally. A further rally will be a function of sustained earnings delivery.

What will the market impact be if the election results are not aligned with market expectations?
 

If there is any disappointment in election results, one can expect a market correction, with broader markets bearing the greater brunt.

India recently became the fourth-largest market. How soon will it reach the $10 trillion mcap mark?
 

Over the long run, mcap growth is always a function of the underlying economy and corporate earnings.

India’s mcap grew at a compound annual growth rate (CAGR) of 17 per cent in the past 10 years and 19 per cent in the past five years. Hence, if we sustain this 17 per cent CAGR, we can expect to achieve an mcap of $10 trillion in the next six to seven years.

This is a year of elections across the globe, including in the US. How will it impact the markets?
 

A heavy political calendar, coupled with expectations of a reversal in the global interest rate cycle and ongoing geopolitical headwinds, can introduce an element of elevated volatility for global equities.