Expert View: IT, Pharma to face headwinds, strong earnings growth seen in Financials, Auto, FMCG, says Deepak Shenoy

Indian stock market seems to be at relatively normal valuations at the Nifty level, said Deepak Shenoy, Founder and CEO of Capitalmind. In an interview with Livemint, Shenoy said he continues to invest in India’s domestic manufacturing industry, energy sector and in local consumption. Here are edited excerpts.

Q. As the earnings season kicks off, what are your expectations for corporate earnings in Q1? Which sectors do you anticipate will perform well?

A. We expect Nifty 50 aggregated EPS to report a high single digit on the back of strong earnings growth from sectors like Financials, Automobiles & FMCG sectors. On the other hand, IT & Pharma may continue to face headwinds however things are expected to bottom for these over the next couple of quarters.

Q. How do you analyse TCS's Q1 results and what is your outlook on the overall IT sector? Do you foresee growth bottoming out in the second half of the year?

A. The market commenced the Q1FY25 earnings season on a positive note, with TCS reporting robust figures: a 5.4% YoY revenue growth and an 8.7% profit growth. These results have provided a much-needed boost to the IT sector, where sentiment has been sluggish, and the IT sector valuations appear reasonable.

Q. Certain private banks have seen a decent uptick, while the challenges over deposit growth and credit costs prevail. What is your outlook on the banking sector and its current valuations?

A. Banks are experiencing robust loan book growth (especially mid-sized private banks, which have reported loan growth of 15-20% YoY). However, NIMs are anticipated to be under pressure, and the proportion of low-cost deposits might keep declining. Credit costs are expected to rise slightly, particularly in segments such as Agriculture and Micro Finance.

Despite these challenges, asset quality is likely to remain strong, helping to keep provisions in check.

Q. How do current stock valuations compare to historical averages, and what implications does this have for potential future returns?

A. At the Nifty level, we are at relatively normal valuations. The Nifty 50 is currently trading at 23 times PE (TTM), which is in line with the historical averages (the Nifty 10Y median PE is 23.4 times). On a one-year forward, we are currently trading at around 21 times.

Q. Do you foresee any significant market corrections in the near future? If so, do you believe such a correction would be a buying opportunity or could it unsettle the market for an extended period?

A. We don’t predict, we respond. Will there be a correction? We don’t know. If there is, would it be a buying opportunity? We don’t know, we’ll have to find out when the correction happens. Will it unsettle the markets? We have no idea, and we can tell you after it does, but then the question will be: when will the markets settle? (To which our answer will be: we don’t know).

We simply do not want to get into predictions.

Q. What is your perspective on SEBI’s oversight in the derivatives market given the recent F&O frenzy? Are you concerned about the increasing retail participation in options trading?

A. I’m not majorly concerned about retail participation in options. India has always had very high retail participation in options, going back to 2003. The frenzy might have a systemic impact for which we believe that either margins should be increased, or that contract sizes must go up, to reduce the impact of lesser capitalized traders.

Q. How much impact do you see on brokers' business from Sebi’s uniform transaction fee rule?

A. For the listed brokers, this appears to be about 10% to 20% of their net incomes, but we will have to see how the brokers react, either by raising their fees or by reducing their costs elsewhere. We do not know about the largest brokers in India, which are private companies.

Q. What are your expectations from the upcoming Union Budget? Which sectors do you think will be in focus, and what strategies should investors consider in the upcoming days?

A. We don’t have any suggestions for the upcoming days. Budgets are not the best reason to buy stocks until after the budget itself. We believe the largesse provided by the central bank dividend, a higher tax collection and strong demand for India’s debt will allow for the government to continue its focus on growth and progress. We continue to invest in India’s domestic manufacturing industry, in the energy sector and in local consumption.

Q. Are there any emerging opportunities or new sectors that investors should consider in the current market conditions?

A. There will always be interesting sectors and opportunities. But they are unrelated to current market conditions as you have to think longer term. As a PMS, it is our job to find new areas of investing opportunities; in the last year, we have found it interesting to buy into the Surging India story, where we focus on domestic premium consumption, travel and hospitality, energy independence, manufacturing and core infrastructure.

Q. SIPs, AIFs, ETFs and similar other products have become a preferred investment tool for risk-averse investors? What is your assessment of such products, and can you spell do’s and don’ts for investors considering these?

A. SIPs are not relevant here - it’s just a concept of investing regularly into something. ETFs haven’t become meaningfully different, as most of the investment into ETFs comes from the EPFO.

AIFs are only relevant to High Net worth Investors, who have to invest Rs. 1 crore or more. This usually involves much higher risk so these are not taken by risk averse investors, but more by those that can take a lot more risk.

Simple do’s and dont’s are:

● Don’t buy products you don’t understand

● Do invest for the longer term, and don’t be swayed by short term ups-and-downs

● Don’t take loans to invest in anything, regardless of how exciting they make it sound

● Do your own research before investing

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.