5-8% market correction likely, avoid overvalued railway stocks: Neeraj Gaurh. Axis PMS

The June 2024 quarter results season has concluded, which was a mixed bag for India Inc. Business Today spoke to Neeraj Gaurh, Fund Manager at Axis Securities PMS, who shared his outlook on the markets, upcoming major trigger and select sectors. Sectors like automobiles and [harma experienced upgrades, while oil & gas, metals, cement, and industrials faced downgrades. IT sector results were in line with expectations, with mid-tier companies showing promise. Banking faced challenges in deposit mobilization despite robust credit growth. The quarter highlighted both sectoral strengths and challenges, setting the stage for upcoming market movements. Read the edited excerpts:
 

Q1. Result season for the June 2024 quarter is behind us now. How did it pan for the markets? Which sectors were the key hits and misses in the first quarter?

Ans: The consensus estimate of the aggregate profit pool for FY25 has marginally been revised downwards by 1%-1.5%. During the quarter, upgrades were seen in Automobiles and Pharma, while downgrades were visible in Oil & Gas, Metals, Cement and Industrial sectors. Earnings from the IT sector largely aligned with expectations, with some positive comments from mid-tier IT companies. Further recovery is expected in the upcoming quarters. In the banking sector, while credit growth remains robust, banks are facing challenges with deposit mobilization. Banks are focused on improving deposit accretion, with future credit growth expected to be largely deposit-led. Margin pressures have been noticeable during the quarter.
 

Most staple companies delivered mid to high-single digit revenue growth despite challenges such as severe heatwaves in the North region affecting consumption, increased competitive intensity, and the impact of the general election. Rural areas mainly led the revenue growth as they recovered and grew faster than urban growth. Cement pricing is down and expected to remain soft until Q2. Demand was soft but is expected to bounce back. The industry is expected to grow between 7% and 9%.


Q2. Beside the rate cuts by the US Federal Reserves, what are the key factors to guide the market in near-term, say next two-three quarters?

Ans: In the first quarter, there was an impact from heatwaves and elections. In the current or second quarter, earnings may be affected by torrential rainfall across the country. We could still see approximately 9-10% earnings growth this year and even better growth next year. Apart from earnings, upcoming events to keep an eye on include the US elections, geopolitical risks, and the potential return of positive flows from foreign institutional investors (FIIs) in November or December.
 

Q3. PSUs, Railways and Defence stocks had been in flavour for quite some time. But now they have seen a decent correction in the last few weeks. What is the way ahead for them? Do you see them getting their mojo back or is the best already priced in?

Ans: Oil and power PSUs still look good, but for PSUs as a general theme, most of the positives are priced in for the time being, given the broad-based rally we have seen recently. However, railway stocks are not a part of our portfolios, as we currently see more value in other sectors. We generally prefer to avoid sectors with extreme valuations. The Nifty Defence Index is down approximately 14% from its peak on July 24th, but this is a small correction compared to the 134% return in the last year. Investors should be aware that the defence sector is a long-term theme, but we need to see sustainability of the order book of each company and what the stock is factoring in the market price.
 

Q4. Broader markets have seen a sharp rally in the last few months and large caps have now caught up. Do you see more steam left in the midcap and small cap stocks or is it time to look at bigger counters? Who will win the next bout between the two?

Ans: The ratio of the market capitalization of listed companies to the country's gross domestic product (GDP) for large-cap stocks is high but below the previous peak. However, it is above the previous cycle peak for midcap and small-cap stocks. According to a recent report from MOFSL, the earnings of their Mid-Cap universe of 85 stocks have declined by 5% year over year, which is in line with expectations. Meanwhile, the MOFSL SmallCap Universe of 100 stocks has posted a 4% decline year over year, as opposed to the expected 5% growth. Both the Mid and Small-Cap indices of India have shown consistent performance, and the market capitalizations of both mid and small-cap companies in India have crossed over $1 trillion each. Currently, we are considering buying more large caps or large mid-caps unless there is a specific bottom-up opportunity in the small-cap space.
 

Q5. Since markets are hovering around their all-time highs, what should be the approach of investors in such a situation? How should they look at value and/or growth in the companies and is it too late now?

Ans: It's important to balance the excitement surrounding new market highs with the potential risks related to geopolitical concerns, particularly when valuations offer a lower margin of safety. Despite the positive outlook for our economy, markets could experience a 5-8% correction. Investors can utilize those opportunities to deploy their lump sum investments in good stock ideas where they have valuation comfort, growth is accelerating, or ROEs are improving. Long-term investors can stay invested, while new investors should consider investing in multi-asset and diversified portfolios instead of chasing highly concentrated small-cap portfolios based on their one-year return.