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Informist, Thursday, Jan. 2, 2025

 

By Alina Geogy

 

MUMBAI – Indian benchmark indices are expected to recover in January if the anticipated improvement in corporate earnings for the December quarter materialises, market watchers said. Apart from the earnings, key decisions by Donald Trump after stepping into the White House for a second term and the monetary policy decisions of major central banks, including the Reserve Bank of India, will give the market direction. If all goes well, the indices could make a strong start to the new calendar year.

 

The year 2024 was "one of the best", with the Nifty 50 rising almost 10% and the mid- and small-cap indices rising around 25%, Vikas Jain, head of research at Reliance Securities, said. "No doubt, the last quarter witnessed some amount of corrective action, but again that is healthy for the markets," he said. "The Nifty 50 corrected 10-12% from its record high, but is strongly poised for the way ahead." Earnings-wise, the Nifty 50 is at a valuation of 19.5 times its 10-year forward earnings, he said.

 

The benchmark indices clocked their second-biggest monthly fall of 2024 in December, with the Nifty 50 and the Sensex falling over 2?ch. The Nifty 50 ended lower for the third month running. Following this, the index's overall returns were around 9% in 2024. The US Federal Reserve's hawkish signals about fewer rate cuts in 2025 and the depreciation of the rupee against the dollar were among the factors that caused the indices to fall in December.

 

As of Dec. 31, the Nifty 50 was down 10% from the all-time high of 26277.35 points it hit Sept. 27. The BSE Sensex was down over 9% from its record high of 85978.25 points, hit on the same day. The Nifty 50 and the Sensex ended calendar 2024 at 23644.80 points and 78139.01 points, respectively. For January, resistance for the Nifty 50 is seen at 24175 points, according to the median of estimates from 10 broking firms. This is 2.2% higher than the index's 2024 close. The 50-stock index is expected to find support at 23281.50 points, which is 1.5% lower than its close for the year.

 

The recent correction offers a good entry point for investors to start accumulating for long-term wealth generation, ICICI Direct said in a note. The brokerage sees double-digit growth in the broader market in 2025. Its preferred stock picks for the year reflect key big themes such as capital expenditure, infrastructure development, premiumisation, and electrification.

While an improvement in quarterly earnings and an increase in government expenditure could boost investor sentiment, expensive valuations, the rupee's recent fall to a record low, and foreign institutional investors being net sellers could limit gains for Indian equities this month, analysts said. Any negative surprises on the earnings front would be a dampener, they said.

 

QUARTERLY HOPES

Market watchers have been worried that companies may report weaker-than-expected earnings for the December quarter as the demand slowdown continued and raw material prices began rising after last year's fall. However, analysts are of the view that the worst is over, and corporate earnings are set to start improving from the quarter. Profitability should see an improvement starting Oct-Dec, thanks to higher spending by the government, a festival-led boost in urban consumption, and continued recovery in rural demand, the National Stock Exchange said in a corporate performance review.

 

Market participants are counting on positive earnings growth for the quarter, especially after the "poor" earnings of Jul-Sept, Jain of Reliance Securities said. "But if it doesn't come through, then we could see some disappointment and the market could witness some time correction," he said. For the September quarter, the on-year revenue growth for Nifty 50 and Nifty 500 companies had moderated to a 15-quarter low of 6.6% and a three-quarter low of 8.3%, respectively, the NSE said in the review.
 

The December quarter earnings are expected to get a boost from a ramping up of government spending, which was slow in the first half of the financial year 2024-25 (Apr-Mar). Government spending was slow because of the general election in Apr-Jun and then the monsoon in Jul-Sept, Narendra Solanki, head of fundamental research, investment services, at Anand Rathi Share and Stock Brokers, said.

 

In the first half of FY25, the government's capital expenditure was INR 4.15 trillion, only 37% of its full-year target of INR 11.11 trillion. This means around INR 700 billion was spent on average every month for the first six months of the financial year. Government spending in October and November averaged INR 492.67 billion a month. Till November, the government had spent INR 5.13 trillion, or 46% of its capital expenditure target for FY25. This means it needs to spend at least INR 1.5 trillion in each of the remaining four months to meet its target, something improbable.

