Deepak Shenoy, CEO of Capitalmind Mutual Fund, has said Indian markets could see another 10% correction, even as early corporate earnings indicate healthy growth. He attributed the weakness in share prices to subdued investor sentiment and fund flows, rather than a deterioration in the earnings outlook.
“I would say that not expecting a 10% correction is asking me to be at my most bullish,” Shenoy said in an interview with CNBC-TV18.
He said a 30% fall from current levels appeared less likely, as it would take valuations much deeper into value territory than they had been in the past 10 years. However, he warned that global developments, including a possible correction in AI-related stocks worldwide, could weigh on Indian equities.
Early earnings growth contrasts with weak markets
Shenoy said the earnings season had started on a positive note, although the number of results available was still too small to draw firm conclusions.
Of the Nifty Midcap 150 universe, around 16-17 companies had reported results, with median earnings per share (EPS) growth of about 22%. Among small-caps, 20 of 250 companies had announced results, and median growth exceeded 30%. Large-caps had reported median growth of around 15%.
Despite these early signs of earnings growth, markets remained weak because of fund flows and investor confidence, he said. The rupee had strengthened from 96.7 to around 94.95, but this had not eased the frustration among investors.
“Prices are more reflective of near-term sentiment,” Shenoy said, adding that investors needed to identify opportunities and wait for the market to turn.
He said the current situation was the reverse of what markets had experienced over much of the previous five years, when share prices rose even as earnings struggled to catch up. He is more confident in the long-term outlook now because corporate earnings are showing signs of improvement.
Banking stocks offer long-term opportunities
Shenoy said the banking system remained in reasonably good shape, with lenders reporting credit and deposit growth and bringing down non-performing assets (NPAs).
Banks account for the third-largest allocation in Capitalmind’s flexi-cap portfolio, with a focus largely on mid-cap and small-cap lenders rather than the largest private sector banks. Shenoy said smaller banks had recorded stronger double-digit deposit growth, which could eventually translate into higher profits.
While earnings growth at the largest bank had been somewhat disappointing, other leading banks had delivered reasonable results.
On valuations, Shenoy said large banks typically trade at between one and two times their book value as they grow. Some public sector banks and private sector lenders were valued at around or below one times book value, which he considered reasonable for long-term investors.
He expects banks that deliver stronger fundamental performance to be rewarded by the market over time.
IT services companies could benefit from AI adoption later
Shenoy said Indian IT services companies were likely to benefit from artificial intelligence (AI) adoption later in the cycle, rather than in its early stages.
He argued that these companies were not necessarily positioned to benefit immediately from developing foundational AI models. Their opportunity would emerge as AI becomes infrastructure and businesses increasingly need help implementing and managing AI-based solutions.
Companies would continue to need service providers to manage processes, take responsibility when systems fail and resolve problems that AI tools cannot address independently, he said.
Shenoy also pointed to competition from open-source AI models and greater scrutiny of token usage as factors that could limit the ability of large technology providers to charge significantly more for AI services. This could benefit IT services companies that implement AI solutions for customers.
AI transformation was contributing around 5-10% of revenue at some large IT services companies, Shenoy said. He expects that share to rise to 20-25%, potentially creating a larger growth opportunity for the sector.