Top 4 sectors to watch out for in 2024 for better returns

Indian economy is at a long-term secular megatrend where the relationship with the historical is being muddled with distinct secular drivers creating inflection that is of greater prominence for the current investment landscape. The risks to the macro are skewed towards the global slowdown, and geo-political mayhem that seed intermittent periods of volatility in the Indian equities market.

The foundation for our optimism lies in the narrative that India is advancing globally positioning itself as the fastest-growing major economy. GDP growth during the first half of FY24 has been robust, exceeding expectations. Earnings in H1FY24 have been healthy additionally we have observed the proportion of profits in the GDP has experienced an upward trajectory, ascending to nearly 5% at present, and is projected to go further up over the next three years. 

We anticipate robust annual earnings growth over the next three years, driven by a multi-decadal growth outlook for the economy, healthier corporate balance sheets, an expanding capex trend focused around infra, a multiyear credit cycle for financials, a structural increasing trend in discretionary consumption and a dependable reservoir of domestic capital.

We expect earnings to continue growing strong in FY25 driven by a diverse spectrum of opportunities spanning various sectors driven by favourable factors that will benefit the large, mid, and small caps. We believe the markets are at reasonable valuations from the perspective of FY25 earnings and the rate cuts will benefit the markets disproportionately in terms of m-caps. Rate cuts globally will lead to inflows from FIIs, and we expect IT and pharma sectors to be primary beneficiaries as these were impacted the most during the rate hike cycle.

Though our inclination is towards the mid and small-cap, we expect the large caps to also contribute going forward as multiples expand for the market against the backdrop assuming a stable global macro, domestic political continuation, and gradual rate cuts by the RBI that will lead to expansion in valuation as the discount rate is lowered and increased inflows from FII’s. 

We expect the following four sectors to give tremendous opportunities in the next 12 months:

Building materials segment

• We are optimistic about the building materials sector due to increased investment towards infrastructure, urbanisation, and a recovery in the housing and commercial real estate markets.
• The government has proposed investing heavily in transport infrastructure projects benefiting the real-estate markets across India, especially in Tier-2 and Tier-3 cities.
• Plastic and metal pipes are witnessing robust demand.
• Commentaries from management are upbeat on the demand outlook on the back of the pickup in real estate, the government’s focus on housing & infrastructure, and industry consolidation. Companies are incurring capex aggressively or actively pursuing inorganic growth opportunities to cater to the demand. Paint companies are registering robust demand uptrends.

BFSI-NBFC

• The banking space is seeing robust credit growth momentum driven by the continued traction in the Retail and SME segments.
• On a segmental basis, home loans, auto loans, and credit card outstanding continue to grow, and corporate loans are recovering gradually. The corporate segment is gradually recovering, and a pick-up in capex would be crucial to maintaining growth momentum.
• The management of companies has also been upbeat about the growth momentum. Asset quality is likely to continue to remain healthy.
• We are optimistic about NBFCs. Our analysis shows that typically in the beginning stages of an expanding capex cycle, since NBFCs have a quick turnaround time, quality names with healthy balance sheets usually benefit. Considering we are in the festive season and entering the election period in 2024 we expect liquidity to be sufficient and NBFCs will continue to outperform.
• In FY23 incremental earnings were primarily contributed by the BFSI sector and we expect the banks will be able to deliver healthy earnings growth in FY24.

Manufacturing

Manufacturing forms the building blocks as the government aims to make India a global manufacturing hub. We are noticing aggressive capex by businesses to cater to the growing demand. While exports are at a slowdown due to a weak global macro environment, domestic demand continues to be healthy. Earnings have been growing steadily for selective businesses that are scaling up to cater to robust domestic demand.

Autos and Ancillaries

• Auto & ancillaries’ healthy performance was driven by

i) Traction in high-end SUV demand

ii) Notable growth in MHCVs

iii) Early-stage recovery in 2Ws

• Margins continue to expand due to the softening of raw material costs. The favourable impact of raw material tailwinds is expected to gradually diminish.
• We anticipate that two-wheeler sales volumes are likely to remain steady, driven by new vehicle launches (premium) and prolonged replacement demand, supported by the growth narrative in India.
• Margin expansion will be dependent on a richer product mix, higher realisation, and operating leverage.
• The emphasis on premiumization and the focus on EVs will contribute to a higher content per vehicle, subsequently enhancing profitability for ancillaries.

In conclusion, the Indian economy stands at the crossroads of a compelling megatrend, characterised by a departure from historical norms and the emergence of distinct secular drivers. Despite global economic uncertainties and geopolitical disruptions, India's proactive global positioning has propelled it as the fastest-growing major economy. 

Robust GDP growth and healthy earnings in the first half of FY24, coupled with a positive trajectory of profits in GDP, signal a promising outlook. The multi-decadal growth prospects, robust corporate balance sheets, expanding infrastructural investments, and a favourable credit cycle paint a picture of sustained economic expansion. 

While the mid and small-cap sectors hold promise, even large caps are expected to contribute as valuations expand and global rate cuts attract foreign inflows. The identified sectors—building materials, BFSI-NBFCs, manufacturing, autos, and ancillaries—present significant investment opportunities, supported by favourable macroeconomic factors and sector-specific tailwinds. As we navigate the upcoming months, these sectors are poised to thrive, contributing to India's economic narrative and offering potential returns for investors.

Anil Rego, Founder and Fund Manager at Right Horizons, PMS