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Informist, Thursday, Dec. 19, 2024

MUMBAI – The valuation of Indian equity markets doesn't present much scope for upside and investors should moderate their expectations of returns in 2025, said Dhiraj Relli, managing director and chief executive officer at HDFC Securities. The brokerage house, while detailing its outlook for 2025 at an event in Mumbai, advised investors to brace for some volatility next year and exercise caution due to high stock valuations.

"It is going to be a lot less easy to do macro investing in India, given that the entry point today is two standard deviations above the (long-term) mean," said Unmesh Sharma, head of institutional equities at the firm, while talking about the Nifty 50 index. He said the right way to look at the valuation of the overall market was to compare it with the long-term averages of the last 10-15 years, rather than just the last five years. Owing to high valuations, Sharma expects flattish returns in 2025.

The retail team of the brokerage has kept its target for the Nifty 50 in 2025 at 26482 points. This implies a return of nearly 11% from Thursday's close of 23951.70 points.

The brokerage expects some headwinds for India's economic growth, at least in the near term. Considering low capital expenditure by the government in the first half of this financial year, Sharma expects the government to miss its budgeted target for the full year. Further, capex by private players is unlikely to pick up significantly in the remaining months of this financial year, Sharma said. 

Having said that, Sharma expects the government to continue to pick up pace in capex well into 2025. The government is expected to increase its budgeted capex for the next financial year in high single digits, said Varun Lohchab, head of institutional research at the firm.

The brokerage's belief that spending by the government will pick up gives it confidence that growth will improve soon. It expects GDP growth this financial year to be 6.4%, before rising to 6.7% in 2025-25 (Apr-Mar). However, it expects some risk to growth if the slowdown in urban demand continues and private capex doesn't rise substantially.

The brokerage is hopeful of seeing an improvement in rural demand next year as inflation is expected to ease further and income levels in rural areas are likely to rise after a good kharif crop. It estimates CPI inflation this financial year at 4.8% and 4-4.2% in the next financial year.

The brokerage expects earnings growth of corporates to normalise going forward as margin expansion is unlikely. It expects the next leg of growth to come from companies that will be able to either increase volumes or prices, thereby leading to revenue growth.

The brokerage house is bullish on large-cap information technology companies and banks, along with those in the capital goods, real estate, consumer durables, and cement sectors. At the same time, it is underweight on automobiles, consumer staples, mid-cap IT companies, small banks, and non-banking financial companies.

SECTORAL PREFERENCE

Large banks with granular deposits and diversified loan books would benefit once interest rates start coming down, Lohchab said. He is also positive on industrials as the order flow in the second half of this financial year is likely to improve as government capex picks up. In the real estate sector, he expects the number of launches to increase in FY26 after some delay in FY25 due to fewer clearances by regulators. 

The brokerage expects cement prices and demand to improve next year, which will support earnings growth in the sector. It, however, acknowledged there would be short-term pressure due to competition, which led to weak product prices this year.

At the same time, the brokerage expects only a gradual recovery in the IT sector with better earnings from the banking, financial services, and insurance segment. The sector is estimated to see high single digit revenue growth, which would lead to mid-teen earnings growth in FY26, it said. 

The brokerage is mixed on consumption, with stables likely to struggle due to high inflation, while high-ticket products fared much better. It expects this trend to continue in 2025 as well. Within the overall consumption theme, it expects weakness in the automobile sector to persist, especially in passenger vehicles, and medium and heavy commercial vehicles due to a high base and muted volume growth. 

RETAIL INVESTORS

The brokerage advised retail investors to keep almost 60% of their portfolios invested in large-caps as these are likely to offer better risk-adjusted returns in 2025. The brokerage prefers large-caps due to relatively better valuations compared to mid-caps and small-caps. It said small-caps and mid-caps have seen a disproportionate rise in valuations and earnings, making several companies in these segments extremely expensive.

The brokerage raised concerns about the investing patterns of retail investors and even of high net worth individuals. Deepak Jasani, head of retail research at the firm, said retail investors are running behind short-term gains and taking big risks such as investing heavily in mid-caps and small-caps, and even overvalued initial public offerings.

While cautioning investors, Jasani said the risk appetite of young investors had increased as they haven't seen a big correction. MD Relli also pointed out that several retail investors are currently stuck in low quality companies and need better guidance from the media and brokerages.

Despite seeing a sharp run in mid-caps and small-caps, Jasani said retail investors continue to be invested in these companies without realising this risk. "...If they keep investing in small-caps and mid-caps at these levels, then may be, there will be some period of disappointment," said Jasani.

Talking about risks, the brokerage said the market is at a risk of de-rating due to shallow cuts in interest rates in India. It said that the Reserve Bank of India is unlikely to be in a hurry to cut rates even as the US Federal Reserve has already reduced its key rates by 100 basis points so far this year. Sharma said the probability of the RBI cutting rates in its February meeting is still only 50%. The brokerage expects the RBI to cut rates by 50-75 bps in 2025.  End

Reported by Anshul Choudhary and Akshay Johnson

Edited by Avishek Dutta

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