Daily Voice | Defence, railways, banking, fintech, power earnings growth should accelerate in FY25: Investment strategist

Which are the sectors to bet on regardless of who forms the next government at the centre?

There are some growth vectors that are likely to continue growing under different governments since there are major non-government drivers for these vectors. Digital Transformation (DX), Artificial Intelligence, Metaverse, Fintech, Digital Banking, Digital Payments, Electric Vehicles, and Capital Enabler Infrastructure are some of these.

Further, there are others where the government is the main driver but the growth vectors are going to continue growing, though the growth rates could differ under different governments. For example, Defence, Railway Infrastructure, Logistics, Power and Banking.

Do you strongly believe in the policy continuity after the general election results?

Yes, as mentioned earlier, we think that most of the reforms unleashed cannot be bottled back easily. So many of these reforms are irreversible but, yes, as mentioned earlier, the growth rates could differ under different regimes. For example, think about digital banking and UPI. It is highly unlikely that digital payments are going to reduce.

Are there sectors that definitely look overstretched in valuations now? What should one do with those sectors?

FMCG, Consumer Durables, Pureplay defence companies, MNCs, non-pharma Healthcare, and Realty. One needs to think of imaginative ways to gain exposure to the underlying sectors. One could look at the upstream and downstream value chain of the industry. Or, an even broader approach is to study the business ecosystem surrounding that industry.

For example, while pureplay private defence companies look quite overvalued and most PSU defence companies look mildly overvalued, there are non-pureplay companies that have defence segments and are significantly undervalued. Another way is to understand the multiple dimensions of Defence, which includes, strategic resources, such as rare earth metals, oil & gas, cyber defence, economic or financial resources, which are used in a strategic manner. Or Indian and international ports, power, railways, industrial technologies, or digital technologies and AI, among many others, which have dual use—both civilian and defence.

What is your overall take on the ongoing corporate earnings season? Have you seen upgrades outpacing downgrades by a wide margin in the March quarter earnings season?

We are quite happy with the progress so far. But we think next year should be even better since we are at an economic inflection point in the cycle and also there are some secular trends that are also at an inflection point or at the early stages. Both these should start accelerating from FY 2025 onwards.

Which are the sectors that will lead earnings growth in FY25?

In our analysis, defence, railways, banking, fintech and power should show accelerating earnings growth in FY25. A contrarian expectation is that technology companies are also likely to show earnings acceleration, starting from the second half of FY2025.

In the current fiscal year, do you see the major risk to equity markets coming only from global factors and not domestic?

Until the election results are out, which is less than a month away, domestic uncertainty is likely to remain. The real risks to equity, however, remain global. Global wars, trade disputes between countries, interest rate and currency wars between central banks, and the economic slowdown in some countries could pose some risks.

However, well-selected global allocation in economically strong countries is also likely to benefit the portfolio in terms of stability on the downside and exposure to new growth vectors, providing upside potential.

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