Expert view: Consolidation to continue; expect a 16% earnings growth over FY25-27, says Sneha Poddar of Motilal Oswal

Expert view: Sneha Poddar, VP of research and wealth management at Motilal Oswal Financial Services, expects the Indian stock market to consolidate in a broader range with sector rotation and intermittent volatility. In an interview with Mint, Poddar discusses what one's equity investment strategy should be at this juncture and how the outcome of the ongoing assembly elections could impact market sentiment.

Edited excerpts:

Why has the Indian stock market been falling lately? Can it fall more?

Two strong factors have been at play in this consolidating market. Weak earnings growth and persistent foreign outflows.

While corporate earnings for Q2FY25 have been weak, results excluding commodities remained on track, though moderation could be seen.

FIIs have withdrawn nearly ₹1.4 lakh crore from the Indian stock market since October, marking a record high selling.

Contributing to this sell-off are concerns over China's economic stimuli, overvaluation of Indian equities, a tepid corporate earnings season, and rising bond yields and the dollar index.

Even though Nifty has corrected 10.4 per cent from the peak, there are no apparent signs of a sustained recovery in the market.

Further, the uncertainty around US President-elect Donald Trump’s trade policies is weighing on the market sentiments.

We expect the market to consolidate in a broader range with sector rotation and intermittent volatility.

What should be our equity investment strategy at this juncture?

Concerns around US policies post-election and upcoming state elections in Maharashtra, Jharkhand, and Delhi, as well as the US Presidential inauguration and India’s Fiscal Budget, will keep markets cautious.

Long-term support will likely come from India’s growth potential, strong corporate fundamentals (notably in financials and infrastructure), and continued government reforms.

Having said that, we would advise investors to start accumulating quality stocks in a staggered manner to build a long-term portfolio.

Portfolios built around such falls often give good returns to investors over a long period.

What is your assessment of India Inc.'s Q2 numbers?

The corporate earnings for Q2FY25 have shown weakness, but excluding commodities, they have been broadly in line.

Nifty 50 clocked 11 per cent earnings growth, excluding metals and oil and gas. The modest earnings growth was again driven by BFSI (banking, financial services, and insurance), with positive contributions from technology, real estate, utilities, telecom and healthcare.

Conversely, global cyclicals, such as oil and gas, along with metals, cement, chemicals, and consumers, weighed on earnings growth.

Consumption has emerged as a weak spot, while select segments of BFSI are experiencing asset-quality stress.

Weakness in government spending has also been one of the factors driving moderation in earnings.

After a flat H1FY25 (first half of the financial year 2025), as the government spending revives in H2FY25 (second half of the financial year 2025), this should augur well for corporate earnings along with a good Kharif crop and improving rural demand.

Overall, Nifty EPS (earnings per share) has seen a nearly 7 per cent downward revision in the last six months, reducing the expected FY25 earnings growth to just 5 per cent ( ₹1,059), the weakest since FY20.

Could the outcome of the ongoing assembly elections impact market sentiment?

The election outcome could influence investor sentiments due to potential political uncertainties.

It could also impact policy decisions, particularly in sectors that are directly impacted by government actions.

However, the impact will most likely be short-term in nature and will not have any major influence on market performance in the long run.

There has been chatter about Indian growth losing some steam. Should investors be cautious?

Traditionally recognised for its secular growth potential, Indian equities are now evolving, bringing fresh dimensions to the investment landscape with their impressive size, diversity, and depth.

India’s market capitalisation has soared to an impressive $5.4 trillion from $1.2 trillion in March 2014, positioning it as the fifth-largest market globally.

Though earnings have moderated temporarily for FY25, it is expected to bounce back to double digits from FY26.

We expect a 16 per cent earnings growth over FY25-27E, which, along with sustained valuation multiples, could lead India’s market capitalisation to double over the next five to six years to reach nearly $10 trillion.

However, some key economic data points have come out unfavourable in the near term.

The October 2024 CPI (Consumer Price Index) inflation, at 6.2 per cent year-on-year (YoY), was the highest in 14 months.

In Apr-Sep 2024, IIP (Index of Industrial Production) grew 4 per cent versus 6.3 per cent in the year-ago period.

GDP growth is believed to slow to 6.2 per cent in Q2FY25, reinforced by a slowdown in industrial output activity.

So, we expect market consolidation in the near term, but the long-term growth story for India remains intact.

Is it the right time for the RBI to start cutting rates?

October 2024 headline CPI inflation jumped to 6.2 per cent YoY, the highest in 14 months and higher than the market consensus of 5.9 per cent.

The acceleration was broad-based, with food and core inflation higher than expected. On the other hand, IIP growth was 3.1 per cent YoY in September 2024, implying growth of 2.6 per cent for Q2FY25, the weakest in seven quarters.

Overall, the combination of weak growth and high inflation is not favourable at a time when many global central banks are cutting rates.

In any case, however, we still stick with our expectation of the first rate cut by the RBI in early 2025, assuming a sharp deceleration in Q2 GDP growth and its outlook.

What are the areas of opportunity? Should we stick to defensives at this juncture?

In times of global volatility, we expect sectors tied to domestic structural and cyclical trends—such as financials, consumption, industrials, and healthcare—to perform well.

As the market shifts toward defensive sectors, discretionary consumption will likely benefit from changing purchasing behaviours, particularly as consumers transition from unorganised to organised retail channels.

The healthcare sector is experiencing robust domestic demand and niche product launches, while financial sector valuations remain attractive with improving growth visibility.

Niche sectors like jewellery, electronic manufacturing, electric vehicles, renewables, e-commerce, and digital technologies are also poised for significant growth.

The electronic manufacturing services (EMS) sector shows strong potential with robust order books and expansion plans.

India is set to lead in global digital infrastructure, with e-retail penetration projected to reach 10 per cent by 2027.

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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.