Expert View | Nifty 50 could deliver 16% earnings growth in FY25: Anand Rathi

After an eventful year of record gains by the equity markets during FY24, what are the expectations for FY25?

Definitely the FY24 has turned out to be an exceptional year for investors and despite the volatility seen in the last few weeks, the overall return has been still broadly impressive. Nifty50 has given a return of about 30% plus while Nifty Next50 is up by about more than 60%. The mid caps and small caps are up by about 60-70% , which is a very good return for the broader markets.

As we talk of FY25  outlook, we have to first divide it in terms of short term and long -term. In the  long term, the broad macro data is positive with GDP growth expectations at 7% (nominal GDP growth at 11-12%), inflation at around 4-5%, Other macroeconomic factors including finances of the government continue to be supportive of strong GDP growth, strong tax collections, reduction in subsidies, fiscal deficit and corporate earnings also expected to grow at least by 11-12% and in high probability may surpass it. All these factors present a comforting and optimistic outlook for FY25.

Also Read- Expert View: Valuations are looking expensive for the market as a whole, says BNP’s Kunal Vora

On short term basis, generally markets are driven more by news, events etc. which are unpredictable and general volatility rises in the markets when frequency of these event increases. Its very normal for markets to correct 5-10%, having said that such fall has historically been bought into and market generally recovers in next two months post a fall. In the last few months, and in first half of the FY25 we are exposed to many such events as elections are due, US Fed’s policy stance and related impact on fund flows, geopolitical crisis etc.  But short term also looks calm right now and major events especially domestic are largely priced in while the global scene, is in balance and neither positive nor negative.

What should be the approach of investors towards the equity markets during FY25? should investment in  Mid cap and small caps continue

I think investors should continue to remain invested in the markets and young investors especially should not get worried about short term volatility as they have time on their side which is one of the important factors in the creation of wealth. Currently we believe SIP mode of investment should be preferred and wait for some fall if any for deploying lump-sum amount as per their preference.

As far as Small and mid-caps are concerned, the rally witnessed in the last year or so in this space is driven more by superior earnings growth and less by multiple expansion. Multiples have also expanded but contribution in returns are more on back of earnings growth. Nifty 50 is expected to deliver 16% earnings growth in 2024-25 and Nifty large cap 100 is expected to register similar earnings growth. However, earnings outlook for small caps still looks the best among all (large, mid, small) for 2025-26.

Even if we assume the fair PE multiples of the respective indices would be lower than the average forward PE multiple during similar phases of business cycles in the past, we do not observe any major valuation concerns in the Indian equity market currently. On the contrary, Nifty small cap 250 seems to be trading below the fair valuation. However, in the meantime one should also be aware that the next year is very eventful hence some short term volatility may be there and in these kind of situation SMID caps have inherently high risks and impact costs which should also be factored by investors.

Also Read- Shares to buy in FY25: Mid-cap, small-cap indices rebound from 3-month low. Top 5 stocks to buy for long-term

How will the performance of Indian markets viz other emerging markets? How are the indian market valuations

If you look at data since year 2000, the Indian markets have been delivering average dollar returns between 7-12% and has ranked either 1st or 2nd on 1-3-5-year basis. So I don’t think next year to be any different from the past. Coming to the valuations, we believe Nifty 50 and Nifty large cap 100 are currently fairly valued, there may be some excess valuations in Nifty midcap 150 and considerable upside to Nifty small cap 250. However, there is no major valuations concerns in the broad equity markets currently. Our estimates suggest that the expected one-year return would be near the long-term average for Nifty 50 and large cap 100, below long-term average for mid cap 150 and above long-term average for Nifty small cap 250 but also except some volatility alongside during the year.

Will FIIs prefer investment in India during FY25 or some other destination can find favor?

I think, barring short term flows, do not see any risks to foreign flows in our markets. With earnings momentum expected to continue in next financial year, strong GDP growth in comparison to other markets, stable and improving domestic fundamentals augurs well for long term. On valuations term as well we do not see any excess valuations building up right now and are at comfortable levels.

What will be factors influencing  FPI flows during FY25?

I think US Fed’s policy stance to have the biggest influence in the next financial year where markets would be keenly tracking the first rate cut signal and follow up actions by the fed. Apart from this, I think global geopolitical concerns/risks to continue to persist in FY25 and do not see any immediate amicable resolution.

Also Read- FY25 outlook positive for FPI inflows, but likely to see short-term volatility, say experts

What are the expectations on  earning growth from India Inc during FY25? Which sectors should be preferred and which will be laggards

We expect earnings growth of Nifty 50, Nifty large cap 100 and Nifty midcap 150 and Nifty small cap 250 during 2024-25 and 2025-26 to be robust – in all cases above 11%. Small cap is expected to record strong earnings growth.

Coming to the sectors, I think Infrastructure including roads, railways, ports should do better, Defense stocks, manufacturing related stocks to perform better. In financials, prefer PSU banks. Also, recently monsoon data has also come and is expected to be better than previous year, so consumer sector also looks promising here onwards.

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Published: 31 Mar 2024, 09:13 AM IST