Fund Manager’s Talk | Appraisal wisdom returns, go against the tide: Alok Ranjan

Sanity in valuations is returning to the market and momentum stocks have breathed a sigh of relief and those who have been acting defensively, Alok Ranjan, Senior Fund Manager – Equity, ITI Mutual FundSays it’s time for savvy stock pickers to go against the tide and reap the benefits.

It is bullish on financials, IT, healthcare and capital goods.

Edited excerpts from the chat:

The next 2-3 weeks are going to be action-packed for investors between the ongoing Q3 earnings season, Trump’s inauguration, the Fed meeting and the Union Budget back home. What will your strategy be when volatility is likely to be higher than normal?

With so many events in the coming weeks, the markets seem to be volatile. During such periods, it is crucial for the investment portfolio to maintain diversification across sectors and market capitalizations, in alignment with the principles of SID. Sanity in valuations is returning to the markets and momentum stocks have taken a breather and those with deep underlying value act as a hedge. In times of increasing volatility, risk mitigation strategies need to be prioritized to ensure portfolio resilience.

Do you think the earnings downgrade will bother investors once again in Q3 results season? What are your broad sector expectations from Q3 earnings?

Q3FY25 earnings are also expected to be lower and based on that, we see forecast earnings adjustments and downgrades across most sectors. Lower industrial growth momentum could create some negative earnings surprises among companies in the capital goods space. Early business updates from the banking sector indicated weak credit in unsecured lending and asset quality concerns that could result in lower earnings and growth forecasts for banks. Issues of extraordinary leverage and recovery in the MFI sector have made headlines in the media over the past few months.

While the brokerage consensus seems to be in favor of large cap stocks, a number of bluechips have underperformed in the last 2-3 years. Do you think the valuations of those bluechips are attractive enough in 2025?

A significant portion of the portfolio of foreign institutional investors (FIIs) has been in large-cap stocks due to their superior liquidity and stable earnings track record. FIIs have been net sellers of Indian equities in the secondary market in the recent past. As a result, these large-cap stocks can become disproportionately weighted and sold later, even when their valuations look attractive. This scenario presents an opportunity for savvy stock pickers who are willing to go against the tide and reap the benefits from a medium to long-term perspective.

Given the low street expectations from the Q3 earnings season, do you think Nifty’s current valuation is reasonable enough to limit major losses unless it is triggered by a shocking external event?

The Nifty 50 has already recovered ~10% from the highs made in September 2024. Q3FY25 earnings are also expected to be lower and based on that, we see forecast earnings adjustments and downgrades across most sectors. Given the low market expectations for the Q3 earnings season, Nifty’s current valuation offers some degree of downside protection, barring any unexpected external shocks. When the market has already priced in a certain level of underperformance, this cautious estimate can help limit further significant declines. However, if an unexpected external event were to occur – such as a geopolitical crisis, a sudden change in global economic conditions or a major disruption in key sectors – it could trigger a more pronounced downside. In the absence of such triggers, Nifty’s valuation seems reasonable enough to limit major downside in the near term.

What impact could Donald Trump’s presidency have on Indian equity markets? IT is seen as a winner but there is a threat around visa strictures. Which Indian exporters are likely to be negatively affected by the Trump regime?

A presidency may present some short-term challenges for India, particularly through factors such as a strong US dollar, rising interest rates and potential capital inflows, as India stands to benefit from changes in global supply chains. If the new US administration were to impose restrictions on work visas, particularly the H-1B visa program, the Indian IT and IT-enabled services (ITeS) sectors could face additional costs. Such restrictions could limit workforce mobility, affecting the ability of Indian IT companies to hire in the US. As a result, Indian companies may need to devote more resources to hiring locally in the US, potentially increasing operational costs and impacting margins. On the other hand, a weaker Indian rupee and a shift away from dependence on China could give Indian pharmaceutical companies, especially low-cost generic drug makers, a competitive advantage.

What are your expectations from the Union Budget from a capital markets perspective?

As the Union Budget for 2025 approaches, expectations are rising about key measures to be introduced to stimulate economic growth and stabilize market volatility. Market participants expect the government to focus on critical issues such as foreign direct investment (FDI), fiscal consolidation, disinvestment strategy and energy transition. Participants will closely monitor government fiscal policies, particularly in areas such as tax reform and government spending priorities. We expect the government to increase its own capital expenditure in FY26 as well as push private corporates to do more capital expenditure. On the other hand, any significant tax relief initiatives and higher rural spending can serve as catalysts in consumption-based sectors.

After the Lok Sabha election results were announced in June last year, the investment theme slowed down. Do rail, defense and other capex stocks have any play in the run-up to the budget or do you think there is a higher chance of a disappointment?

The capex theme appears subdued following the Lok Sabha election results, and there are concerns that the Indian government may fall short of its capital expenditure (capex) target for fiscal 2025. However, the government is taking steps to boost capital spending, with visible acceleration in sectors such as railways, defence, power and data centres. This momentum is expected to support growth in FY26. According to government estimates, India’s GDP growth is projected to touch a four-year low of 6.4% in FY25. To stimulate economic activity, market participants expect an increase in the government’s capital investment target for the next financial year. Historically, infrastructure development and defense spending have been key priorities in government budgets, which can provide a positive boost to these sectors.

Following the correction seen in the market after the September-end peak, which sectors have become attractive from a valuation perspective?

Financial services

India’s financial services sector is exhibiting strong resilience, with the gap between bank credit growth and deposit growth narrowing, which is expected to ease margin pressure. The banking sector, in particular, has shown strong return ratios and improved capital adequacy levels, reducing the need for additional capital infusion. Valuations of private sector banks are attractive relative to the broader market, indicating stability and long-term growth potential.

Information Technology

India’s IT services sector is poised for continued growth due to increased investment in emerging technologies such as artificial intelligence (AI), blockchain and cyber security. Demand for cloud services is expected to remain strong, positioning India as a key player in the global technology landscape. The rapid growth of generative AI, with demand projected to grow 15 times between 2022 and 2027, presents a significant opportunity for Indian tech companies.

Healthcare and Pharma

Healthcare expenditure in India is expected to continue to rise, supported by rising GDP per capita and an aging population. India, a major producer of pharmaceuticals and vaccines, appears well positioned to meet the growing global demand for healthcare services. The country is also becoming a preferred outsourcing destination, particularly for contract development and manufacturing organizations (CDMOs), as companies seek to diversify supply chains away from China. The Indian CDMO market, valued at $22.51 billion in 2024, is projected to grow to $44.6 billion by 2029 at a CAGR of 14.7%. Medical tourism is expected to surpass pre-pandemic levels, while the hospital and diagnostics sectors are expected to continue to grow. Additionally, the market for small molecule drug discovery is expanding, with rising R&D spending bolstering the pharma sector.

Capital goods

The capital goods sector, which includes sub-sectors such as electrical equipment, plant machinery and mining machinery, is benefiting from increased government infrastructure spending and initiatives such as the Production Linked Incentive (PLI) scheme. These investments are expected to increase manufacturing capacity and strengthen India’s industrial base, providing further growth opportunities for the capital goods market.