Valuations higher than what growth warrants; pick stocks carefully in this market: Shreyash Devalkar
Shreyash Devalkar
,
Fund Manager,
Axis Mutual Fund
, recent GDP growth numbers for FY25 and Q4 met expectations. US flows are aiding the market. Despite lower volume growth,
valuations
are high. The IT sector's growth and PE ratio trends are an example. Globally, IT service valuations have shifted due to higher cash flows. Current valuations exceed what growth justifies. Careful
stock picking
is essential in this market.
Indian markets have had a strong. Will this party continue and if yes, why and if no, why not?
Shreyash Devalkar:
You have been highlighting one point which is true as far as overall markets are concerned – good macro, in which there is low interest rate, low commodity prices, and fiscal deficit in control. The recent GDP growth numbers released for FY25 and Q4, have not shown much deviations from the expectations though the numbers are not what the market expected a year ago. But as of now, there is no deviation.
by Taboola
by Taboola
Sponsored Links
Sponsored Links
Promoted Links
Promoted Links
You May Like
Una inversión en Amazon podría darte un salario extra.
preg.marketingvici.com
Undo
So, broadly, combining all these factors we see definitely the flows from the US are there and that is definitely helping the market. And despite relatively lower growth on the volume front especially, the valuations are definitely high. I always give an example of the IT sector. In the first decade of this century, the IT sector used to grow at 15% with around 20-25 PE.
In the second decade, it grew at around 10% with 15-20 PE, and now it is growing at around 5% with around 20 PE. So, the growth is low and the valuations are definitely higher than expected. Some of these valuations are not only in India and if you see IT services globally and take similar companies like Accenture in the US, there also they have seen some changes in valuation, the most appropriate reason is actually over the last three decades, the higher cash flows and higher payouts which this sector has witnessed. But broadly for various reasons, we can try to attribute one thing or other for every sector per se. Valuations are now higher than what the growth would warrant. So, one needs to be very careful in terms of stock picking in this kind of market.
Is it okay to say that the macros are looking much better than the micros. Will that be a fair statement? The rupee has stopped falling. Inflation is coming under control as are bond yields. There has been an early onset of monsoon. Are we in for macro dominated rather than micro dominated trade now?
Live Events
You Might Also Like:
Can India become the services factory of the world? Gautam Trivedi explains
Shreyash Devalkar:
Yes, this has been the case probably for one year to one-and-a-half years. Just one year ago, this trade had started because over last year we saw earnings cut and since September of 2024, the market started reacting to the micro numbers. If you remove even Trump trade related fall, before that also, there was a substantial fall and that was micro related. So, let us not totally ignore the micro and earnings growth. This phase has been a reminder of that and that is where on a one-year basis and so on, the returns as such are not as lucrative as one would like to have. So, definitely macro is good and it provides some downside protection to the market, but micro would be important to make money in individual stocks.
We just concluded the Q4 earning season. Help us understand what were your key takeaways from the earning season? Other than that, which sectors do you believe offer an opportunity for long-term investors? Have you spotted any standout sector?
Shreyash Devalkar:
As far as the season is concerned, it was good versus expectations. What is happening currently is that since the last two-three quarters, the earnings are getting cut ahead of the earning season and expectations are getting revised downward prior to the earning season. So, generally, the earning season is not seeing as much cut as far as the period of approaching the earning season and that is why you have seen that not much reaction to the earning disappointment during the earning season per se. The stocks actually fell, as I said, from September onwards itself.
If you take the largecaps represented by Nifty 50, then the growth has been less than 5% overall, while the broader market growth has been around 8%. Good growth in the context of valuation, has been in financial services in the last quarter in terms of NIMs versus expectation. Growth as well as asset quality have been good in some of the oil marketing companies, and the frontline capital goods companies as well. Only a part of the margin is where the focus is on the market especially when it comes to the capital goods and auto kind of cyclical sectors.
Otherwise, the earnings are broadly in line with expectations. Since earnings are getting cut for the last three-four quarters ahead of the earning season, I see that FY26 earnings may not see further cuts beyond a point because the market has tried to factor in the recent trends in the earnings in FY26 as well. FY27 is where the entire bulge is when it comes to the earning growth expectation. As far as near-term earning cuts are concerned, we are broadly there.
You Might Also Like:
Top Nifty50 stocks analysts suggest buying in this volatile week
What in this market is cheap but not good and what is good and yet cheap?
Shreyash Devalkar:
That part has been the case again for the last eight months or one year or so. So, the largecap of India mostly if you take bank, FMCG, IT, largest companies some of them, point is that since they are so large their growth is very much dependent on GDP growth and at 6-7% GDP growth whatever are the numbers for that and if there is expectation of the GDP growth further improving from here, with that expectation definitely the largecaps are reasonably valued compared to their growth expectation.
