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January continued to be a tough month for Indian equities as the benchmark index NIFTY 50 declined by 1%. Furthermore, the broader market, as measured by the BSE 500 Index, dropped even more by ~4%. The Small and Midcap indices were battered during the month, declining by 10% and 7%, respectively. The January sell-off has resulted in the market entering an oversold zone, as indicated by a few technical indicators.

The global macroeconomic scenario continues to evolve with the Trump presidency. In the near term, the market will remain volatile as the threat of tariffs continues to loom. However, over the medium to long term, equities will track the earnings trajectory in conjunction with the cost of funds.

As January was tough for Indian equities, our strategies also took a hit and underperformed the benchmark index by a significant margin. However, if we look at the performance over the entire fiscal, they still outperformed the benchmark by a significant margin. Moreover, as the correction has been significant, value has clearly emerged in most of our holdings, which have continued to report good earnings growth. Thus, it is just a matter of time before the portfolio performance also catches up with its earnings growth.

Q3FY25 Earnings Coursing the Trajectory

The Q3FY25 earnings have been broadly in line with expectations, with 67% of the NIFTY 50 companies reporting earnings that either beat the estimates or were in line with them. While earnings expectations were modest, meeting quarterly projections was also a challenge for most companies. In this context, given the weakness in Q2FY25, the in-line Q3FY25 numbers provide a welcome relief. The sectors that delivered healthy numbers were Autos, IT, and Pharmaceuticals. However, as expected, the Metals & Mining sector delivered weak numbers.

The Banking sector reported mixed results, facing challenges in both credit growth and deposit mobilisation. However, deposit mobilisation remains a more pressing concern, as credit growth is less of an issue in a capital-starved economy like India. Challenges in the unsecured lending space persist but are expected to moderate over the next few quarters, which is a positive development. Thus, Q3FY25 could be considered the peak of challenges in the unsecured space, with clear improvements to be expected from Q1FY26 onwards.

The Small and Midcap space reported mixed numbers for Q3FY25, but the outlook for future quarters is more constructive. The Consumer Staples category has remained under pressure, with industry bellwether companies such as Hindustan Unilever reporting sluggish volume growth. Asian Paints also disappointed on the revenue front, but margins were better than expectations. Overall, the earnings season has been a mixed bag, though it was on the expected lines. The outlook is improving, which is a significant positive.

Union Budget 2025: Great Budget to Spur Consumption Growth

The Union Budget 2025-26 focused on reviving India’s consumption-led growth engine. While the budget outlined several measures for the agriculture sector, its key highlight was the tax reforms aimed at increasing the disposable income of the large middle diaspora of the country. This taxation reform had been a longstanding demand of the middle class, a key tax contributor, who often felt that their contributions did not yield adequate benefits from the government. The Union Budget finally addressed these sentiments. Overall, while reduction in taxation will lead to a revenue loss of over Rs 1 Lc Cr in direct taxes for the government, it will significantly increase the segment's disposable income, giving a much-needed thrust to the country’s consumption

Notably, while the highlight of the budget was the tax reforms for the middle class, the focus on capital expenditure remained unwavering. The capital expenditure for FY25 was budgeted at Rs 11.1 Lc Cr. However, the government will significantly undershoot the target and achieve 10.2 Lc Cr. While this is significantly below the target, its pick-up has been quite significant in the last couple of months. Moreover, the budgeted Capex for FY26 is pegged at Rs 11.2 Lc Cr, a 10% increase over FY25. Nonetheless, considering the government grants to the states, the total expenditure is projected at Rs 15.5 Lc Cr, representing a significant increase of 17.4% over FY25. Given the strong pick-up in recent months and favorable growth prospects for FY26, capex is unlikely to be a challenge. Although the market showcased a slight disappointment on the public Capex front, the chances of positive surprise have increased substantially.

Trump Tariffs - A Short-Term Challenge

Overall, the structural story remains intact, and the current market conditions present an excellent opportunity to invest and achieve double-digit returns from equities. However, history tells us that these challenges are, more often than not, short-lived. The imposition of sanctions on Russia after the RussianUkraine war led to a sharp surge in commodity prices, including crude oil, natural gas, and many other commodities. However, these challenges were shortlived and normalcy returned. Similar challenges surfaced with the unrest in the Middle East.

All these challenges eventually appear in broad macro indicators like inflation or currency. Rupee depreciation against the US has been one apparent factor contributing to the outflow of foreign investments from the Indian equity market. However, the Indian economy offers excellent value, and the Rupee-Dollar equation is likely to stabilise very soon, which could mark the return of foreign investors. In a nutshell, while tariff challenges seem significant, they are unlikely to materially impact over the medium to long term. The first clear signs of improvement will likely emerge once the currency stabilizes, which is expected to occur soon

Conclusion: Good times to come Indian economy is in a very stable political regime. With recent wins in various assembly elections and a good budget, the current Modi administration has further cemented its position as a stable regime. Quarterly earnings are expected to improve sequentially as government spending accelerates and the capex revival in the private sector appears on the horizon. The market is in the oversold zone, and domestic institutional investors have continued to see good inflows during January. Thus, it is a matter of time before market orientation changes, and would likely touch new highs by the end of the year. Overall, the structural story remains intact, and the current market conditions present an excellent opportunity to invest and achieve double-digit returns from equities.

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