Pay Commission expected to benefit GDP, consumer categories: Aditya Sood
, Portfolio Manager,
InCred Asset
,
says amidst
tariff uncertainty
and FII selling, the
festival season
offers a glimmer of hope.
Rural consumption
is expected to rebound strongly due to rising gold prices and balance sheet repair. Low unit consumption categories are likely to perform well. The upcoming
Pay Commission
is anticipated to positively impact GDP.
Consumer categories
are expected to benefit from the Pay Commission implementation.
Look at the way the markets are playing out right now. We are trading in a range because we are still undecided on how the tariffs are likely to play out and what is going to be the impact. The 25th August meeting is yet to take place. But one thing is very clear that it is the domestic economy that will shape the future of Indian markets and therefore, earnings are going to be a big positive trigger. Till now, how have the earnings shaped up for you and in the second half, how do you see the earnings play out?
Aditya Sood:
As you rightly mentioned, earnings are very critical. If you step back, ever since the Covid lows, we had 25% CAGR in earnings getting delivered from 2020 to 2024. If you look at the long-term earnings trajectory, possibly it is like 12% CAGR in terms of
earnings growth
which is a combination of GDP growth and inflation, the nominal GDP growth. We believe that we are in a mean reverting environment.
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Last year, on account of elections, state, centre, earnings fell off the cliff. Nobody was expecting that the earnings growth is going to be in that 5% sort of a vicinity. So, our belief is that we would be in a 10% to 12% earnings growth trajectory. Having said that, there are certain elements which are very critical. The first one being credit growth. So, credit growth clearly needs to pick up.
The liquidity is abundant at this point in time, but we do see a lack of fiscal impulse by the corporates in the sense that we do not see too much of capex happening. So the environment is very, very conducive. If you look at India's positioning, in terms of today, the risk-free rate has virtually collapsed. If you look at the bond yield differential between India and the US that leads me to believe that India's premium within the emerging market has already shrunk massively.
We are in a very good environment as far as expansion of PE multiples are concerned and more importantly, in the last one year, the index has not gone anywhere, but one year return on a rolling basis is zero. We believe that this is a very conducive environment. The second half is going to be materially better in our view in terms of earnings growth essentially because of the base impact of earnings as well.
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There is so much happening on the global as well as the domestic front. There is tariff uncertainty. FIIs are constantly selling in the domestic markets. At the same time, the earnings season is not as great as we expected, at least the first half and at the same time, the positive triggers for the market are missing. The only ray of hope right now is the festival season which will kickstart with Raksha Bandhan and it will go for the second half till December. Do you see festival-related seasonality factors playing around? Which favourable sectors are on your radar?
Aditya Sood:
One has to take a one, one-and-a-half, two-year view. Post Covid, we saw urban consumption doing very well and one of the elements was mean reversion. For example, in a category like cars, basically an upgrade in terms of two-wheelers, we saw that playing out. The rural consumption story is directly correlated to income and with gold prices going up, I am a big believer that rural consumption will rebound very strongly on account of two fact factors.
One is that a bit of a balance sheet repair has gone through because in a $4.5-trillion economy, we have got two $2.5 trillion of gold holding. If gold goes up by 45 odd percent in a year, it helps in terms of balance sheet repair, and so that is point number one.
Point number two is that two things are happening in the consumption basket. One is low unit consumption which logically should do well. There are a lot of people who have upgraded from the bottom of the pyramid and they are just above the poverty line. We are very constructive on the low unit consumption categories. Then there is the additional trigger of the Pay Commission which is going to come through.
In our view, this is going to have a 1% positive impact on GDP for the next year. Coming to the Pay Commission, if you go and see how consumer categories do in the Sixth and Seventh Pay Commissions, they always do well. Obviously, one has to take it with a pinch of salt in the sense that the number of employees on account of headcount of VRS and so on and so forth has gone down. It is not as large an impact as it used to be in the past, but still 1% of GDP is not a small impact.
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