Stock market strategy: Volatility to continue amid muted Q2 results, says Seshadri Sen; suggests buying on weakness

The corporate earnings for the second quarter of FY25 are expected to be muted with high sector divergence, and the stock market volatility will continue in the near future, analysts said. While Materials, Energy, and Financials are likely to drag the aggregate net profit growth of Nifty to 5%, other sectors are expected to post a healthy high-teen growth.

The consensus forecasts for FY25 Nifty EPS (Earnings Per Share) growth are resilient at 15.9%, said Seshadri Sen, Head Of Research And Strategist at Emkay Global Financial Services Ltd. He expects the volatility in the markets to continue for a few more quarters and advises long-term investors to buy into this weakness with a horizon of more than two years.

Q2 Results

The topline growth for companies under Emkay Global universe is estimated to remain muted at 3% YoY, with near-zero net profit growth.

“This has been dragged by cement (due to an unusually pronounced seasonality) and Energy companies (due to a high base, which normalizes in 2HFY25). The rest of our universe reports a healthier 7.7% YoY topline growth and 12.7% YoY PAT growth,” Sen said.

The trends are similar for consensus Nifty estimates, with 3% topline contraction and 9% net profit growth. Despite the weak topline, margins are forecast to improve by 140 bps to 20.2% for Nifty 50 companies, ex-BFSI.

The consensus Nifty FY25 EPS has been steady at ₹1,134, a growth of 15.9% YoY, despite the weak headline H1. Around 67.5% of the top-350 companies by Emkay coverage were in the stable zone of EPS forecasts (-5% to +10% change) in 2QFY25 versus 65.4% in Q1FY25.

Sen believes the two downside risks to earnings are crude prices staying at or above $80 per barrel and a 50 bps RBI repo rate cut in Q3FY25, putting bank earnings at risk.

Sectoral Winners and Losers

Consumer Discretionary and Industrials sectors are expected to report relatively strong Q1 numbers, but that is largely in the price, and forward guidance and commentary will carry greater weight than the Q2FY25 earnings reports, according to Emkay Global.

Materials (led by cement), Energy, and Financials are expected to be the negative outliers.

Hindustan Unilever, oil marketing companies, and select midcap IT names like Eclerx Services could see a positive reaction after the results, while Tata Consultancy Services (TCS), Aditya Birla Fashion and Retail, and Zee Entertainment Enterprises (ZEEL) are vulnerable to post-result corrections, Sen said.

Market Outlook

The Indian stock market is expected to remain rangebound with heightened volatility. According to the Emkay Global, the upside is capped by valuations as its September 2025 target for the Nifty 50, at a generous 22x PER 1-Year Forward, is 26,000 and offers less than 5% upside from here.

“The downside is also protected, we believe, by sustained earnings growth and unprecedented macro-financial stability. The recent market sell-off is unlikely to translate into a major correction for broader indices. The big negatives - an oil shock from the Middle-East conflict and diversion of FPI flows to China - are transient, in our view,” Sen said.

RBI Policy Impact

On October 9, the Reserve Bank of India’ (RBI) Monetary Policy Committee (MPC) decided to keep the benchmark repo rate unchanged at 6.5%, but changed the policy stance to ‘Neutral’ from ‘Withdrawal of Accommodation’.

According to Sen, RBI’s decision to hold rates will have little impact, while the turn in liquidity stance is a positive, he sees the easing cycle commencing in the December MPC meeting.

“The interregnum (easier liquidity and rates on hold) is a sweet spot for banks, as it notionally helps liabilities without triggering loan yield cuts. Stocks could react positively if the market sees rate cuts getting delayed, with HDFC Bank benefiting the most. We would see that as purely a short term trade though, and use it to lighten positions in the BFSI sector,” Sen said.

For the broader markets, he believes the rate easing cycle is in the price and unlikely to trigger a major move.

Read TCS Q2 Results Live Updates here

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.