 

"While capital spending saw a pick-up in November, it remained lower by 12.3% YoY till November 2024," Elara Securities said in a report Thursday. While an uptick is anticipated in the last four months, the government's capital expenditure is likely to fall short of the annual target by INR 750 billion, the brokerage said. Several capital expenditure-driven sectors, such as infrastructure, capital goods, engineering, construction, and cement, will benefit from the uptick in spending, Solanki of Anand Rathi Share and Stock Brokers said.

 

CONSUMPTION REVIVAL?

Earnings of companies could also get a boost from improved consumer demand in the December quarter. There was a slowdown in urban consumption in Jul-Sept due to a fall in disposable income amid inflation, Solanki said. Urban consumption is expected to have improved and been marginally positive in Oct-Dec, he said. There is already a pick-up in rural consumption and this is seen improving sequentially in Oct-Dec, he said.

 

Consumption-led sectors such as automobiles and fast-moving consumer goods will be in the spotlight after recent worries about demand. In December, there were concerns that FMCG companies could report lower-than-expected earnings for Oct-Dec after a disappointing business update by Godrej Consumer Products Ltd., which warned of pressures on volumes and margins. The near-term outlook for the sector looks challenging, but there is interest in the space from the perspective of a long-term growth opportunity, ET Now said, citing a report from brokerage Citi.

 

On the automotive industry, market watchers had raised concerns about high inventories and low demand in some segments. They said there are green shoots but only for select segments or companies. The automobile sales data for December highlighted a mixed trend. Among carmakers, Maruti Suzuki India Ltd. and Mahindra & Mahindra Ltd. posted double-digit on-year growth in the passenger vehicle category, while Hyundai Motor India Ltd. posted a decline. Sales of Tata Motors Ltd. in this segment were nearly flat on year. Eicher Motors Ltd. posted on-year growth in sales of commercial vehicles, while two-wheeler maker Bajaj Auto Ltd. and tractor maker Escorts Kubota Ltd. reported a decline in sales.

While there are worries about demand not picking up enough during the marriage and festival seasons, these negatives have been priced in, said analysts. The risk-reward ratio for the automotive sector has turned favourable as it is trading at a discount of 10-12% to its long-term averages after shares of companies such as Tata Motors and Maruti Suzuki fell sharply in the past few months, Jain of Reliance Securities said. Here on, any positive data or strong earnings could help these stocks move up, he said. Automakers which have announced price hikes effective January may also see an improvement in margins in upcoming quarters, he said.

Tier-2 companies from the information technology sector are expected to continue to outpace tier-1 firms in growth during the December quarter, Motilal Oswal Financial Services said in a report. Recovery now appears to be expanding beyond the banking, financial services, and insurance verticals in the US into additional verticals such as hi-tech, which is recovering ahead of schedule, the brokerage said.

 

Pharmaceuticals and healthcare were the top gainers in 2024, with the Nifty Pharma and Nifty Healthcare indices up around 40?ch. Pharmaceutical stocks are likely to outperform other sectors again this month as these are an attractive defensive bet amid uncertainty about the next move in the market and slight near-term bearishness, analysts said. The depreciation of the Indian rupee may also boost sentiment towards this export-oriented sector as several US-focused drugmakers receive their payments in dollars.

 

Pharmaceutical stocks had gained over the past few weeks as part of a "defensive play", Prathamesh Masdekar, research analyst at BP Equities, said. These gains came despite broad-based selling across most other sectors. Pharmaceutical companies have been reporting good earnings in the last 3–4 quarters and strong results are expected again for the December quarter, he said.

 

MONETARY POLICY

Major central banks across the globe have started easing their monetary policies, and all eyes will be on the RBI's Monetary Policy Committee to see if it follows suit. Market players expect the rate-setting panel to cut rates on Feb. 7. While CPI inflation moderated somewhat in November from October's 14-month high, high food inflation remains a major obstacle in the policy-easing path. The way forward "depends on how inflation remains and how the RBI is positioning themselves against inflation", Abhilasha Satale, associate fund manager-equity at Quantum Asset Management Co., said. "If there are rate cuts as expected in the upcoming meetings, then that will give some boost to the economy," she said.

