Nifty 50 outlook: Indian stock market benchmarks may see a significant correction of 5-10 per cent in the near term, while the mid and small-cap segments may suffer more. However, the long-term prospects of the Indian stock market remain positive and a meaningful correction could be an opportunity to buy stocks, according to brokerage firm Emkay Global Financial Services.
"We see the risk of an imminent 5-10 per cent correction in the headline indices, with bigger drawdowns in SMID (small and midcap) stocks. We remain constructive on India from a longer-term (more than 1one year) perspective and would use a meaningful correction to increase exposure to the market," said Emkay.
The brokerage firm pointed out that the market's valuation is stretched, and most variables are already priced. The Q1FY25 earnings are expected to remain tepid, and rate cuts in the US may start only at the end of the year.
After a 1.1 per cent fall in the previous session, market benchmark Nifty 50 opened 0.3 per cent lower at 24,445.75 on Monday, July 22, and slipped further by 0.7 per cent to a level of 24,362.30.
However, the index reversed losses and moved up soon, thanks to support from select heavyweights such as HDFC Bank and Infosys.
Around 11 am, the index traded 0.2 per cent up at 24,575.
Emkay Global highlighted the following four key reasons why the Indian stock market could see a correction:
Emkay expects policy continuity in the Budget. It said fiscal deficit should be maintained at about 5-5.1 per cent of GDP, with a focus on capital expenditure (capex) over revenue expenditure (revex).
"We see little risk of a pivot to increased welfare spending, despite the pressures of a relatively adverse election result and the loss of absolute majority for the BJP. The ₹2.1 lakh crore windfall from the RBI dividend gives the government increased degrees of freedom on both, pursuing fiscal prudence and pushing capex," said Emkay.
"We would, however, watch for forward movement on privatization (unlikely) and asset monetisation (more likely). There is an outlier probability of negative changes in the capital gains regime, which could trigger a strong sell-off and prolonged sideways market after that," Emkay said.
The brokerage firm emphasized that the market seems complacent about the changed political landscape, posing a risk if the upcoming assembly elections yield unexpected results.
"Though the government remains stable, there could be adverse events (like a possible NDA defeat in the upcoming Maharashtra assembly elections) that could exacerbate uncertainty," said Emkay.
Emkay observed that the growth in FY24 PAT (profit after tax) was led by a 275bps improvement in EBITDA (earnings before interest, taxes, depreciation, and amortization) margins (BSE-500, excluding financials). This is now in the base.
"For financials, upward normalisation of credit costs could dampen PAT growth. This is partly reflected in the FY25 Nifty EPS (earning per share) growth slowing to 16.5 per cent (FY24: 18.2 per cent). While the forecasts have little downside risk, upgrade potential also looks dim," said Emkay.
"A weak Q1 owing to stretched valuations and a strong lead-up stock-price rally could trigger a correction. The manufacturing sector, overall, is a little more exposed to this risk than the services sector. Tech would be most immune from this trend," said Emkay.
Emkay expects the tight monetary conditions to persist till end-2024.
"Our base case is that the Fed starts cutting rates in Q4CY25, with significant risks of further delay. The RBI is likely to be in lockstep (by choice if not by necessity), with little chance of a rate cut until inflation is firmly in the comfort zone of nearly 4 per cent," said Emkay.
"Domestic liquidity conditions have eased somewhat, but we expect active RBI interventions to ensure no rate cut by stealth. Therefore, the rally in banks could fizzle out as expectations of easier monetary conditions ease. For investors wishing to position themselves ahead of the year-end rate cuts, the best sectors would be autos, real estate, and technology – this, however, could take more than six months to fructify," Emkay said.
Emkay underscored that the post-election rally has shot up the valuations of the Indian stock market.
"The Nifty, at 21.4 times one-year forward PE, is 10 per cent above the five-year historic mean. Valuations for the NSE Midcap 150 (42 times trailing PE) and NSE smallcap 250 (31 times trailing PE) are also 52.5 per cent and 35.5 per cent, respectively, above the five-year averages. Even accounting for the strong growth outlook, we see these valuations having some front-ended future returns and setting up the market for a one-time correction," said Emkay.
"Only meaningful upgrades in forward estimates could support such elevated multiples, and we do not see that in the next one to two quarters," Emkay said.
HDFC Bank, SBI Cards, PI Industries, Eicher Motors and L&T Technology Services are the stocks in the "key avoids" list of the brokerage firm.
Emkay is underweight on financials and said even as the market adjusts to new growth or ROE (return on equity) reality, there is scope for derating in HDFC Bank and SBI Cards
"We initiate a key avoids list. Our underweight financials are reflected via HDFC Bank and SBI Cards, as we see derating in both stocks even as the market adjusts to a new growth/ROE reality," said Emkay.
The brokerage firm has added Eicher to the list as it prefers Hero and TVS, given product positioning and valuations.
Emaky said L&T Technology Services, at 40 times PE, is at an unwarranted premium to large-cap IT services names, especially with a looming weak FY25 (5 per cent EPS grwoth). PI Industries is the fifth stock: the sub-5 per cent EPS growth for FY25 and FY26 is not yet reflected in the 33 times PE ratio.
Emkay's model portfolio includes TVS Motor, Hero MotoCorp, Dabur, HUL, IndusInd Bank, Axis Bank, UltraTech Cement and IndiGo among the top stocks to buy.
Suprajit Engineering, Honasa Consumer and Senco Gold are among Emkay's top recommendations from the small and midcap segments.
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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.
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