RBI surprise to boost earnings, support India’s market outperformance: Mayuresh Joshi

Mayuresh Joshi, Head Equity, Marketsmith India

ET Now: The market has reacted very positively to the rate cut that has been announced today, but do you see this rally sustaining going forward driven by fundamentals or is there a risk of profit booking going ahead?

Mayuresh Joshi: In the first place, it was not expected. Now, Street was going with the 25 bps, but the 50 bps and 100 bps CRR cut I think that is a surprise for the market. But the RBI again concluded this by saying that they have changed the policy stance to neutral which basically means that they will look at data points, they will see how global yields are expected to move, how the global rate cycle shapes up and therefore, a large part of this move is expected to ensure that the financial system does transmission and therefore, there is heavy lifting that probably happens in terms of advances that are clearly lagging.

Obviously, the basic fact that comes through with all this is, if you have a combined effect of the 25 and the 50 basis so far with the CRR 100 bps cut as well, I think all these efforts might actually help prop up corporate earnings by almost 250 odd bps as a base case scenario and again, the expectation largely in 26 with expectations of corporate earnings expected to pick up in the second half and a base case scenario of 10% to 12% being built in in terms of earnings growth, I think that lower end of the base with all this policy measures that have probably happened gets lifted by almost 200-250 odd bps.

So, base case scenario in terms of corporate earnings that might actually grow might be in that range of 12.5% to 14-14.5% now which is not accounted for by most analysts on the street and is thus translate into micros actually doing well. The sustainability in terms of India’s outperformance might actually continue. A lot of economies in the world are struggling both on macros and micros and India might just be doing better on both these fronts. So, valuations might come down a tad bit if corporate earnings grow at a significant pace or at a decent pace at what was expected and therefore the markets are now not looking that expensive with these assumptions taking place. So, yes, I think remain optimistic.

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ET Now: The RBI has lowered its inflation forecast to 3.7% for FY26. But I want to understand, is there any change on how one must look at the consumer discretionary companies and those reliant on the stable raw material prices given this inflation forecast?

Mayuresh Joshi: It is a huge positive because if you probably have a construct that input cost inflation is something that was hurting a lot of commodity-driven companies to a large extent and therefore, with expectations of input cost inflation actually going lower across baskets whether it is food inflation or otherwise or imported inflation to a certain extent as well, crude prices are significantly lower as we speak, that would drive margin expansion to a large extent. What would also drive is the inherent demand coming back based on two cyclical factors. One, obviously, with the tax cuts that have got announced, the expectations in terms of discretionary spending is expected to go significantly higher this fiscal and better monsoons expected this time around will mean that rural consumption which had been lagging and which has shown signs of coming back might come back very-very strongly in terms of MSP increases, in terms of farm produce, farmgate prices being significantly higher and initiatives that the government both centre and state are taking in terms of food/cash crops as well. And therefore, a large part of the consumption basket and I would include all three aspects of this including consumption discretionary, including consumer staples, and consumer durable as well, urban consumption should start coming back steadily as we speak. Rural should see a significant amount of comeback as well as we head into the second half and therefore, inflationary trajectory does play a huge part in terms of consumption trend and the key drivers that might actually have a multiplier effect as more banks are probably putting forth in terms of advances growth, in terms of better demand coming through, and in terms of better savings having households, a lot more can be expected in terms of volume-led pricing growth coming back creating operating leverage in all three segments of consumer discretionary, staples, as well as durables.

ET Now: Now, given the rate cut, of course, the biggest beneficiaries of that are the banks, the NBFCs, and the rate sensitive real estate sector. But besides that, what are the pockets of value that you see in the market, what are the sectors that you see leading from the front now that the rate cut is out and it is a big upside surprise that we have got. So, by virtue of that, we do have certain micros that are auguring very well for Indian markets whether it is the cooling off of inflation, the rate cut, or the food prices also easing off. A lot of tailwinds there. What are the sectors that you see moving ahead in the next leg of the rally?

