Markets snapped a two-day gaining streak on Wednesday, with the Nifty falling back below the 22,700 mark. The Reserve Bank of India‘s 25-basis-point rate hike and shift to a calibrated tightening stance added to the pressure, while the rupee weakened following the policy announcement.
Gautam Duggad, MD & Head of Sales, Institutional Equities at Motilal Oswal Financial Services, believes the earnings picture is considerably better than the market’s current mood suggests.
“We are all getting consumed by what is happening globally right now,” Duggad said in an interview with CNBC-TV18.
Why aren’t stronger earnings helping the market?
Duggad said corporate earnings in the first quarter were the strongest in three years, but the market largely shrugged them off. He expects the current quarter’s numbers to be even better.
High-frequency data has also remained strong, he said, pointing to GDP, trade growth, GST collections and monthly auto data.
He expects full-year earnings growth of around 16-17%. But with global factors dominating investor sentiment, better company-level numbers have not translated into a broad-based market recovery.
The divergence can also be seen across market segments. Duggad said the small-cap index is up 13% for the year, while the Nifty is down around 7%.
That suggests investors are still rewarding companies where they see stronger earnings growth, even as the benchmark remains under pressure.
What could change the market’s mood?
One of the biggest unanswered questions is when foreign institutional investors, or FIIs, will return.
Duggad said there is no easy answer, with global factors such as war, geopolitics, crude oil and rising interest rates continuing to influence investor behaviour.
The rupee is another part of the equation.
Lakshmi Iyer, Group President of Investments at Bajaj Alternate Investment Management, said the currency could remain in a range for another few weeks before stabilising more decisively.
She sees the dollar index as an important watchpoint, along with interest rates. The rupee, she said, has been the worst-performing currency year to date.
For investors, the combination of currency weakness, tighter monetary policy and continued FII selling means that improving earnings alone may not be enough to drive a sustained market recovery in the near term.
Why does Duggad remain positive on earnings?
Duggad’s more constructive view is based on the combination of earnings and valuations.
He said the Nifty is trading at around 17.5 times earnings, which he described as potentially the lowest level in a decade, excluding the brief period around COVID-19.
He also pointed to the relatively weak earnings performance of the previous two years. Nifty earnings grew by only around 6% cumulatively between FY24 and FY26, with earnings per share rising from ₹1,000 to around ₹1,060.
Duggad said the market’s performance broadly reflected that earnings trajectory. Nifty market capitalisation went from around ₹180 trillion to ₹192 trillion over that period before returning to around ₹180 trillion as of September 30.
The outlook is now more favourable. Duggad expects Nifty profit and revenue growth to exceed 20%, after several years of weaker growth.
“Markets have this tendency where they will test your patience and, at the end of the day, they’ll reward your conviction,” he said.
The argument is not that the market must recover immediately. Rather, stronger earnings and lower valuations could provide greater support once some of the current global pressure eases.
Should investors move back to large caps?
Not necessarily, according to Duggad.
His approach is to combine large-, mid- and small-cap exposure while focusing on the earnings growth available in individual companies.
Motilal Oswal’s model portfolio has reduced its large-cap allocation from 75% to 60% over the past nine months. Mid-cap companies are expected to deliver close to 20% earnings growth for the third consecutive year, he said.
But the preference is not simply for smaller companies.
Within large caps, Duggad said the focus is on avoiding businesses where growth is weak. Companies delivering earnings growth of more than 20-25% continue to command strong valuations, while those with growth below 10% are facing pressure on their valuation multiples.
That makes stock selection more important than simply choosing a particular market-cap segment.
“You have to be very cognisant of the growth that you are buying, be it large cap, mid cap, or small cap,” Duggad said.
What does the RBI’s rate stance mean for equities?
The RBI’s decision has added another layer to the market outlook.
Iyer said the interest-rate swap curve was already pricing in around 100 basis points of further rate increases. However, she cautioned against assuming that the entire amount would necessarily materialise.
Her own expectation is for around 50 basis points of additional tightening.
She also expects the process to be gradual rather than a series of aggressive rate hikes.
“It is going to be higher for longer. That is what calibrated actually means,” Iyer said.
Duggad believes the equity market could absorb further rate increases relatively quickly. Even another 75-100 basis points of hikes, he said, could be discounted by equities fairly fast.
Where does Duggad see opportunities in financials?
Duggad remains underweight on private-sector banks, including HDFC Bank, but has a preference for selected mid-cap banks such as AU Small Finance Bank and RBL Bank.
His larger preference within financials is for diversified financial businesses, particularly capital-market companies and NBFCs.
Capital markets have been a preferred theme for the past three years and remain so, he said. His model portfolio includes an asset management company, an exchange and NBFC exposure, including Shriram Finance.
He also has an overweight position in PSU banks through SBI.
So while the overall financials allocation may look neutral because of the underweight position in private banks, Duggad’s positioning is tilted towards capital markets, NBFCs, selected mid-cap banks and PSU banks.
What about IT stocks?
Duggad also believes investors need to look beyond the traditional definition of the technology sector.
His team now covers 30 new-age technology companies. Within the firm’s overall technology allocation of 13%, new-age technology accounts for 7%, while legacy IT accounts for 6%.
The attraction of new-age technology is primarily its growth, although questions remain around profitability and the path to profitability.
Traditional IT, meanwhile, offers a different proposition. Duggad said the risk-reward has improved as valuations have fallen, but uncertainty around growth and longer-term growth prospects could limit the upside in the near term.
Artificial intelligence is another factor that could influence the sector, with companies potentially facing questions around their guidance.
Still, valuations provide some support. Duggad pointed to trailing PEs of around 14-15 for many IT companies and dividend yields of 3-4%.
For investors, that leaves the sector with limited downside in his view, but potentially requires patience before meaningful gains emerge.
The broader message from Duggad and Iyer is that improving earnings are an important positive, but they are currently competing with a much stronger set of macroeconomic pressures. Until those pressures ease, the market is likely to remain selective, with earnings growth and valuations determining which stocks attract investor interest.