Which sectors will outperform the market in 2025? Hospitals, airlines, or something else?
ADVERTISEMENT What is your take on the earning season so far because now that we have finished with all of the Nifty 50 earnings, and particularly the last three have been quite strong. How has the earning season been so far? Any unexpected misses or surprises that you have spotted?
Pratik Gupta: As far as the earning season is concerned, it has been broadly in line with somewhat muted expectations ahead of the earning season. For example, for the Nifty as a whole, we were expecting about 5% earnings growth. That has come in at about 6.5-7% for the June quarter. But more important has been the commentary and the guidance which has been weaker than expected and the continuing weakness in the economy.
At Kotak, we cover about 300 companies, so for the broader universe and more importantly for the Nifty 50, before the start of the June quarter earning season, we were projecting about 12% earnings growth in FY26. That estimate has now come down to 10% and our analysts still see further downside risks if things do not pick up in the next one or two quarters. So, the earning season has been okay and there are a lot of hopes now on the second half post monsoon recovery, the festive season demand, the impact of the RBI rate cuts. Dipan Mehta highlights capital goods and power as next market leaders
Obviously most important is the expectation that the Trump tariffs will somehow come down to more reasonable levels next week or later this month. If those things do not pan out, then as far as earnings are concerned, we could be in for some negative surprises going forward.
In this kind of flux of all the news flow, all question marks about what the festive season is going to do, what the government intends to do after the big fillip of 50 bps cut from the RBI, and the big question mark on tariffs, how should investors be positioning themselves now because at best you only have very tactical short-term visibility?
Pratik Gupta: You are right, which is why we are recommending a somewhat cautious stance. We do not think this is an environment where you need to take on risks. We would recommend a couple of broad themes. One, look at domestic plays rather than export plays. Second, look at quality versus value momentum, cyclical kind of plays. The third is a corollary of the second one; largecaps versus the small and midcaps, tend to weather an economic slowdown much better. What is clear is we are going through a slow growth patch and this may persist for some more time and who knows it may get worse if the tariff headwinds do not abate. So, we are in for a tough economic environment. We do not see signs of a very strong domestic economic recovery, at least not in the short term. We have not seen any sort of government action as such coming through in terms of reforms. So, until then you have to be somewhat cautious. So, stick to domestic plays, stay away from IT services for example, where even before the US tariff threat, we were concerned about high valuation and the weakness in discretionary IT spending. Then we have got the AI risk coming through, we had ChatGPT 5 being released last week, and that just shows overall how things are moving in that direction. So, generally be cautious, stay away from cyclical or rather high beta plays, be defensive and do not try and be a hero in this environment, that is sort of the broad advice.
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You have been mentioning that you have made some tweaks in your earnings estimate which is now down to 10% versus 12% earlier. Help us understand which sectors are you sporting that may outperform this growth number because of late, we have seen some sectors and rather some companies talking about double-digit growth. A case in point is hospitals, the EMS companies and select pharma companies as well.
Pratik Gupta: Let me begin with the sectors which are likely to underperform and that is usually typically this year it has going to be the IT services companies, the consumer sector where volume growth is still low single digit, revenue growth in maybe high single digits, and even the banks this year are likely to not show very strong earnings both a combination of lower NIMs as well as higher credit costs. These are the large sectors which will likely underperform.
Unlock 500+ Stock Recos on App When it comes to outperformance, as you rightly pointed out, some of the sectors you mentioned we also like them. Hospitals are definitely a space we like. This is a sector which is somewhat unimpacted by the tariff situation or global slowdown, and so that is a secular growth story. Valuations are a bit on the topish side, but nonetheless growth is very strong. So, we like the hospital space.
ADVERTISEMENT Hotels, airlines are the other sectors we like. Again, more domestic-focused, less impacted by what is going on globally or with tariffs. In telecom, frankly, there is just one play, Bharti Airtel, and we like that one as well. We also like some of the leading NBFCs where the decline in funding costs should basically help them and the credit cost impact may not be as much. So, we like some of the NBFCs. We do not think private banks will outperform from an earnings perspective but valuations have come off. A lot of these stocks have come down sharply and in the context of the overall market, these stocks are looking relatively more attractive. The Nifty is trading at 21 times. So, we have to look for not just where earnings are very strong like the EMS companies that you pointed out. They have very strong earnings growth, but valuations are off the charts. These stocks are trading at 60 to 80 times one year forward earnings. We like the businesses but not the stocks and which is why we would rather be in businesses which are not doing as well like the banks but where valuations are a lot more attractive.
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