market strategy: India’s fiscal discipline and infrastructure investment to drive growth in 2025: Nilesh Shah

“In context of all of that, 24 has been a wonderful year and I would be surprised if 25 again ends up being a good year though maybe the start might be a little kind of more cautious, more jittery, there might be a bit more volatility, but on the whole 25 should be a good year,” says Nilesh Shah, MD & CEO, Envision Capital.

What is your view for 2025?
Nilesh Shah: Yes, I think we start off on a good note. I would probably say it is a cheerful note because 24 honestly versus all kinds of expectations has turned out to be a lot better given the kind of capital raising which has happened from the primary market, given the kind of overdose or overhang of secondary deals which was there and the FII selling or the FPI selling. In context of all of that, 24 has been a wonderful year and I would be surprised if 25 again ends up being a good year though maybe the start might be a little kind of more cautious, more jittery, there might be a bit more volatility, but on the whole 25 should be a good year.
But why would you say that the start would be volatile? Is it just going to be because of domestic factors like our own earnings and then the budget which is going to follow or is it going to be more global in nature with the trump administration formally taking over and perhaps some announcements coming in from there?
Nilesh Shah: It is going to be probably a mix of both global and local factors. Globally, of course, we now have a new administration in the world’s largest economy and they are expected to be big bang policy changes and it is the best performing market, so that is one. Two is what the US Fed does in terms of interest rates.

Obviously, last year they have gone ahead and started to cut, but how inflation shapes up and will they continue to cut or take a pause these are the two big imponderables or the variables out there as far as the United States is concerned. As far as India is concerned, a few things, I mean obviously headline earnings growth has been weakish, I would probably say tepid for the H1 of the last financial year or this financial year that and two is our own interest rates.

Third is government spending. I mean, we obviously saw government spending kind of go down or not grow as much as what was expected but that is something which we need to watch out for because that is going to be important for us to kind of sustain the 6% to 7% or maybe even beyond growth rate. So, a whole bunch of both global and local factors which will play out initially and as the market begins to absorb the impact of these and the changes, probably see performance might probably be a lot more back-ended versus being more front-ended.

What do you think will be same in 2025 as 2024 and what do you think is going to be different because 2024 for instance had that massive FII outflows as well, I mean you can say that the primary market issuances were more and you balance it out the argument that Samir Arora was also making, but what do you think is going to be different in 2025 versus 2024?
Nilesh Shah: Firstly, what could continue to play out in 25 is domestic liquidity, that is going to be extremely crucial for our markets and I continue to believe that clearly the case for Indian equities and for our domestic savers to become investors remains as compelling as what it was a year ago, three years ago, or five years ago, that is something which is a long-term theme.

The whole financialization of savings is something which will continue to play out and therefore 25 will continue to be the same. Second, in terms of what will continue to play out will be essentially the government’s focus on fiscal discipline.

The path of fiscal consolidation will continue, which augurs very well for financial markets. What could be very different is maybe some of the largecaps which have honestly underperformed for the last year or two years, maybe there might just be a kind of a comeback especially if FPIs and FIIs stop selling and probably start to buy, for them clearly the largecaps could be basically the low-hanging fruit, so that is something which could be very different from what we have seen over maybe the last year or so.

You talked about fiscal deficit, so I just want to complete that point, you are expecting it to remain the same in the sense that the glide path will continue. However, part of the street believes it would not be too bad if they loosen the purse string a bit given the fact capex in first half of the year has not been great, the entire economy in the sense the middle level and the mass segment is a bit weak right now, and it would not be too bad if they loosen their purse strings and let go of fiscal deficit for a year.
Nilesh Shah: Yes, but these are situations which are always very-very tricky. Maybe from 4.9 maybe we do not go down towards the 4.5, but even if we remain below 5, I still think that would essentially be a very welcome kind of a measure or a target to have. Clearly, we still depend a lot on the government spending, especially in areas like infrastructure, energy, defence, railways, these are really some of the big impact sectors and clearly it has to be the government which will have to take the lead or remain in the lead be the Pied Piper and continue to ensure that based on its own investment the private sector do can or tries to chip in. So, clearly that is going to be very-very important and therefore be good.

The other thing, of course, is that at the state government levels, of course, you clearly have the handouts which are happening which is basically going to be a bedrock for consumption, all the schemes which the individual state governments have been doing which is you could call them as direct benefit transfers, direct transfers, income transfers, whatever you call them, so both are, these two important things, I think at the central government level they will continue to focus on infrastructure and at the state government levels they will continue to focus on direct benefit transfers and these are two very-very important kind of triggers for the markets.

You also touched upon government spending, that is what I wanted to ask you, the big event in the first half of this year now is also going to be the union budget. Do you think on the back of some announcements that we are expecting to hear in the budget the likes of your defence, capex, infra related stocks could do well or rather outperform the usual defensives like your IT, pharma, and consumption?
Nilesh Shah: I still believe the infrastructure, the capex, the capital goods space will continue to outperform, notwithstanding the fact that they still enjoy premium valuations compared to the largecap IT or the largecap defensives and that is purely because the earnings growth of the largecap IT, largecap pharma, or largecap FMCG will probably at best be in high single digits, unlikely to be more than 10% or so.

Especially, one or two sectors could benefit because of the depreciation of the rupee and the strength of the dollar, but beyond that the overall growth is double digit, worse is that the cap goods will continue to have double digit earnings growth and that could be a big draw for investors.

What about some of the segments that I remember chatting with you about during the Diwali time as well, BPC was one category that you are very positive on and I understand it is a long-term theme, but if you go by the numbers which have come out of late, the kind of performance which has come in from the likes of Nykaa, Mamaearth, and all of that, it has not been that impressive. Would you still stick with your view there and continue to hold on? Do you think maybe just trim positions and get in later? What is the view there now?
Nilesh Shah: So, clearly, yes, the growth in the BPC segment has been a tad lower and especially in terms of the outlook, the outlook is not as strong as what one expected it to be, but I still believe that it is a short-term phenomena. It is a bit of increasing competitive intensity. A lot of the private players, smaller players who are well-funded are pretty much out there splurging in terms of their spending on advertising and customer acquisition, which is impacting margins, impacting growth for the leaders. Second is channel mix.

Clearly, many of them have relied on the general trade segment versus that quick commerce has essentially come in and pretty much stolen the thunder. And most of these product companies are trying to adjust or readjust themselves. Even modern trade on the offline side has been struggling and finding it difficult to cope with the competitive onslaught of the quick commerce space, so that is in turn impacting the product company. So, it is a bit of several things playing out, but I probably think maybe two or three quarters from now they should be back on to a strong wicket.

So, you are saying buy on the given decline?
Nilesh Shah: They look good. The segment look good. It looks very promising for the long term. I clearly believe that even the government’s focus seems to be on the female segment of the population. A lot of the direct benefit transfers which I earlier alluded to are going directly in the hands of women and the female segment and that essentially if you look at it even a part of that essentially goes into the BPC segment, it will be quite phenomenal.

I think the problem is the sector is too shallow right now. I think that is where it is stuck.
Nilesh Shah: Yes absolutely.