Earnings growth has faced challenges in recent quarters, Rohit Shimpi, Fund Manager at SBI Mutual Fund said at CNBC TV18’s Market Townhall today, December 18. He highlighted that the slowdown is primarily driven by two factors: The impact of the monsoon and the election-related slowdown.
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Shimpi explained, “Earnings have not been great over the last couple of quarters. A significant part of this has been due to monsoon disruptions and the election-related slowdown that we’ve observed. We are hopeful, however, that these trends will reverse in the coming quarters, particularly as the capex cycle gains momentum.”
Despite the dip in earnings, Shimpi pointed to other indicators suggesting a brighter outlook for the economy. “While market sentiments have cooled off in recent months, we believe the current market conditions, with valuations in the middle range due to the prevailing interest rates, set the stage for a recovery. Although sentiment has softened, we anticipate that the earnings trajectory will pick up as the capital expenditure cycle accelerates.”
In terms of sector-specific trends, Shimpi noted that the renewable energy, sustainability, and manufacturing sectors are poised for growth. “There is increasing capital expenditure (capex) in sectors such as renewable energy, sustainability, and manufacturing, which is encouraging. We are optimistic about these areas due to their potential for long-term growth,” he said.
The consumption landscape is also shifting. While the lower-end consumption sector has been subdued, there are signs of improvement. “The recovery has been K-shaped, with rural areas particularly affected. However, there’s potential for growth in this space as government income transfers and marginal policy changes start to bear fruit. Specifically, we expect the two-wheeler market, which had been struggling even before COVID-19, to start picking up. Consumers have adjusted to price changes, and there is room for improvement,” Shimpi elaborated.
On the real estate front, Shimpi acknowledged the strong performance of the residential realty sector. “Residential real estate has been in a good cycle since 2021, with low housing inventories driving new launches. The uptrend in new launches, particularly in 2022-2023, is expected to continue at a rapid pace into 2024,” he said.
However, he cautioned that certain areas of the real estate supply chain, like tiles and ceramics, have not seen the same momentum. “In the previous real estate upcycle, we saw peak launches between 2010-12, but the completion phase, involving products like tiles and furniture, only took off in 2015-17. Currently, the initial stages of construction — such as the use of housing pipes — are thriving, but there is a delay before we see growth in sectors tied to home completion,” Shimpi added.
Finally, Shimpi shared a cautious outlook on the paints sector, indicating a selective approach due to high valuations and increasing competition. “We have been careful and selective with investments in the paints space. While there is potential in the sector, we are wary of the high competition levels that have emerged after the market capitalisation of leading companies invited new players into the field.”
Shimpi’s comments reflect a mixed outlook for the markets in the short term. While some sectors show promise, particularly renewable energy and residential real estate, the broader market is likely to remain impacted by macroeconomic factors, such as the monsoon and elections, in the near future. “We are tracking earnings closely for the next few quarters, and while sentiment is off peaks right now, the outlook remains positive as long as earnings begin to show consistent growth,” he concluded.
Watch the accompanying video for the full interview
