General Elections 2024: Phillip Capital believes incremental equity returns can be made on buy-on-dips; check top picks

With hopes of the ruling BJP government returning to power, leading to policy continuity and additional reforms in coming years, brokerage house Phillip Capital believes incremental equity returns can be made on buy-on-dips and sector rotation in FY25.

"We anticipate Nifty earnings in FY24/25/26 to grow by 19 percent/18 percent/13 percent; assigning 18.5x-19x PE, our Nifty target is 24,000-25,000 by March-September 2025. While the BJP coming back to power is widely anticipated, the mandate (if 400+ seats) will add to the equity market’s performance in the medium term. Our sector preferences are automobiles, cement, metals, capital goods, and financials. For others, we will adopt a bottom-up approach in stock selection. We believe incremental equity returns can be made on buy-on-dips and sector rotation," the brokerage said in a recent note.

In its base-case scenario for FY25-26 (India/globe), it assumes that prices of commodities will remain stable/lower, inflation and interest rates will stay low, economic growth will be decent (no steep recession), geo-political conditions will be stable, and that the Indian government will execute its policies and keep its promises.

With the Modi government most likely retaining to power in the upcoming elections, the brokerage expects economic buoyancy to persist; it has retained FY25 GDP growth at 7 percent, estimated FY26 at 7.3 percent.

READ HERE: General Elections 2024: Investing before polls can be strategically advantageous, says Franklin Templeton

Inflation should remain in a comfortable zone, resulting in a rate reduction in FY25-26, it forecasted. A fiscal deficit of 4.5 percent by FY26 will limit government spending, against the pace seen in the last few years while the BoP surplus is expected to rise substantially due to strong capital inflows. The brokerage continues to expect USD-INR to gradually appreciate in FY25-26.

"We will be watchful of the quantum of interest rate reduction globally; resilient economic data may lead to lower rate reduction than being widely anticipated," it said.

Equities uptrend to continue, boosted by earnings and liquidity

The brokerage remains positive on Indian equities due to strong corporate earnings, growing demand, sustainable margins (muted inflation), and strong equity flows from FIIs and DIIs. While the Nifty is richly valued, it expects higher valuations to be sustained based on strong liquidity. Both domestic flows and FII flows have been robust in FY24; FII flows should strengthen, it added.

"Equities have been the showstopper asset class in 2022-24 on the back of strong economic and corporate performance attracting domestic and global savings. We have been extremely bullish on India for the last two years. Currently, Nifty is trading at a one-year forward PE of 20.7x, which is on the higher side. While we continue to remain positive on Indian equities due to strong corporate earnings, expanding demand, sustainable margins (muted inflation), and equity flows by FIIs and DIIs, we believe incremental returns can be made on buy-on-dips and sector rotation. In case the Fed and RBI cut rates sharply, equities will respond quite positively. The return of the BJP as an election outcome is largely factored into equities," said Phillip Capital.

READ HERE: What should be your investment strategy in this record-high environment?

Nifty forecast: For the next 12 months (March 2025)

Bear Case: 21,960-22,320 (FY26 EPS: 1220-1240, valuing at 18x)

Base Case: 23,560-23,940 (FY26 EPS: 1240-1260, valuing at 19x)

Bull Case: 25,200-25,600 (FY26 EPS: 1260-1280, valuing at 20x)

Nifty at 24,00-25,000 by March-September 2025, so an upside of 8-14 percent. Earnings could be revised upwards for FY26, so the chances of a bull-case scenario playing out are higher, assuming a strong political outcome, stable/positive policies, and marginal rate reduction. However, economic softness and weak capital flows will result in the bear case scenario playing out, noted the brokerage.

Earnings momentum robust in FY25, upside risk likely in FY26

The brokerage estimates PC-Universe’s earnings growth in FY24/25/26 at 20 percent/21 percent/14 percent with margins continuing their expansion in FY25/26 to 15 percent/15.3 percent from 13.6 percent in FY24. It sees buoyant growth in automobiles, financials, metals, and cement; and decent growth trends in IT, pharma, and FMCG. For now, the brokerage's FY26 earnings estimates are softer than FY24-25, but assuming the sustainability of strong growth trends and conducive government policies, there is a possibility of an upgrade in FY26.

READ HERE: Minor correction expected in markets before 2024 elections, says Trivesh D

"According to current projections, capex for PC coverage companies is expected to grow by 1 percent in FY25 and decline by -5 percent in FY26. The NIFTY500 consensus estimates indicate a similar pattern, with stable capex in FY25 and -3 percent decline in FY26. However, we examined these estimates with the data gathered in the year before. Significant upward revisions were seen in both PC coverage and NIFTY 500 capex for FY24/25. Estimates for PC coverage capex increased by 16 percent/21 percent for FY24/25, while NIFTY 500 capex increased by 18 percent/21 percent during the same time. We believe that this trend will continue and that the Indian corporate sector will invest significantly more, especially after the elections," explained PC.

The brokerage expects the highest incremental EPS contribution to be from financials/oil & gas/IT in FY25.

"FY25 EPS YoY growth will be higher for telecom (at 70 percent, Bharti), metals (at 57 percent, led by Tata Steel and JSW Steel), pharma (at 34 percent, Apollo Hospitals and Divi’s Labs), automobiles (at 32 percent, led by Tata Motors and Bajaj Auto), cement (at 26 percent, UltraTech Cement), industrials (at 25 percent, Adani Ports and L&T), financials (at 16 percent, Bajaj Finance, Bajaj Finserv, HDFC Life, and SBI Life), and IT (at 15 percent, Tech Mahindra and LTI Mindtree)," it predicted.

READ HERE: Manufacturing to be a major theme for next few years: Equirus MD Ashutosh Tiwari

Top Picks: ICICI Bank, HDFC Bank, Maruti Suzuki, Tata Motors, Hero MotoCorp, L&T, ABB, BEL, UltraTech, Ambuja, JK Cement, Tata Steel, Hindalco, LTIMindtree, HCL Tech, Persistent, Ratnamani Metals, APL Apollo, Dr Reddy’s, Syngene, Finolex Cables, PG Electroplast, Kaynes Technology, Concor, Mahindra Logistics, GAIL, IGL, Shriram Finance, SBI Life, Aarti industries, SRF, GCPL, Nestle, Trent, Coromandel.

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 taking any investment decisions.