TThe frequent regulatory changes remain a worry for the market, according to Manish Sonthalia, Director and Chief Investment Officer at Emkay Investment Managers. Highlighting the need for greater predictability in the regulatory environment, Sonthalia urged regulators to prepare the market for the changes.
In an interview with NDTV Profit, he said that the frequent regulatory changes have emerged as an additional concern for investors.
“The new worry is the frequent regulatory changes,” Sonthalia said, pointing to changes and proposals across areas such as MDR, BIS notifications and insurance commission norms.
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According to him, while such reforms could be beneficial for consumers, industries and the market over the long term, they can create short-term disruptions. Changes to the rules of the game can force investors to reset their valuation models, particularly because a significant portion of a company's valuation is derived from its terminal value and assumptions around continuity of business.
Sonthalia urged regulators and policymakers to better prepare market participants before announcing major changes.
“Prepare the market for it. Don't just announce it abruptly,” he said, adding that reforms would be better received if businesses and investors were given adequate time to adjust.
He said the insurance sector's consultation process is an example of how proposed changes can be discussed with stakeholders before final rules are implemented.
FY27 Earnings Growth At Risk
The Indian stock market may see further earnings downgrades if the ongoing Middle East conflict prolongs beyond October-November, with margin pressure likely to become visible in corporate results from the second quarter of FY27, according to Sonthalia.
He said that the market is already factoring in some of the concerns around geopolitical tensions, crude oil and bond yields.
Sonthalia said the key earnings risk for Indian equities is a potential downgrade in FY27 estimates if the US-Iran war in the Middle East war continues for longer.
The market is currently building in around 14-15% Nifty 50 earnings growth for FY27, he said. A prolonged conflict could push up raw material and input costs, putting pressure on corporate margins and potentially leading to earnings cuts in the December quarter.
“Margin is a bigger issue currently with regard to the potential cut in numbers in the third quarter,” Sonthalia said.
He expects manufacturing companies to feel the impact more clearly, particularly as imported inflation remains a concern amid currency volatility. With the September quarter results set to begin shortly, he expects investors to get a clearer picture of the impact of higher input costs on margins.
Banks To Benefit From Lower Funding Costs
On the banking sector, Sonthalia expects the cost of funds to come down going ahead. Credit demand, however, will remain a key variable for banks, with both corporate and retail credit growth needing to be monitored.
He also flagged the large amount of liquidity currently available in the financial system. According to Sonthalia, liquidity of around Rs 14-15 lakh crore could significantly heat up the economy, eventually requiring sterilisation or liquidity absorption by policymakers.
For banks, the eventual impact will depend on the trajectory of credit growth and credit costs, he said.
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IPO Pipeline Remains Strong
Sonthalia remains constructive on parts of the primary market, saying several recently launched and upcoming companies are being offered at reasonable valuations.
He said he and his team have evaluated several recent IPOs and are also looking at upcoming listings.
According to Sonthalia, strong demand for IPOs has made allotments difficult even for QIB investors, while some companies are seeing future earnings expectations priced in at the time of listing.
He also said the flow of capital from the secondary market into IPOs is an inherent feature of the capital markets, as one of their primary functions is to provide capital to businesses.
Energy, CDMOs And Advanced Manufacturing
On sectors, Sonthalia highlighted energy, CDMOs and advanced manufacturing as areas where growth opportunities remain strong. However, he cautioned that investors need to assess valuations carefully.
While these businesses could benefit from strong order flows and improving pricing power, high valuations may already reflect a significant portion of the expected growth.
“Valuation is something that you will have to figure out — what value are you getting at what price,” Sonthalia said.
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