JP Morgan's Mookim seeks bright spots amid earnings lull in Indian markets

Mint

19-05-2025

MUMBAI
:
Over the past 18-20 months, identifying large-cap top performers has been challenging amid elevated expectations and lacklustre earnings, according to Sanjay Mookim, head of India equity research at J.P. Morgan.
Currently, only financial stocks appear attractive from a growth and valuation perspective, Mookim says, highlighting the scarcity of compelling opportunities in a market starved of earnings surprises.
The latest earnings season has done little to lift enthusiasm, with few standout results emerging. Though the market rallied briefly following the recent India-Pakistan ceasefire, Mookim expects volatility to persist, fuelled by shifts in US trade policy and potential new trade deals.
With GDP growth normalising and fiscal stimulus exhausted, Mookim describes the current phase as a 'bull market reset", one requiring selective stock picking amid ongoing uncertainty from global trade tensions and geopolitical developments.
Edited excerpts:
After a period of blockbuster economic growth and stock market returns in the last three to four years, what is your expectation for the economy and markets going forward?
For the next three odd years, we are looking at a nominal gross domestic product (GDP) growth of 9-11% for the Indian economy. While we no longer have any room for further fiscal stimuli, there is some monetary policy support from the Reserve Bank of India (RBI).
Even though we anticipate an overall 100 basis point cut in interest rates, favourable liquidity conditions need to persist for a period of time for that to have an impact on the economy.
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With GDP growth normalising after the post-covid boom, company earnings will also reflect a similar growth pattern. Hence, we can call it a bull market reset rather than a pause, where the breadth of the companies posting earnings growth will be narrower.
Which sectors do you think will lead this 'reset" era?
Right now, the task that lies ahead of us is to identify a set of top-down stocks within the large-cap segment or a theme where we are seeing earnings surprises. Ultimately, what works in stock picking is avoiding companies that will miss earnings expectations and buying those that will beat expectations.
However, over the last 18-20 months, identifying top-performing stocks has been challenging due to elevated expectations and lacklustre results in the last three quarters. Currently, only financials look attractive from a growth-valuation perspective.
Are current Q4 earnings offering enough positive surprises?
So far, results have been lacklustre. We are seeing very few beats this quarter. While there have been a few that have delivered better-than-expected near-term quarterly earnings, changes to 12-month earnings projections matter more to stock prices.
There have been relatively few instances where analysts have been required to increase forward numbers so far.
What is the FPI sentiment regarding India right now?
The consensus view on India is that it is relatively better positioned compared to other emerging markets amidst the ongoing global uncertainty. Conceptually, foreign investors want to buy Indian stocks, but they do not want to overpay.
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Even after a broader market correction, valuations are not anywhere close to being reasonable.
Only financial stocks are available at pre-covid multiples, hence they are the favourite by default. Plus, there is scope for growth there as well. Even if banks' net interest margins come under pressure as the RBI cuts rates, over a two-three-year view, they will have decent compounding of value as loan volumes will receive a boost after rate cuts.
Domestic institutional focus is on sectors with the least exposure to exports. Hence, themes like domestic consumption have gained traction lately. What is your view on that?
I'm wary of feeding the narrative here. Yes, exporters are in trouble, but how well are non-exporters expected to do? This strategy may work for a few months, but I'm not entirely convinced that they will surprise on earnings.
For example, hotels and airline companies are growing well. Their capacity utilizations are high. But are they going to surprise us anymore? This may be difficult given already elevated expectations.
Do you expect a rebound in Indian consumption after the tax break in the Union budget, and hence a rebound in broader earnings in 2025-26?
The quantum of the tax break is just 0.3% of India's GDP. So, I would be sceptical about whether it leads to any material change in consumption. Moreover, young consumers are increasingly chasing experiences, so it remains to be seen how the extra cash will be used beyond smaller ticket discretionary items.
But what really perplexes me is whether Indian consumers are really in trouble, or are they just more value-conscious? We have observed that wherever companies have reduced the prices of products, they have been able to gain volumes and market share quite rapidly. The recent disruption in the beverage space is a prime example.
Do you see the rural segment leading India's consumption story as urban consumption continues to languish following a post-covid normalisation?
India's consumption story is more of an income distribution issue than a rural-urban divide. According to the RBI's latest consumer confidence survey, mostly the low-middle-income households have expressed a drop in confidence levels after an initial recovery post-covid.
This is a bit of a mystery because on one hand, you have large, listed companies struggling to grow volumes of basic staples, but on the other hand, service sector sales remain robust, flight ticket sales are rising, and jewellery consumption is doing extremely well despite the ₹1 lakh sticker shock on gold.
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We are seeing smaller unlisted consumer companies from the private equity world, like consumer startups growing very rapidly, while big names are reporting meagre top line or volume growth. Our sense is that such listed companies are probably over-earning. They are defending their margins too aggressively. Previously, you had commodity price inflation, so companies raised prices to pass it to the consumer, but commodity prices have not been a problem for quite a while. Moreover, the staples companies will themselves tell you that their demand is very price-elastic. But prices have not been cut. Hence, they are seeing lacklustre volume growths.
What are the positive levers for the Indian economy?
I believe urbanization is a slightly underappreciated and unexplored driver of the Indian economy. There is a significant degree of migration happening right now in all state capitals, and not just in top-tier metros like Delhi or Mumbai. This will likely boost and sustain consumption. Second, there is a lot of focus on manufacturing right now. Even though India's manufacturing-to-GDP ratio has not actually improved for all the effort that has been exerted. I think this is more a theme that needs to be seen from the bottom up. With the trade war, more manufacturing will come to India. It has started with iPhones and electronics, opening up opportunities in specific sectors. Now it is up to those who are able to best capitalize on them.
Given the market's latest reaction, following the ceasefire agreed between India and Pakistan over the last weekend, do you expect more volatility ahead from this front, or has the market priced in relative stability for now?
Yes, markets are likely to remain volatile in response to changes in US trade policy, potential new trade deals signed between countries, and ultimately driven by actions major central banks take in response to any weakness in economic data.