 

Market participants will also be watchful of guidance from the Fed on its rate-cut trajectory. A majority of interest rate traders expect the Fed to keep key rates steady at its next policy meeting at the end of the month, according to the CME FedWatch data. This is after recent signals by the Fed that there would be fewer rate cuts in 2025. At its December meeting, the Fed had reduced key interest rates by 25 basis points to 4.25-4.50%, taking the total cuts in 2024 to 100 bps.

 

Market participants have mixed views about Trump's return as US president as his agenda and changes to major polices could have significant implications for Indian companies. With the 'America First' agenda in mind, Trump could push for higher tariffs on Indian exports. Companies with large operations in the US could face challenges if his administration puts curbs on work visas. However, there is a sliver of hope as Trump, in contrast with his earlier views, recently voiced support for the migration of skilled workers into the US over opposition from his political base.

If Trump announces tariff barriers and restrictions on H-1B visas, Indian technology companies, which derive most of their revenue from the US, would be in trouble. Such restrictive moves or any negative surprises on the earnings front would trigger sharp profit-taking, analysts said. If restrictions are not imposed, the positive momentum will continue and the IT sector will continue to do well, they said. Any development in the sector has to be watched carefully, given the current valuation levels, Jain of Reliance Securities said. IT stocks are near their 52-week highs and the sector has seen no major correction, outperforming most other sectors in 2024, he said.

 

If there are no negative policies directed at India, several sectors may benefit indirectly from restrictions targeted at China. "If they (US policies) are detrimental for Chinese manufacturers, then Indian manufacturers will benefit, and their share in the US manufacturing space could go up," Satale of Quantum Asset Management said. For example, manufacturers of solar devices in India could benefit if the import duty on Chinese solar manufacturers continues, resulting in higher exports from India to the US, she said. The electronics manufacturing services sector will also benefit, especially with large firms pushing for the China-plus-one strategy, she said.

 

Inflows from foreign institutional investors are expected to be volatile until Trump's administration provides more clarity about what to expect in the medium-to-long term from US policies, after which some stability can be expected in these flows, Solanki of Anand Rathi said. However, a meaningful revival in buying by FIIs would also depend on the valuations of Indian equities, which remain expensive when compared to other markets, analysts said.

 

Foreign portfolio investors net bought shares worth only INR 4.27 billion in 2024, their lowest net purchase for a full year since 2002, excluding four years when they were net sellers. FPIs recorded their lowest net purchases in 22 years despite net purchases of shares worth INR 154.46 billion in December, the fifth-biggest monthly purchase in 2024. This was largely offset by heavy selling in previous months, especially in October.

 

Meanwhile, the derivatives market may continue to see a decline in volumes because of recent rule changes by the Securities and Exchange Board of India, according to analysts. In November, SEBI had limited the weekly derivatives contract of every exchange to one and tripled the minimum contract size for Nifty 50 derivatives.

 

The average daily notional turnover in the derivatives segment for December has fallen 47.5% from October. Volume in the derivatives segment has fallen since the rule changes to deter small-ticket-size traders, said Rajesh Palviya, head of technical and derivatives research at Axis Securities. The fall in volumes could deepen in January with the increase in minimum contract size for index derivatives, he said.

 

Following are the support and resistance levels for the Nifty 50 index for January, based on responses from 10 brokerages:

 

BROKING FIRM	Support 1	Support 2	Resistance 1	Resistance 2
Anand Rathi Shares and Stock Brokers	23300	--	24500	24800
Axis Securities	23200	22700	24000	24500
Choice International	23300	23000	24500	24750
HDFC Securities	23200	--	24200	--
ICICI Securities	23300	--	23800	23900
Indiacharts	23263	22500	24150	24350
Lakshmishree Investment and Securities	23600	23250	24000	24350
Maximus Securities	23536	23200	23950	24550
SAMCO Securities	23200	23000	24000	24500
StoxBox	23500	23250	24200	24850
Median	23281.50		24175

 

End

 

Edited by Rajeev Pai

 

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