Why Avendus Spark's Ganeshram Jayaraman Is Cautious On Earnings Growth Optimism

Indian companies may see some downgrade in their earnings growth, according to Avendus Spark Institutional Equities' Ganeshram Jayaraman. If government capital expenditure follows a flatter trajectory, it's crucial to exercise caution on broader-level earnings growth expectations, he said.

It's essential to not be excessively bullish and expect a 20% earnings growth, given the prevailing economic conditions, said Jayaraman, managing director and head of institutional equities at Avendus Spark Institutional Equities.

"It's actually not FY24 earnings that we are worried about. It's FY25 earnings, which means the multiples are something that we need to watch," Jayaraman told BQ Prime's Sajeet Manghat.

In the consumption sector, there has been a slowdown, and the volume growth is also getting moderate across various categories, including staples, automobiles, consumer durables, e-commerce, and discretionary items like quick service restaurants, according to Jayaraman.

Private capex has begun to pick up, and he anticipates an acceleration over the next 12-18 months, Jayaraman said. He attributed this growth to the increase in multinational corporations' investments, driven by the production-linked incentive scheme and the 'China plus one' strategy.

MNCs' growing confidence in India has been a significant factor contributing to this surge in private sector capex, he said.

However, Jayaraman also noted that beyond the ongoing year and the upcoming elections, government-led capex might moderate or flatten out. He emphasised that the government's fiscal expenditure, which had previously served as a substantial stimulus for the economy over the last few years, is likely to stabilise.

Jayaraman maintains a positive outlook on the banking sector. He anticipates that credit growth will continue to be robust, even though there might be a slight margin compression observed in the last quarter or two. However, he is not overly concerned about this trend, suggesting that it can be sustained without causing significant worry.

The MD doesn't see credit costs spiking. Both return on assets and return on equity have the potential for a healthy trajectory over the next 24 to 36 months.

Jayaraman's confidence extends across various types of banks, including public sector undertaking banks, large private banks, and mid-cap private banks. These banks are poised for a positive trajectory, making them attractive topics for investment, according to him.

Jayaraman does not expect rate hikes at the MPC meeting on Oct. 6. However, he remains cautious due to persistent challenges related to inflation and pressure on the rupee. These factors could keep central bankers vigilant.

"The tone of their commentary will make markets not get too confident in the outlook," he said.