If GDP growth accelerates, then largecaps can give better risk-adjusted returns. When it comes to mid and smallcaps, this conundrum has been there for the last three years now. It is not today's conundrum that largecap lacks growth while valuations are reasonable and midcap, smallcap the growths are better than the largecap but valuations have got elevated quarter after quarter.
A 20 PE mid, small great growth story, became 30, 40 after every quarterly result season. Even in this quarter, the same thing would have happened and initially largecaps outperformed. But post the result season, many of the mid and smallcaps because of the good earning growth delivery have caught up.
As an investor, if I am running a diversified portfolio, we are looking at a mix of both. So, just for the sake of reasonable valuations, one need not be entirely in the low growth segment. At the same time, one should not totally ignore some of the companies where the valuations are high, but the growth stories are intact. So, reasonable valuation is what we are looking forward to in our diversified funds.
You Might Also Like:
Stocks to buy today: Paytm, Swiggy among top 5 trading ideas for 2 June 2025
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
India.com
10 minutes ago
- India.com
Bollywood's richest family has no superstars, still richer than Bachchans, Kapoors, Khans, Chopras, once sold fruits, now worth Rs..., they are..
Bollywood's richest family has no superstars, still richer than Bachchans, Kapoors, Khans, Chopras, once sold fruits, now worth Rs..., they are.. From Kapoors to Chopras, the Hindi cinema has seen few prominent wealthy families that have ruled the Indian cinema, and are responsible for launching stars and producing blockbuster films. Yet, none of them are as rich as this family, who once started as fruit vendors, now amass extravagant wealth without backing of any big superstar. It is none other than the Kumars, owners of T-Series, the family who has surpassed net worth of Khans, Bachchans and Chopras, according to the Hurun Rich List. The latest edition of Indian list from Hurun released last year, and revealed Bhushan Kumar's family, the richest in Bollywood, with net worth at $1.2 billion (over ₹10,000 crore). The tag, which was once claimed by the Kapoors, having net worth of Rs 2000 crore, is now ultimately shifted to the Kumars. The second on the place after Kumars is Yash Chopra's family, with combined reported net worth of Rs 8000 crore. Shah Rukh Khan, Bollywood's wealthiest actor, his familial net worth is Rs 7800 crore, according to Forbes. Well, The Kumars journey to success started with humble earnings. Just one generation ago, Gulshan Kumar, father of Bhushan Kumar, was a fruit vendor in Delhi. His career transformed in the 1970s when he began business of selling music cassettes. From there, the family launched their own record label, Super Cassettes, which later developed into T-Series. Currently, Bhushan Kumar leads the family business, as the chairman and managing director of T-Series. Supported, by his uncle Krishan Kumar, who manages the company's operations, he has two sisters- Tulsi and Khushali Kumar, who are involved in the entertainment sectors. While Tulsi is a well-known playback singer, Khushali is an actress. His wife, Divya Khosla Kumar, producer and director, also holds shares in the company. The Kumars draw a bulk of income from T-Series, one of India's biggest music labels and production companies. According to Industry insiders, Bhushan Kumar hold 80% of family's collective net worth. Meanwhile, his sisters Tulsi and Khushali Kumar reportedly own Rs 250 crore and Rs 100 crore net worth. Well, T-Series also has several other subsidiaries and an acting school in Noida.
