Market outlook and top sectoral picks in the current scenario

This article is authored by Aditya Sood, Fund Manager at InCred Asset Management.

We have had a constructive stance on the markets for the past 12 months, at this juncture the market multiplies are not cheap although they are well supported by the superior ROE profile of the Indian corporates and earnings growth trajectory. The biggest risk to equities is always valuation, and after years of solid performance, this is true more than ever for India. The valuation of Indian stocks has undeniably expanded 15 per cent higher vs pre-Covid earnings multiple. Having performed so strongly recently, there is a high probability that the markets would consolidate and possibly correct.

The Interim Budget for FY25 underpinned the government’s commitment to fiscal consolidation. The government continued emphasis on capex, although the rate of capex growth has slowed down to 11 per cent growth pegged at 3.5 per cent of GDP. Core expenditure (excluding interest costs) is expected to grow at 4.1 per cent in FY25 the expenditure figures may need upward revisions, the tax assumptions for FY25 are considered reasonable.

Allocations for core sectors like Road, Railways, Water, and Sanitation have been kept flattish, The allocation for the Production-Linked Incentive (PLI) scheme has seen a significant increase of 120 per cent, particularly benefiting sectors such as Auto components, Semiconductors, and large-scale Electronics, and there is a moderate boost to the rural economy, with a 9.3 per cent increase in the outlay for the rural sector.

Although the opportunity set has narrowed after a good year of returns still there are pockets of opportunities in stocks which have disappointed in the last 4-6 quarters in terms of earnings growth – some companies were hit hard by cost-push inflation raw material, power & fuel cost and rising freight cost.

We have a positive stance on life insurance companies which are structural plays in an under-penetrated insurance market like India. APE growth would be driven by strong ULIP growth while VNB margins are expected to contract due to a higher share of ULIP & decline in non-par products.

One should prefer domestic pharma companies which sell branded medicines including MNCs which have the potential of being steady compounders in the portfolio.

Within Auto OEMs, we prefer 2-wheelers which is a play on rural recovery and 4-wheelers companies. In the ancillary space, we like battery companies which benefit from exposure to strong industrial order inflow.

Within consumer durables, we like small appliances/light electrical products have seen a decline in growth. We also like cable and wire companies which are demonstrating strong growth on the back of government and data center capex. In consumer discretionary plays we like alcohol companies focusing on the premium category wherein the volume growth is outperforming the popular category.

We have had an underweight stance on lending financials to both banks and NBFCs for the past 6-9 months. Healthy NII Growth, higher C/D ratio and NIM compression. Most banks have made contingency provisions on AIF based on the RBI's December-23 circular. There is stable asset quality commentary on the retail loan book. NBFCs experienced a moderation in growth and margins.

We are underweighting IT companies on account of anemic USD constant currency growth for 3Q averaging ~ 0.5 per cent q-o-q for Tier 1 companies. From a vertical perspective, financial services and telecom witnessed a y-o-y decline in revenues for 3Q, while the healthcare and manufacturing verticals grew by ~10-12 per cent. Stable demand commentary was observed from ER&D companies. We believe valuation multiples are rich and the scope of derating is real.

Investors can follow a two-pronged approach in this market to either focus on buying value stocks wherein one sees a scope of mean reversion/expansion in multiples. Investors can focus on quality growth stocks that have limited downside and have sharply underperformed the index over the past two or three years. 

Disclaimer: The opinions expressed above are personal and may not reflect the views of DSIJ.