23-07-2025
Get ready for a narrower market over next 2-4 years where earnings surprises will drive share prices: Rakshit Ranjan
Rakshit Ranjan of Marcellus Investment Managers points out a significant slowdown in Nifty 50's earnings growth, dropping from a 24% CAGR to mid-to-high single digits. Coupled with valuations nearing cyclical highs at 21-22 times FY26 price to earnings, this creates market uncertainty. The focus should shift towards bottom-up stock picking, where earnings surprises will be key drivers.
ADVERTISEMENT Yesterday's market flip-flopped between red and green and there's a similar sentiment among investors because there is not much action in the market. It has remained in a range- bound mode for the past month or so. What is your sense? What will drive the markets now? Even the earnings which have come so far have not been the way it used to be, at least in the last quarter. In fact, a dip is there in the earnings which have been disclosed so far.
Rakshit Ranjan: Let me add to the context. In terms of earnings growth momentum, not just from last quarter to this quarter but if you look at Nifty 50's earnings from FY21 to FY24, it was as high as 24% annualised CAGR for three long years. From there, in the last five or four quarters plus the one ongoing, we have had a mid to higher single-digit earnings growth. So, it is a massive moderation from mid-20s to mid to high single-digit earnings growth for the market as a whole.
The second piece which is also a bit of a challenge for the broader market is when you look at valuations, at about 21-22 times FY26 price to earnings, Nifty 50's PE multiple is nearing a cyclical high. So, there is a combination of moderating earnings at a time when valuations are at cyclical highs and which is why, there is uncertainty in terms of where the markets will go. Our thinking in that regard is that this is the kind of a stock market which is ripe for bottom-up stock picking rather than breadth of the market or width of the market, helping investors make money.
In that regard, you will see a far narrower market going forward over the next two, three, four years where earnings surprises – whether or not with or without elevated valuations but earnings surprises – will drive share prices more than just overall every company in that sector doing well like the market we used to have till a year ago.
CCP's current portfolio has delivered EPS growth of 14% in FY25 compared to 6% for Nifty 50. Can you enlighten us on the same and explain how to see Marcellus' Consistent Compounder Portfolio (CCP) position amidst the various risks in the markets currently?
Rakshit Ranjan: In CCP, we are very conscious of the risk of broader moderation in earnings growth for the stock market. We are very consciously choosing stocks bottom up where the return on capital employed to begin with should not be backed by tailwinds of macro. They should be backed by competitive advantages of companies because macro tailwinds are fading away. Hence there is a lot more competitive advantage-oriented return on capital employed and then a very high rate of reinvestment of that cash to drive growth. There are a couple of themes that are part of the portfolio. For instance, in terms of sectoral themes that become an outcome of the bottom-up stock picking, healthcare is a very big area where our allocations have increased in the last one, one-and-a-half years in the Marcellus CCP. This includes hospitals, diagnostics, even health insurance which is a little bit of a BFSI play. But on healthcare and some pharma companies which are not just formulations doing generic generics or branded generics, but a lot of IP-based competitive advantages in the pharma space. So that is one piece where the lack of macro tailwinds is not a big concern. Hence it is a greater part of the portfolio.
ADVERTISEMENT Otherwise, in the traditional sectors like retail, consumption and financials, we are picking up companies which are likely to gain share either because they are evolved supply side business models or demand side business models. Let me take a simple example in consumption. Rather than the traditional modern trade being the primary source of supply side, you have either got large format retail or the quick commerce and e-commerce players doing well and hence orienting growth drivers towards the evolving supply side and demand side of some of the traditional sectors is the second big area where we are constructing the portfolio.
ADVERTISEMENT You mentioned quick commerce and yesterday, Eternal was in focus. For over two days, the stock has been on fire, going up around 10% on Tuesday. I want to understand this space. How do you see this space faring in the context of the consumption theme. There are a lot of fintech players in this space. Do you think that competition will also weigh in?
Rakshit Ranjan: Oh yes, a lot of capital is chasing this space and as a result, you have to be patient if you want to make money out of prospective winners in this space. Having said that, the proof of the pudding is here. We can see sustainable disruption of the traditional channels and quick commerce, e-commerce are not just fly-by-night disruptions that have come in and will go away. I think they will sustain. So, when you combine the two together, we have businesses such as the one that you mentioned where profitability is very volatile given that it is in a high investment stage, in early stages of scaling up. But if you have got clarity of thought on which will turn out to be the winners amongst all the options in such a space, there are a lot of returns for investors to be had. We have not got exposure specifically to the stock that you mentioned but we have got exposure via a job postings company which is also investing in quick commerce companies like the one that you just mentioned. So yes, we are exposed here.
ADVERTISEMENT When do we expect the FIIs to come back because they have been extending the selling spree and a few sessions where we do see buying, the buying levels are also of very short quantum. DIIs are trying to support the markets, but the exposure of FIIs more so is in the banks and financials and IT. I agree the IT results were not that great and we still have a lot of results in largecap or midcap IT plays to come out, but are the banks and financials doing good?
Rakshit Ranjan: Yes. First of all, I am not an expert on FII, DII flows and there are so many moving parts here that every month, the answer to your question on broader FII, DII flows will be changing. Every month there are different factors at play which keep moving up and down. In terms of the sectors that you mentioned where FIIs have historically oriented themselves and the outlook of those, you are right IT services certainly is undergoing a very uncertain period in the interim but once the transition towards how AI applications and the entire GCC versus IT services balance are through and a few other factors that are playing out in interim for IT services, settles down, this sector will continue to see to see growth. The banking sector, on the other hand, has completely evolved in the last 12 months. Till a year ago, pretty much all banks were reporting healthy deposit growth, credit growth, healthy net interest margins, NPA, all sorts of parameters were pretty healthy for the broader industry. In the last six to nine months, we have seen a separation between the boys and the men in this space where we have not seen a massive NPA spike across the system, but the gap in NPA progression of higher quality lenders versus the rest, has widened a bit. Deposit growth has widened a bit and with interest rates falling, net interest margins will be another differentiating factor.
ADVERTISEMENT Some companies will be able to manage the pressure on NIMs better than others and that is where you will see the gap opening up. So, men versus boys separation is underway and whether or not that links into FII flows pumping into the high-quality lenders, we will have to wait and watch.
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