Macros are good but where is the market headed based on earnings, liquidity & PE multiples? Here's the Citi view

Economic Times

08-05-2025

Samiran Chakraborty, Chief Economist India and Surendra Goyal, Head of India Research, Citi, in conversation with ET Now. Goyal says market growth in fiscal year 2025 will be in single digits. Earnings are expected to recover going forward. FY25 presented earnings challenges, expecting mid-single-digit growth. Large private banks and downstream energy companies are showing strength, offsetting consumption weakness. Tax slab changes and macroprudential norms should aid long-term growth, targeting historical 11-12% earnings growth. Positive domestic flows and stabilizing FII trends support a constructive medium-term market outlook, despite limited near-term upside.
ADVERTISEMENT On the macro front everything is looking good?
Samiran Chakraborty: Yes, India is getting a lot of tailwinds. To start with, there is a huge boost from lower oil prices. India is likely to be one of the first countries to strike a deal with the US on the tariff front also. We have already done a trade deal with the UK which could be the template for it. On top of it, monetary policy is extremely supportive. We have already seen significant rate cuts and liquidity infusion, going ahead we could get even more. And to some extent, in a very uncertain global world, India could be a relative beneficiary and even from that perspective we could see capital finding its way into India.
'Sell in May and go away' or stay put in the market? Pankaj Pandey answers Last but not the least, currency pressure not being there definitely helps with this kind of environment of dollar weakness. Policymakers will have one less headache to worry about. All these things are positive, but we have to do our own things as well. We have to keep on doing the kind of reforms that are needed to attract this capital into the country and boost our manufacturing prowess. That is the part where more work probably needs to be done still.
If I take the clock back before we move it forward, when Indian markets were in a disarray, as a house you came up with quite a constructive report which talked about a year-end target of about 24,000 plus. We have reached there because of liquidity as well as macros. We have reached there perhaps because of earnings recovery also. Where are we headed next given that your price targets for the full year are already there on the ticker?
Surendra Goyal: To answer that, let me take a step back first. In February, we turned overweight on India in our EM strategy and it was driven by a combination of things. We had seen a lot of action by the central bank. We had seen the tax slab change being announced by the government. The valuations had corrected a fair bit at that point of time – both in absolute terms as well as relative terms. All of those things had happened and to that extent valuations were starting to look more attractive. So that is where we had turned overweight and we had an index target of around 25,000 at that point of time.
The current Nifty target for December is 26,000 which as of today is around 7% upside from here. So, where we sit today, I would say there is still some upside and it starts with the point of macro looking pretty decent. So that is the first point. For earnings, FY25 was a challenging year, and FY 26-27 should be better. We are expecting a 26-27 aggregate return to the long-term trajectory that India has had. In FY25, the growth will end up in single digit, which is well below what India normally has on a longer-term basis. But we expect earnings to recover as we go forward. So, at this point of time I would say yes, we have seen a nice rally of around 10-11% from February end, in dollar terms the returns are even better. So, some of that upside is captured in and to that extent, there is a moderate upsides and any dips will be an additional chance to add.
ADVERTISEMENT Let us get your view on the three important moving parts -- earnings, liquidity, and then PE multiples. Where are markets headed based on that?
Surendra Goyal: On earnings, the point I make is FY25 was a very challenging year. We will end up in mid-single digits. The way the current quarter is shaping up, the trends are broadly mixed. But within that, two large sectors from an earnings perspective, which are delivering better numbers are the large private banks as well as the oil and gas, especially the energy companies downstream. So, because of that the reported numbers will look better, but overall trends are quite mixed because on the consumption side we have seen weakness in select names.As we go forward, whatever changes have happened in terms of tax slabs, in terms of liquidity, in terms of change in macroprudential norms, should start helping and we should go back to a more longer-term growth in India. On a 15-year basis, earnings have grown at 11-12% in large indices in India. So, that is what we expect, that is the view on the earnings side.
ADVERTISEMENT The second point is on the PE multiple. Samiran mentioned that the macro looks pretty decent. India is looking relatively quite good within the EM construct, a lot of things really going in favour at this point of time and which is why we believe that the PE multiple is on the higher side, but it could still be supportive. In fact, if you look at our index target, it is at an earnings of around 19-20 times, which is not very different from where we are currently. The third point is liquidity. One of the things we saw which took the market down around 15% between October, November last year and February was the FII outflows and which happened because there was a bit of a cyclical slowdown in growth, the dollar strengthened. So all of those things resulted in that. But from the last couple of months, it has turned positive, again a small positive but positive. Domestic flows have continued to be pretty resilient and that has gradually taken the market up higher.
ADVERTISEMENT So, on all the three factors, things are kind of stable to decent and that makes us constructive on the market medium-term, admitting that the market has bounced back quite nicely and to that extent near time upsides might be limited.
If we were having this chat a month ago, the conversation would have centred around tariff. Now it appears that there would be a lot of negotiations, some reconciliations, and some logic when it comes to the tariff interplay. So, while talking about macros, are you accounting in the tariff which would be at play after that 90-day window gets over and what kind of assumptions are you making at a global level when tariff windows would be open.
Samiran Chakraborty: Obviously, this is a very fluid situation where every country is doing their negotiations on the tariff side and from India perspective, it is a story of absolute versus relative. In an absolute sense, at least whatever the current tariffs are, we might be impacted to some extent, but in a relative sense India will probably be impacted much less. The second thing is that if India at least on the manufacturing side uses the template that we have done with the UK which is that on the manufacturing side, we are offering almost zero for zero tariff, then it could actually turn out to be better. The third is that if there is a relative tariff divergence between India and China, then in the initial days, we will benefit from some sort of trade diversification where more and more orders will come to Indian companies and over the medium-term we can even benefit from supply chain diversification where these companies will be putting up their production hubs in India as well.
ADVERTISEMENT These are the positives that can come out of this tariff scenario in some sense for India. The negative is that we can also get impacted by somewhat cheaper Chinese imports coming in if this tariff differential persists. For our calculation perspective, we had taken about a 30 basis point cut in our GDP growth forecast from 6.6% to 6.3% as an initial take on how things could be. But we also wrote that if for some reason this tariff shock through its secondary effects on global growth slowdown and generic uncertainty around leads to a much deeper growth slowdown below 6%, then India is in a position to activate a lot of additional policy measures, not just on the monetary policy side but also on the fiscal policy side. So, for us, 6% growth is a red line where the policy impetus will become stronger and probably push growth somewhat higher into that 6-6.5% range.
There are two factors which in a sense are still moving parts. One, when would the government spending which had slowed down because of election and other compulsions in FY25, normalise and if it will normalise? Second, when will we see the real recovery in rural India because for almost three years, we have not seen meaningful contribution from there.
Samiran Chakraborty: So, we have our own way of estimating the government spending data on a more high frequency basis and it appears to us that in the month of April, the government has spent a lot of money. Their cash balance at the end of March has almost been entirely drawn down in April which is a sign that this spending has happened, but that is very near-term. Over the more medium term, the big debate is not about the total quantum of government spending, but more about the composition of the spending between the revenue spending side versus the capex spending side. Our sense is that the capex spending will still grow, at least the nominal GDP growth rate, which is in excess of 10%, but we are not going to see that 20% plus capex that we had seen for a couple of years. That is probably behind us.
But more and more, we will also have to see this capex being done at the state level and at the third tier government level as well. So, diversification of capex will become important from the government side, but total expenditure, at least in the near term, has picked up well. The open question is if for some reason, the growth headwinds are stronger, then how does the government stimulate the economy on where it can spend more? Those are still very open questions.