Nifty has corrected ~10% from the top over Sep-Nov’24, on account of earnings moderation and premium valuations, along with global factors. Uncertain geopolitical situation in the Middle East and clouds over possible policy changes after the Trump swearing in Jan’25, too contributed to the fall. FIIs also sold equities worth ~₹140bn in Oct-Nov’24. Thus the correction has cooled off the valuations in large-caps with Nifty-50 now trading at ~19.6x FY26E EPS (near its 10 year average P/E of 20x). 

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"After a flat 1HFY25, as the government spending is expected to revive in 2HFY25, it should augur well for corporate earnings along with a good kharif crop and improving rural demand. This gives us conviction in domestic structural as well as cyclical themes. We are overweight on IT, Healthcare, BFSI, Consumer Discretionary, Industrials, and Real Estate," says Sneha Poddar- VP - Research, Wealth Management, MOFSLin an exclusive e-mail interview with Zee Business.

Sneha Poddar is a Research Analyst in the Motilal Oswal Retail Research Advisory since 2017. With over 10 years of experience in Equity research, she brings with her an in-depth understanding of equity fundamentals, institutional research and retail research, with a rich knowledge across various sectors. 

Where do u see Nifty by the end of the current fiscal year as earnings cut remain a cause of concern?

After a healthy 21 per cent CAGR over FY20-24, corporate earnings have moderated in 1HFY25. This led us to reduce our FY25 estimates for Nifty EPS by 5%, and we now expect a modest 5% growth for Nifty earnings in FY25, the first year of single-digit growth in five years. However, compared to the muted 1H, we expect corporate earnings to recover in H2, aided by a rise in rural spending, a buoyant wedding season (30% higher weddings YoY), and a pick-up in government spending. Any disappointment on that front coupled with uncertain global factors could keep market in a consolidation mode. Indian markets are likely to face significant influence from a combination of domestic and global economic events. The RBI interest rate decision, US Fed policy, US president elect Donald Trump’s swearing in and the upcoming annual budget will provide important signals for market participants. With a volatile global economic environment and mix macro domestic factors, investors should be prepared for fluctuations.

Even despite a host of important global events such as the US President elections and state elections here in Jharkhand and Maharashtra, Nifty has remained largely trading rangebound with a negative bias. Can we expect the blue-chip index to gain both momentum and strength any sooner?

Nifty has corrected ~10% from the top over Sep-Nov’24, on account of earnings moderation and premium valuations, along with global factors. Uncertain geopolitical situation in the Middle East and clouds over possible policy changes after the Trump swearing in Jan’25, too contributed to the fall. FIIs also sold equities worth ~₹140bn in Oct-Nov’24. Thus the correction has cooled off the valuations in large-caps with Nifty-50 now trading at ~19.6x FY26E EPS (near its 10 year average P/E of 20x). Further, the BJP’s decisive victory in the recent Maharashtra and Haryana assembly elections has boosted the overall sentiment, as this could strengthen policy momentum, expedite the key infra projects, and increase focus on overall govt. spending going ahead (govt. spending remained flat YoY, while capex was down 17% YoY in 1HFY25). Thus we expect some recovery in bluechip index and believe above mentioned factors provide an opportunity to add select bottom-up ideas.

As after a weak Q2 earnings, there are views that pickup in capex, festive season demand etc. will improve corporate earnings in H2. So as per you which sectors are you overweight and underweight on. Kindly take thus through your take on this.

After a flat 1HFY25, as the government spending is expected to revive in 2HFY25, it should augur well for corporate earnings along with a good kharif crop and improving rural demand. This gives us conviction in domestic structural as well as cyclical themes. We are overweight on IT, Healthcare, BFSI, Consumer Discretionary, Industrials, and Real Estate. In contrast, we are underweight on Metals, Energy, and Automobiles.

Now that we are nearing the calendar year end, do you anticipate higher volatility as is seen in case of other financial securities like gold?

Indian stock markets have already corrected 11-12% from the top over Sep-Nov’24, due to a variety of factors mentioned above. But BJP’s decision win is leading to some recovery in the market. However going ahead, the recovery will not be linear. Instead high volatility is expected given mixed domestic as well as global cues. The recent escalation in the Israel-Iran conflict adds fuel to the fire of the already simmering geopolitical tensions from the ongoing Russia-Ukraine and Israel-Palestine conflicts. Also there is uncertainty around the policies that will be brought in by US President-elect Trump and its impact on the Indian market. Despite the challenges, healthy festive season, better-than-expected monsoon over Jul-Sep’24, and consequent pick-up in rural consumption provide a near-term catalyst for economic activity. Further BJP’s decisive victory in the recent assembly elections have boosted overall sentiment.

So, despite the roller-coaster ride and nearly 4,500 points gain or 23 per cent upside in the Nifty50 index in the last one year, how would you advise investors to go about their asset allocation strategy? Should they be sticking to quality largecaps and sell mid and smallcaps? Please share your views on it.

The correction has cooled off the valuations in large-caps, even as mid/small-caps trade at expensive multiples. Nifty-50 is now trading at 19.6x FY26E EPS, while mid-cap/small-cap indices are trading at 30x/23x one-year forward P/E multiples, off from the Sep’24 highs but still rich vs. their own history as well as relative to Nifty-50. Thus the recent correction and the consequent moderation in valuations provide an opportunity to add select bottom-up ideas. We would advise investors to remain overweight towards Largecaps in their portfolio, with selective exposure towards Midcaps and Smallcaps.

Also, in the primary market, some of the IPOs that made a stellar debut this year have been dragged below their issue price? Is the downtrend in the secondary market also weighing on the primary market space?

Year 2024 has been record breaking year for IPOs with almost Rs1.3 lakh crore raised so far, surpassing previous record of Rs1.18 lakh crore set in 2021. However, with equity markets witnessing healthy correction and entering the consolidation mode, there could be a reduction in new IPO’s as companies tend to delay the listing awaiting a better market condition.  With several global and domestic triggers inducing volatility, IPOs which listed at premium valuation are being beaten down. However, IPOs of companies that were fundamentally strong and with fair valuation have performed well.