Stock Market Strategy: Prefer IT, Pharma, FMCG, avoid growth stocks like capital goods, manufacturing: Analysts

Indian stock market indices, Sensex and Nifty 50, were trading with minor gains on Monday lifted by positive global market trends. Domestic investors sentiment also remained upbeat amid strong economic growth and lower inflation dynamics into the play.

Nifty 50 is still down more than 2% from its record high of 25,078.30 level hit in the beginning of this month. The valuations seem to have moderated, with the Nifty 50 trading at 22 times PE on a TTM basis and around 20 times PE one year forward.

However, some analysts believe slowing earnings and weak demand amid record-high valuations may warrant caution. Nifty 50 is off to a soft start with Q1FY25 net profit growth being sub-5%. The Street’s growth forecast for FY25 is 15%.

“The Q1FY25 earnings season was weak, with negative PAT growth. Topline momentum remained muted across the board, while energy dragged overall margins. The share of negative surprises spiked. The good news, however, is that earnings forecasts for the Nifty and the wider universe remained stable,” said Seshadri Sen, Head Of Research And Strategist at Emkay Global Financial Services.

Though valuations have moderated after the recent correction, we do not see a decisive short term up-move unless the earnings upgrade cycle restarts, Sen added, saying that he remains constructive on the markets from a more than one year perspective.

Net profit growth for BSE 500 slipped to 2.9% in Q1FY25 from 12.4% in Q4FY24. Topline growth (ex-BFSI) remained weak at 5% YoY, in line with 4QFY24. EBITDA margins fell by 20 bps YoY to 15.1%, mostly due to a 388 bps contraction for the Energy sector – most other sectors delivered strong margins.

Despite the rising share of negative surprises, consensus estimates remained rock steady with both FY25 and FY25 Nifty EPS estimates, remaining within a 1% band over the earnings season, according to Emkay Global analysts.

“The Nifty P/E has moderated to near-LTA levels (20.1x one-year forward) after the recent correction but there are pockets of overvaluation persisting, further down the market cap curve,” Sen said.

According to him, near-term cues are now mixed: weak commodities, a possible US rate cut in September, and a mass consumption recovery are significant tailwinds, but slowing consumption at the premium-end remains a worry.

“We think the market is fairly valued and a near-term upside would come only if the earnings revision momentum returns. From a >1-year perspective, we are constructive because of continued double-digit earnings growth,” Sen said.

Sectors with Opportunities

The recent rally in the Indian stock market, the valuations seem to be rising towards higher levels.

“The narrative is turning positive in the US and the relief rally in Asian markets have all supported the Indian stock market that has gained momentum. This has resulted in valuations increasing in many sectors,” said Vinod Nair, Head of Research, Geojit Financial Services.

According to Nair, the IT sector has done well and is continuing to perform well, while the Pharma sector does not seem to be expensive. The valuations in the FMCG sector appear cheap and some private banks are trading at 10-year average, Nair said.

Sectors to Avoid

Nair suggests avoiding the growth sectors and recommends a ‘sell on rally’ approach in these pockets.

“We are cautious on growth sectors such as capital goods, manufacturing, industrials, metals and real estate. Reduce the exposure to these sectors and add defensive instead,” Nair said.

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.