The brokerage firm has constructed a portfolio of 10 stocks that offer compelling investment opportunities – two well established mega caps, and 4 each in mid cap and small cap category that are likely to offer relatively limited downside and superior upside potential.
Edited excerpts from a chat:
What is your outlook on Samvat 2081? Do you think Nifty would give double-digit returns in the new year as well?
FY25 will mark the first year of single-digit growth in Nifty earnings over the past five years, following an impressive compounded annual growth rate of over 20% for the previous four years.
Stock prices are slaves to earnings in the long run. It is the profit performance of companies that drive stocks to appreciate. Despite modest earnings growth expectations, Nifty had soared by over 30% by early October this year. However, lower-than-anticipated Q2 FY25 earnings and cautious remarks from various management teams are prompting investors to adjust to the new reality.
As the earnings growth is expected to be muted at the aggregate levels, we expect benchmark indices like Nifty to generate modest returns this year from the current levels this year. As we roll-over into FY26, we expect aggregate growth to resume and indices to offer low double digit returns to investors.
Do you think earnings can be the biggest risk for the market? The Q2 earnings season isn’t turning out to be good enough, particularly given the elevated valuations that the market is trading at.
Strong flows from retail investors into equity markets alongwith superior earnings growth have resulted in across the board re-rating of stocks and have generated fantastic returns for the investors.
Current stock prices of many companies have already discounted aggressive growth ahead and any disappointment in the quarterly numbers may lead to severe derating.What is the kind of strategy that you’re following at this stage of the market where FIIs are pulling out, DIIs and retail investors are super-bullish and Q2 results are leading to downgrades?
As benchmark indices were richly valued compared to their historical averages and prevailing stock prices across different sectors offered low margin of safety, we have been cautioning investors to temper their returns expectations this year.As we approach this Diwali, the sentiment on the street is a little subdued. We firmly believe that bottom-up stock picking and sector specific opportunities will continue to reward investors next Diwali as well.
Also read | Diwali stock picks: Over 50 ideas to light up your portfolio in Samvat 2081
As market cycles change, winners keep changing. Given the key events lined up – RBI rate cut cycle (which will eventually begin in next few months), US presidential elections, etc – for the next one year, where do you think the puck is going to be in Samvat 2081?
Global equity markets rallied as the US Fed announced its first rate cut in Sep 2024, marking a dovish shift to its monetary policy, and thereby reducing borrowing costs in the economy. The rising risk of escalation in the gulf region and its repercussions on global growth is a risk that cannot be ignored. Policy divergence among major central banks could trigger heightened volatility in global financial markets, with spillovers to emerging market economies in the short run.
A sharp bounce back in Chinese stocks following recent fiscal and monetary stimulus measures, triggered some outflow from India to China. Cyclical sectors like Oil marketing companies and Metals that are affected by global commodity prices are likely to put a lid on earnings growth in the second quarter.
Earnings growth is likely to be driven once again by BFSI, with positive contributions from Technology, Utilities and Healthcare. Banks (Private + PSB) would mainly lead BFSI’s earnings, with 10% YoY growth.
Do you think that the correction in PSUs and capex plays is now nearing its end before the market starts focusing once again on the 2025 Budget?
Improved performance of industrial sector, upturn in investment activity, above normal monsoon, pick up in rural demand, high-capacity utilisation, healthy balance sheets of banks and corporates, and the government’s continued thrust on infrastructure spending augur well for the capex plays in the second half of this year and the next financial year.
Market is eagerly awaiting the outcome Us presidential elections in the short run and expected pivot to dovish monetary policy by the RBI’s MPC early next calendar year.
Global Investors may react to new economic, tax, or trade policies that could affect corporate earnings post the decision on who will be the 47th President of the United States.
Tell us which pockets of the market you see most of the opportunity lying in the new year.
Financials are our preferred pick in this market.
Financials
India is one of the world’s fastest-growing economies with a large, young population. Rising prosperity is driving demand for financial services. Government reforms and digital banking initiatives are increasing sector efficiency and accessibility, expanding the customer base. A strong focus on collections, overall improvement in asset quality, write-offs and resolutions via the IBC have helped banks in strengthening their loan books.
Valuations of the sector are currently at reasonable levels. Financial inclusion efforts and technology adoption are also transforming rural and underserved areas, presenting new growth avenues for the sector. We find this sector is most reasonably valued and as the RBI starts cutting interest rates early in the next calendar year, cost of capital for the sector will come down leading to higher credit growth.
Pharmaceuticals
Indian Pharmaceutical Market (IPM) reported robust growth for the first half of the year, led primarily by price increases. We expect IPM growth to remain steady at 8-10% over the next few years, with companies boasting strong franchises and brands likely to see faster growth.
We like domestically-focused/diversified companies due to their strong pricing power, better margin profile, and cash rich B/S and strong return ratios, which led to rerating among domestic peers.
Balance sheets of most pharma companies are cash-rich and debt-free, offering room for investments in the international markets. India business provides sustainable secular growth for the companies.
Indian pharma companies have been investing in categories including biosimilar, innovator and patented products, complex injectables, and this would drive growth in the international business over the long term.
Railways/Infrastructure
Infrastructure sector enjoyed tailwinds and a healthy order book given the government’s focus.
There have been massive investments in Railways and Defense in the past few years and that is likely to continue in the medium term. Indian players have also tie-up with global majors and that too augurs well for this sector.
Is domestic demand, which was one of the biggest drivers of earnings growth, giving enough signs of slowing down? Can the festive and wedding season change the narrative?
With an estimated 48 lakh weddings taking place nationwide in November and December 2024, merchants and retailers across the country are preparing for an unprecedented surge in demand for wedding-related goods and services. This year’s wedding season is set to outpace last year’s figures, which saw 35 lakh weddings and generated business worth Rs 4.25 lakh crore.
Rural growth, in the second quarter of 2024 (April-June), overtook that of urban areas, a trend expected to continue for the remaining year.
For the first time since the pandemic, the MGNREGA’s (scheme that provides temporary jobs to employ people who have limited or no alternate stable income opportunities) 12-month moving average employment demanded number has fallen below pre-pandemic levels in August 2024.
While the rise in farm-sector employment due to above-average monsoons and increased labour demand for kharif sowing likely reduced reliance on the scheme, a steady decline probably also points to the possibility of individuals finding better-paying job opportunities elsewhere. The fall has been the sharpest since the beginning of fiscal.
This augurs well for the demand during festivals in rural India in the coming quarters.
Give us your top ideas for Diwali.
We believe bottom-up stock and sector specific opportunities will continue to reward investors this year as well. We have constructed a portfolio of 10 stocks that offer compelling investment opportunities – two well established mega caps, and 4 each in mid cap and small cap category that are likely to offer relatively limited downside and superior upside potential.