Banking, capital goods and consumer durables segments among favourable investment landscape, here’s why

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Businessman analyzing company's financial balance sheet working with digital augmented reality graphics. Businessman calculates financial data for long-term investment.

It is often true that the Indian stock market may not endure its stellar growth for FY25. However, the economy aims to maintain its momentum seen over the last 3 years. India’s booming industries are propelling it to the forefront of global economic growth.

As FY25 begins, the market grapples with various challenges. These encompass volatility linked to national elections, increased tensions in the Middle East, prolonged global inflation, slowing earnings growth, and high valuations. These factors may influence near-term performance.

With regards to the banking sector, we anticipate a shift in the RBI’s interest rate policy towards an accommodative stance in H2CY24, coupled with the expected continuous growth in private capex, is poised to drive growth. However, liquidity constraints persist, prompting banks to seek higher fixed deposit rates. Despite private capex falling short of expectations, credit growth maintains stability. We like private banks compared to public banks. 

The prospect for capital goods remains resilient, as continued industrial and infrastructure investment, alongside heightened allocations in textiles, construction materials, metal products, and machinery, is expected to fuel substantial order inflows. Despite concerns about margin contractions due to specific raw materials and premium valuation, the earnings growth forecast for FY25 stands at 25% for S&PBSE Capital Goods Index, with projections indicating higher earnings in the second half of FY25, making the sector a good investment opportunity.

Consumer durables sector is poised for a robust growth fuelled by rising temperatures driving air cooler, air conditioner, and fan sales. Stabilizer and inverter demand to surge due to power fluctuations, while continued momentum in real estate & construction to boosts cables, wires, and switch gears demand. BSE consumer durable index revenue to increase by 19% YoY, with EBITDA and PAT expected to rise 31% and 37% YoY, respectively, alongside an 80-100 bps margin expansion. However, premium valuation for sector, (P/E of 55x, versus 10yr & 5yr averages of 36x & 43x), suggests a selective approach.

The GoI’s prioritization of self-reliance has notably bolstered the defense sector’s outlook. Strong growth prospects for FY25 are underpinned by robust order books, effective execution, investments in research and development, and advancements in technology. Import constraints on defense items seek to reduce dependency and decrease the import expenditure, thereby favouring domestic producers. Furthermore, with a planned government investment of USD 130bn between FY24-FY30, projecting a roughly 7% CAGR for armed forces modernization, optimism prevails though valuation of stocks is high. 

With confidence prevailing, a “buy on dip” strategy is advised for the FMCG sector. Anticipated demand rebound is expected to occur gradually, as competition pressures ease with stabilized input prices. A favourable progression in the monsoon season would further augment this scenario. FY25 is forecasted to start with low double-digit growth in both revenue and EBITDA and graduate in the later period. Additionally, a slight margin improvement is expected, attributed to stagnant prices, and increasing crude prices. The industry performance was dull in the 1.5yrs leading to an attractive valuation. 

When it comes to Infra sector, the anticipated easing of key interest rates by the RBI is poised to stimulate spending, bolster profitability margins, and fortify the balance sheets. The GoI’s augmented capital expenditure for FY25 to Rs11.1tn, along with a projected 7% GDP growth for FY25, paints a positive outlook for the sector. Additionally, the average capacity utilization level of 74.7% in Q3 FY24 indicates a resurgence in private capital expenditure in the forthcoming years. Business outlook is robust while valuations are near the long-term average a decent pick in an expensive market. 

Lastly, we also remain optimistic about the Indian IT industry on a long-term basis. However, our stance remains neutral for the short term since the sector will continue moderate revenue growth in the near term on concerns over macroeconomic conditions and inflationary headwinds. Yet, operating profits are expected to improve with cost optimisation measures. Despite headwinds, critical spending and cost optimisation deals continue to gain traction. The rupee-dollar exchange rate can significantly influence the sector, with INR depreciation against USD. Long-term investors should adopt an accumulation strategy, focusing on companies with strong balance sheets, particularly those involved in AI and Gen AI technologies with strong deal wins.

In short, while challenges persist, opportunities abound across various sectors of the Indian economy in FY25. By navigating complexities and leveraging emerging prospects, investors can position themselves to capitalize on India’s dynamic economic landscape.

First published in Mint

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