Mayuresh Joshi: Banks have done exceptionally well and my own sense is that this provides additional ammunition in terms of earnings stability and earnings growth that this sector can probably exhibit and therefore, banks, select leadership NBFCs in our opinion can continue doing well and let us not forget PSU banks as well where there is an additional cushion and comfort in terms of risk-reward as far as valuations are concerned as well.

And therefore, this pocket of the market has to do the heavy lifting as far as the growth dynamics are concerned for the economy as a whole and they would continue doing that. Obviously being selective is the mantra here because we do not want to probably get into any particular or specific stocks which have lower capital adequacy or where credit underwriting is not up to the mark.

So, select leadership stocks within this space should continue doing well. The second aspect that I just mentioned was consumers and consumer discretionary/staple stock/durable selectively should start making a comeback as we head into Q2. Q1 might still be a transition quarter in my opinion in terms of how demand dynamics are playing out. Q2 might be a base building quarter. But the second half is where numbers should start coming back quite significantly.

So, select FMCG stock, select footwear stock, select apparel stocks should continue or should start performing well as far as numbers are concerned. Couple of pockets where the earning stability and growth should continue, where a large part of our portfolios are probably skewed at this juncture both locally and globally as well, would be select agrochemical/speciality chemical names which have shown strong earning stability as we speak. And within healthcare, hospital stocks have exhibited a very-very strong show as far as numbers are concerned. So, my own sense is that these broad-based sectors in my opinion is where earning stability and earning strength should continue.

ET Now: Now, consumption basket has been an underperformer. Now with the inflation cooling off, especially if the food prices and now with the rate cuts and therefore more money in the hands of the people for discretionary spends, how do you see the consumption basket moving and within the consumption basket what are the pockets whether it is the staples, the discretionaries and within discretionaries what would you be betting on?

Mayuresh Joshi: So, as I said, all three pockets selectively might do well because both urban and rural was lagging and both these pockets are expected to make a strong comeback as we head into the second quarter. So, within FMCG, Marico is something that we continue holding both in our local as well as local portfolios. Our sense is that the kind of numbers that Marico has exhibited so far, volume should be steady state going forward, pricing should start coming back and where a large part of the FMCG basket was getting affected was the inability to pass through prices. Input cost inflation was higher. They had to resort to different measures in terms of reducing grammage or introducing different SKUs, but a complete pass through was not happening, I think that might largely be behind in the next few quarters as demand comes back and demand-led pricing probably ensures operating leverage on the balance sheets.

At this juncture Marico probably remains our top pick. I mentioned footwear players and again, if you look at the bottom-up approach that probably happens, these are one stocks when consumption starts coming out of a slump FMCG selectively, footwear, and apparel makers are the first three pockets that show significant signs of strength and improvement and therefore, a stock like a Campus Activewear as an example, Bata has largely underperformed. Input cost inflation going down, expectations of demand coming back, expectations of margins inching higher will create those EPS numbers that we are probably looking at which might be significantly better over the next two years.

So, stocks like Campus, Bata is something that we are keeping on our radar. The third is obviously apparel makers and apparel makers which are priced less than thousand odd rupees, which are present in tier I, tier II cities, tier III cities as well, that is where the core growth will come from as growth returns quite significantly, specifically in rural and or semi-urban areas and therefore a stock like V-Mart Retail as an example or Vishal Mega Mart is an example where pricing is appropriate, where the expectations in terms of same store sales growth should actually improve quite significantly and exponentially over the next few quarters based on these assumptions that we are probably carrying might actually reflect in better numbers and earnings visibility over the next few quarters. So, these three pockets will continue doing well. Consumer durables have done well and as urban starts coming back, your select leadership stocks whether they are AC makers, whether they are select consumer durables who are doing kitchen appliances as an example might actually start coming back as well.

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