Indian equities may have crossed the 24,000-mark amid continued uncertainty around foreign institutional flows, but the underlying market fundamentals remain robust, according to Shreyash Devalkar, Head of Equity at Axis Mutual Fund. He believes improving nominal GDP growth, pricing power across sectors, and resilient corporate earnings are creating opportunities for investors despite pockets of valuation concerns.
Devalkar said sectors where companies are successfully passing on higher costs, explained why large-cap earnings could finally catch up with mid-caps, and outlined his fund’s preference for auto ancillaries, healthcare, and select manufacturing plays.
Earnings growth driving market internals
Devalkar said market performance ultimately depends on earnings growth and recent corporate commentary suggests that fears around geopolitical tensions and inflation may have been overstated.
“The internals of the market are always driven by earnings growth. Earlier, it was expected that war and inflation would have a significant impact, but in the listed space the impact has largely been benign,” he said.
According to him, higher nominal GDP growth and inflation-linked pricing actions across industries could support stronger revenue growth during the June quarter.
He noted that several companies have implemented price hikes to offset rising raw material costs and that investors should focus on businesses where margins remain intact despite inflationary pressures.
“There are segments where the price increase may more than compensate for the increase in raw material costs, and margins may remain broadly intact,” he added.
While mid and small-cap companies have consistently outperformed large caps in earnings growth over the past several years, Devalkar expects the gap to narrow.
He pointed out that many mid-cap businesses have delivered growth rates exceeding 15 per cent, while sectors such as power-linked capital expenditure have grown at more than 20 per cent.
“For the last several quarters, mid and small caps have shown superior growth. What we are hoping for now is that large caps also revive and show better growth,” he said.
“With nominal GDP growth improving, there is a case for large caps seeing an uptick in growth, especially on the headline revenue front,” he added.
IT sector faces growth challenge
Devalkar remained cautious on the information technology sector, arguing that weak dollar-denominated growth continues to limit return potential.
He noted that when sector growth remains below 5 per cent, investors struggle to generate meaningful equity-like returns.
“If growth is less than 5 per cent, then it becomes very difficult to make a compelling case around the sector.”
While valuations offer some downside protection through dividend yields, free cash flow generation and buybacks, he believes the sector requires stronger revenue growth to become attractive again.
He said, “Unless growth in dollar terms moves from 2-3 per cent to above 5 per cent, it is difficult to make a strong case.”
Preference for auto ancillaries over OEMs
Axis Mutual Fund continues to maintain a higher allocation towards auto ancillary companies than automobile manufacturers.
Devalkar said the transformation of many component makers into diversified manufacturing businesses has significantly improved their long-term prospects.
“We are more positive on auto ancillary companies than auto OEMs,” he said.
He further said, “Many auto ancillary companies are getting into non-auto businesses and are becoming a good play on India’s manufacturing story.”
Healthcare and Pharma remain key portfolio bets
Healthcare continues to be one of Axis Mutual Fund’s preferred sectors, with exposure spanning pharmaceuticals, hospitals and diagnostics.
He said, “The international piece is broadly getting in place and is getting reasonably priced.”
“On the domestic front, growth is good and is as good as, or maybe better than, FMCG companies,” he added.
Defence story intact, but valuations need monitoring
Devalkar remains constructive on the long-term outlook for defence and capital goods sectors, citing structural drivers such as increased domestic manufacturing and geopolitical shifts.
“Defence is a long-term structural story. There is no doubt on that,” he said.
However, he cautioned that investors should be selective because many of these themes are no longer undiscovered opportunities.
“These structural stories are no longer in the early cycle. They are discovered, and one needs to be cautious because of valuations,” he said.
Crude oil emerges as key market risk
Despite concerns around monsoon variability and elevated market valuations, Devalkar believes the balance of risks has improved over the past month.
He cited easing crude prices, supportive monetary policy measures and government actions as positive developments for equities.
“There have been more incremental positives than negatives,” he said.
“Crude remains the key risk at this juncture,” he added.
(Disclaimer: The above article is meant for informational purposes only, and should not be considered as any investment advice. ET NOW DIGITAL suggests its readers/audience to consult their financial advisors before making any money related decisions.)