Mint
14 minutes ago
- Mint
Indian stock market: 8 key things that changed for market overnight - Gift Nifty, US jobs openings to crude oil prices
Indian stock market: The domestic equity benchmark indices, Sensex and Nifty 50, are expected to open higher on Wednesday, following upbeat global market cues. Asian markets rallied, while the US stock market ended higher overnight led by gains in tech stocks. On Tuesday, the Indian stock market ended sharply lower amid growing concerns over stretched valuations and foreign capital outflows. The Sensex dropped 636.24 points, or 0.78%, to close at 80,737.51, while the Nifty 50 settled 174.10 points, or 0.70%, lower at 24,542.50. 'There is no outcome yet on the global trade settlement involving major economies, which is creating a lot of uncertainty amongst the investors and prompting them to slash their equity bets at regular intervals. Also, with no solution yet to the conflict between Russia & Ukraine, the risk-off sentiment continues with the investors,' said Prashanth Tapse, Senior VP (Research), Mehta Equities Ltd. Here are key global market cues for Sensex today: Asian markets traded higher on Wednesday following a tech stocks-driven rally on Wall Street. Japan's Nikkei 225 gained 0.83%, while the Topix index rose 0.47%. South Korea's Kospi index rallied 1.57% to hit a 10-month high, while the Kosdaq surged 1.06%. Hong Kong's Hang Seng index indicated a weaker opening. Gift Nifty was trading around 24,730 level, a premium of nearly 55 points from the Nifty futures' previous close, indicating a positive start for the Indian stock market indices. US stock market ended higher on Tuesday, led by gains in technology stocks and optimism over trade talks between the United States and its trading partners. The Dow Jones Industrial Average gained 214.16 points, or 0.51%, to 42,519.64, while the S&P 500 rose 34.43 points, or 0.58%, to 5,970.37. The Nasdaq Composite closed 156.34 points, or 0.81%, higher at 19,398.96. Nvidia share price rallied 2.9%, Broadcom stock price gained 3.2% to hit a fresh record high, Tesla share price rose 0.46%, Wells Fargo shares rose 1.2% and Dollar General stock surged 15.8%. Kenvue stock price dropped 6%, Reddit share price fell 1.1%, while Pinterest shares rose 3.8%. US job openings increased in April, but layoffs picked up. Job openings, a measure of labor demand, rose 191,000 to 7.391 million by the last day of April, the Job Openings and Labor Turnover Survey, or JOLTS report, showed. Data for March was revised higher to 7.200 million open positions instead of the previously reported 7.192 million. Economists polled by Reuters had forecast 7.10 million vacancies. New orders for US-manufactured goods dropped sharply in April. Factory orders fell 3.7% after an unrevised 3.4% jump in March. Economists polled by Reuters had forecast factory orders declining 3.1%. They rose 2.0% on a year-on-year basis in April. Japan's service-sector activity growth slowed in May on weaker demand. The final au Jibun Bank Japan Services purchasing managers' index (PMI) fell to 51.0 in May from 52.4 in April, although it was higher than flash 50.8. The US dollar drifted lower on Wednesday. The dollar index, which measures the currency against six other counterparts, was flat at 99.159. The dollar was down 0.09% at 143.82 yen and the euro was up 0.13% at $1.1385. Crude oil prices fell after two days of gains. Brent crude oil prices fell 0.17% to $65.52 a barrel after closing at a three-week high, while the US West Texas Intermediate (WTI) crude futures declined 0.20% to $63.28. (With inputs from Reuters) 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.
Time of India
15 minutes ago
- Time of India
Can rising EPS estimates restore investors confidence despite tariff uncertainties?
Mumbai: Investors may have a reason to cheer amid elevated uncertainties over the fallout of tariffs in the near term. Analysts have increased the earnings per share (EPS) estimates of most large companies following the March quarter, reversing two straight quarters of downgrades. Of the companies on the Nifty 500 index tracked by at least five analysts or more, 315 saw EPS upgrades in the fourth quarter compared with the December quarter, according to data from Eikon. EPS estimate upgrades signal improving earnings outlook, boosting investor confidence and often driving stock prices higher. "After two consecutive quarters of disappointing earnings, we've now seen some early rounds of earnings upgrades from analysts across selective companies following the fourth quarter numbers," said Aniruddha Sarkar, chief investment officer and portfolio manager at Quest Investment Advisors. "Government capex picking up sharply in the last four months is largely responsible for the same, along with a pickup in consumer spending." Analysts had moderated the earnings outlook in the previous two quarters after profits slowed to single digits amid concerns over an economic slowdown. The EPS growth of Nifty 50 was at 4.1% in the June quarter and 8.9% in the September quarter from the year-ago periods. In January-March, EPS grew at 10.9% from the same period a year ago. The EPS growth for FY25 was at 9% year-on-year. Live Events Agencies Slowing corporate earnings and the resultant downgrades by analysts were reasons for the sell-off in Indian equities between September-end and March, as investors found stock valuations rich in the face of the squeeze in profitability. Money managers expect further recovery in earnings in the quarters ahead. The Nifty's EPS is expected to grow at about 13% on a compounded basis between FY25 and FY27, up from 10.9% in the fourth quarter, supported by a lower base of FY25, accommodative monetary policy, and continued government spending , said Nikhil Rungta, co-chief investment officer - equity at LIC Mutual Fund. "Banks benefited from improved asset quality, while the auto sector saw steady domestic demand and successful new launches," he said. "Government-led capex supported infrastructure and real estate, and a rural demand revival boosted consumption." The pace of upgrades will be crucial for determining the direction of the market. "We believe the first quarter of FY26 could see some more modest upgrades but the pace of upgrades across the broader market could pick up from Q2 onwards as the low base of FY25 will come into play," said Sarkar.
