The Indian stock market has been on a rollercoaster ride. Over the last few months, corporate earnings have improved but foreign investors have exited the markets. Domestic sectors like banking and auto have thrived but there are concerns about froth in certain segments. To comprehend these uncertain times, Outlook Business spoke with Axis Securities chief executive and managing director Pranav Haridasan. Here is what he said.
Edited Excerpts
What is your take on India Inc.’s quarter 4 financial results?
The March quarter’s earnings met our expectations overall. Domestic sectors have benefited from economic recovery and improved high-frequency indicators. Private banks have shown strong earnings growth. The automobile sector has also posted robust results due to increased demand, a better product mix and operating leverage with a slight shift towards the two-wheeler segment.
However, valuations remain a concern in some sectors. IT sector earnings were as expected, with large-cap companies giving cautious FY25 guidance due to demand uncertainty. FMCG [fast-moving consumer goods] companies provided positive commentary on rural demand. With normal monsoon predictions by IMD [India Meteorological Department], a gradual recovery is anticipated.
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The strategy for foreign institutional investors (FIIs) seems to have shifted from selling in China and buying in India to selling in India and buying in China—Do you think this trend will stick?
Both domestic and foreign investors continue to show strong confidence in India’s long-term growth. In the financial year (FY) 2024, FIIs and domestic institutional investors (DIIs) invested $25 billion each in Indian equities. After being net sellers in FY22 and FY23, FIIs gained confidence in FY24 bolstered by the government’s strong performance in key state elections.
Recently, FIIs have been selling and reallocating some funds to China where valuations are more attractive, and the government is focusing on demand revival. Despite this, India’s growth story remains intact supported by a stable political regime, strong earnings outlook and a private capex cycle which will draw FIIs back to India for the rest of FY25.
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There have been a lot of downgrades in earnings-per share of Nifty 200 companies. Last year, markets were driven by robust earnings which justified their valuations—Will this not hold anymore? Are the markets entering a patchy phase?
The downgrades must be looked at from the standpoint of global macros, particularly inflation remaining sticky on the upside. Even against that backdrop, Indian corporates remained relatively strong throughout FY24. We expect Nifty earnings for FY24 to rise by 20 per cent with double-digit growth anticipated over the next few years.
Strong corporate earnings have allowed Indian companies to largely maintain margins, raise capital, deleverage, and better manage their capital structures. These factors position Indian corporates well for growth in a volatile global environment and likely to maintain their premium valuations.
Which sectors have the potential to become dark horses in FY25?
The consumption sector has underperformed in the last two years due to weak rural demand. Entering FY25, normal monsoon expectations and a lower base from last year besides a stable political regime, barring any surprises on June 4, and increased government spending are expected to revive rural demand in the second half of FY25.
There has been a lot of talk about frothy valuations and earnings in the small- and mid-cap segments. What is your take? How should one navigate these segments?
FY25 is expected to be an eventful year for the equity market with several key developments: First, the ongoing general elections; second, anticipated Fed rate cuts; third, full-year budget around July; fourth, expected rate cuts by RBI in line with global trends and fifth, US election in November. These events are likely to create market volatility, influencing direction based on developments. Style and sector rotation will be crucial for generating returns.
Mid-cap and small-caps have recently seen strong gains, but their current valuations offer less margin of safety compared to large-caps. That could mean a heightened risk of a time correction in these benchmarks triggering a shift of flows to large caps. This shift could keep the Nifty higher longer.
Overall, the long-term outlook remains positive with ‘growth at a reasonable price’ and ‘quality’ themes [being] particularly attractive.
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What are your views on the Reserve Bank of India’s recent crackdown on the banking and fintech space?
This is a positive development that shows the regulator’s vigilance and improved supervision indicating significant advancement in risk management.
With election results due on June 4, public sector undertakings (PSUs) remain market favourites. Where do you see their valuations going?
If the election results do not throw any major surprises, PSUs are poised for continued growth in coming years with sectors like defence, PSU banks, OMCs [oil marketing companies], utilities and railways standing to benefit.
Do you think the markets have priced in the return of the National Democratic Alliance (NDA) government? In case of a different scenario, is there a major downside risk in the short term?
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The market is pricing in policy continuity and a stable leadership at the top following the results of elections in key states that went to polls last year. Any unexpected outcome could increase volatility and lead to a downside. Though this scenario is not priced in at present, with both benchmarks either at record levels or close to them.
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