Earnings slowdown to persist, but expected to see improvement in Q3: Nitin Raheja

“But Q3 will be better. But the earnings slowdown will probably take a few quarters. What has really happened is that we have seen so little change,” says Nitin Raheja, Julius Baer Wealth Advisors.

Hope 2025 is bigger, better, brighter for you as well as the markets. But is it a base case scenario because last year we saw a rise of around 9% on Nifty, but it was the smallcap and midcap indices which were over 20-25%. Will it be another year where smallcaps and midcaps massively outperform or do you think largecaps have room to catch up?

Nitin Raheja: So, what you have highlighted is correct. I mean, last year was an inconsistent year where largecaps dramatically underperformed while mid and smallcaps actually outperformed largecaps by around 70-80%.

And I think that has a lot to do with the fact that you have massive FPI flows happening. We had the biggest FPI inflow in a year, but it’s kind of a testament to our markets that despite that kind of inflow we maintained and we still had a positive return and it was about 10% for the big and 17-. 18% for medium and small.

And broadly this year is going to be just as challenging, at least the first half of the year is going to be very challenging because we have the slowdown in earnings that we’re seeing, that we saw in Q2. Q3 would be better considering that in that period we all had festivals, be it Diwali, Christmas, and so on.

But Q3 will be better. But the earnings slowdown will likely take a few quarters. What has actually happened is that there has been little change in this that we have seen.

Most of our growth was being driven by capex and that was primarily government capex. Being an election year, we saw a marginal slowdown in capital expenditure and it is yet to fully recover from what was budgeted in the last budget in July.

We should start to see that start to happen in the next two or three months. You should see a bunch of orders next quarter. So, therefore, as we enter the next calendar year, in the second half we will see the impact of all this on the ground. But the other interesting thing is consumption, which has continued to defy expectations and has been slow for some time. We saw premium consumption doing very well in the first half of the year and that too seems to be slowing down.

But this whole movement that has seen governments try to give handouts and increase social spending with every election has had results.

And if you look at it from another perspective, clearly the consumer is getting hurt. And while he is getting this handout, he is rewarding the incumbent who is giving him this handout by getting elected to power.

But that money that flows into the hands of individual consumption should also start seeing a return to consumption as money goes into the hands of the woman of the family on a monthly basis and so on. Therefore, we should see the bottom end of the consumption curve starting to show signs of revival. But a lot is going to be back-ended this year, we will start seeing those signs from the second quarter of this calendar and then depending on how we see the monsoon.

But this year, if you ask me, will be an equally challenging year. The trend of the last three months, where the markets have recovered around 10%, is likely to be the trend we are going to see in the near term for the large and midcap space. So, in the short term, I believe we are in a time/price correction where the markets will probably trade in the 2000 point range. Make no mistake, we are in a long-term bull market, but it is a bull market that is on a short-term pause.

But I just wanted to dig a little deeper on the issue related to what you’re enjoying, that you believe the bottom end should start to show some signs of recovery, and maybe the momentum will come back in the second half. But one such theme that has played out quite well in the consumption space is discretionary spending. So, given the kind of run-up we’ve seen this particular year, what’s your outlook for discretionary spending? Is that trend expected to continue and do better?
Nitin Raheja: See, when you talk about discretionary spending, you need to divide it into two baskets. So, we have this K-shaped recovery post-Covid.

So, whether it is in the form of real estate sales or whether it is in the form of premium automobiles etc. or for that matter travel has done very well.

Now, it’s K below, who has struggled. I think K at the bottom has struggled mainly because wages haven’t risen as fast as inflation.

And inflation continues. And so, you have seen this huge dissatisfaction and I believe that the state governments in the form of social expenditure or doles of about Rs. 2.1 trillion is being allocated, if you call it that I think the money will go into private hands. That should help revive the lower end of the consumption curve as we move into the next few quarters.

As far as the top end is concerned, even if you go to the current December quarter, we have seen travel very strong. If you go topically and check hotel ARRs or flights and so on and so forth, we’ve seen that stay strong.

The holiday season is well underway as we spoke to some retailers and more. So, I think that’s not a concern, that segment is less affected by inflation compared to bottom K and that’s where we see recovery in the next few quarters.

If you had to list the top two or three sectors for the year, where would you put your money?
Nitin Raheja: So, clearly, we think private banks, especially financials, should do well as we see the deleveraging beginning. We have already seen a number of approvals coming in. We are seeing government investment coming back. We are seeing a decline in private capex. So, we see that banks are doing well. And if we get a rate cut, it actually works very well for private banks, so from a cyclical perspective, it will work well, so financials is one sector.

Capex sectors like power, railways, engineering companies should do very well. We see that telecom is a growth sector and one of the big players announcing their IPO on their valuation, we can clearly see that there is a push, that we are seeing an increase in ARPU, so we are seeing telecom doing very well. are And autos are also doing well.