 "Mukul Kochhar, head of institutional equities at Investec India")
The market is currently pricing in a “comfortable majority” for the incumbent Bharatiya Janata Party (BJP) government, says MUKUL KOCHHAR, head of institutional equities at Investec India. In an interview with Samie Modak in Mumbai, Kochhar explains that securing fewer than 303 seats would suggest the BJP has possibly peaked. This outcome would disappoint the market and could hinder its economic agenda. Edited excerpts:
How is the market positioned ahead of the Lok Sabha election results on June 4? How could it react to the possible outcomes?
The market is currently pricing in a comfortable BJP majority on June 4. There are two critical numbers we are monitoring.
If the BJP secures more than 303 seats — the number they won in 2019 — it would indicate increasing national penetration for the party, likely accompanied by strong performance in the South and East. This would set the BJP up for a stable five-year term, allowing them to advance their economic agenda, and would be a modest positive trigger for the equity market. However, the upside will be limited, given the good returns already delivered since the pandemic.
The second critical number is the absolute majority figure of 272. While any figure above 272 would provide the BJP with a stable platform for the next five years, a number below 303 would suggest the BJP has possibly peaked. This might lead to introspection within the party, potentially hindering its economic agenda. Such an outcome could disappoint the market.
An even bigger disappointment would be a coalition government with no single party holding a majority. However, this scenario appears unlikely. A month ago, all opinion polls were predicting a comfortable majority for the BJP, with the lowest estimate being 304.
What will the focus shift to after the election results? What do the markets look forward to in the Budget if the incumbent government continues in power?
In the next term, expect the government to double down on its manufacturing agenda, with a continued focus on infrastructure and investments. The market will look at the implementation of labour and judicial reforms, disinvestment, and investment in new-age sectors like renewables, electric vehicle, and green hydrogen.
We also expect an increase in capital expenditure (capex) due to the Reserve Bank of India transferring ~2.1 trillion to the central government. Some of this will likely be allocated to defence, renewables, roads, and railways, which are priority areas for the government.
How has the fourth quarter (Q4) 2023-24 (FY24) earnings delivery been? How does it alter expectations for 2024-25/2025-26? What are the key macro-growth drivers?
The Q4FY24 earnings growth for S&P BSE 500 companies has been strong, with about 19 per cent year-on-year (Y-o-Y) growth. This has resulted in a solid 34 per cent Y-o-Y growth for FY24.
According to our expectations, automotive (27 per cent Y-o-Y), pharmaceutical (45 per cent Y-o-Y), and financials (42 per cent Y-o-Y) have shown strong growth in Q4.
Conversely, energy, technology, and consumer (fast-moving consumer goods) have reported weak growth. Margins have been a key positive this quarter, as most sectors maintained or expanded margins.
If policy direction remains stable, we expect a robust private investment cycle to drive economic and earnings growth in the mid-term. Consequently, low teen growth in earnings is a reasonable expectation over the next five years, with modest margin delivery continuing, driven by consumer premiumisation.
Which sectors or themes are you bullish or bearish on?
We remain positive on private capex and consumer discretionary stocks, such as automotive. We believe private capex is likely to see a strong revival, benefiting sectors linked to this trend.
Banks are exceptionally well-positioned due to underperformance combined with solid earnings growth, leading to reasonable valuations.
Additionally, we expect the pharmaceutical sector to continue benefiting from moderating investments and increasing profitability. While information technology (IT) stocks may benefit from growth in the US, uncertainty around the US elections and valuations are key hurdles.
We anticipate the rupee will maintain a stable/appreciating bias, negatively impacting margins and growth in the IT sector. Therefore, we advise clients to wait for a better entry point.
We have seen sharp foreign portfolio investor (FPI) outflows this month. What’s the reason, and what’s the outlook going forward?
This month, we have seen FPI outflows of around $2.6 billion, likely due to election-induced volatility. The Indian markets have been strong outperformers, and we are in contact with several funds planning to increase allocations to India or set up new investment vehicles here. We believe these outflows will reverse if the election results align with market expectations.
What are the key global headwinds and tailwinds?
Geopolitics remains the key concern today, with active conflicts in Europe and West Asia and strained relations between China and the rest of the world. The upcoming US elections in November may lead to more hawkish rhetoric on these issues, which would be unfavourable for equities.
From an Indian perspective, crude oil prices remain a critical factor. While current prices are manageable, a sharp increase would impact near-term foreign flows. However, India is more resilient now than in the past, as strong growth in services exports and remittances has provided a cushion against rising crude prices.
