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NIFTY EPS has entered a downgrade cycle since 1QFY25 with successive cuts amounting to 7.5/6.1/2.1 on FY25/26/27. NIFTY has shown a decline of 3.5% since our last strategy report as the market is adjusting to the reality of slowdown in economy triggered by 1) decline in Govt capex during 1H25 2) tepid consumer demand triggered by prolonged rains and sharp spike in food inflation to 10.9% by Oct24 and 3) rising probability of cash dole outs and election freebies crowding out Govt capex and casting shadow on overall fiscal discipline in the country. Reduction of gap between 10-year G-sec and US treasury by 140bps has added to currency volatility with lower elbow room for RBI to cut interest rates aggressively.

With food inflation having peaked out at 10.9% in Oct and Govt trying to accelerate capex spending, we expect gradual economic recovery to set in. we are already witnessing uptick in ordering momentum in Railways, Defense, Power, Data centers etc. the execution of which will accelerate growth in FY26 and beyond. 

We believe upcoming budget and Trump 2.0 hold key to market returns. While GOI might miss out on revenue collection, lower capex will help sustain fiscal discipline in FY25. We expect a growth-oriented budget with an attempt to pump prime the economy and incentivize the middle class to increase spending.

We believe India Capex story (Capital Goods, Infra, Ports, EMS, New Energy, Data centers, Railways, Defense), Healthcare (Hospitals, Pharma), Tourism (Aviation, Hotels, Accessories), Discretionary consumption (E-com, Jewellery,  Food Services, Retail), Financialization (Capital market entities, Digital Public Infra) are some of the key themes to play for long term gains.  We cut our base case NIFTY target to 27381 (27867 earlier) on Nifty EPS cut by 0.5/2.0/1.5 for FY25/26/27. We recommend selective buying on dips.       

3Q25 - PL coverage shows 4% PBT growth, FY25/26 EPS cut by 3/1%, more cuts might follow

We estimate a growth of 2.8% in sales, 6% in EBIDTA and 4% in PBT of our coverage universe. Ex oil & Gas, we estimate 8.3% growth in EBIDTA and 6.6% in PBT. Auto, Capital Goods, Hospitals, AMC’s, Pharma, Telecom, Durables and EMS will lead PBT growth. Cement, Metals, O&G and Building Materials will report a decline in PBT. Banks, Chemicals, HFC, Travel and Consumer will have single digit PBT growth.             

Above teens EBDTA growth will continue in Hospitals, Capital Goods, Durables, Travel, Telecom, Media and EMS.  Auto, banks, chemicals, Logistics and Pharma will also show double-digit EBIDTA growth.

Building Material, consumer, Cement and Metals will report a decline in EBIDTA margins while all other sectors will show an increase led by EMS, Hospitals, Durables and Pharma by 175, 121, 79, 95 bps. 

Rural demand is showing a sustained recovery, although high inflation has impacted urban demand. The festival and wedding season has provided boost to demand for travel, Jewellery, watches, QSR, Footwear, apparel and durables. However, building materials and auto remain mixed.

Consumer staples are expected to show broad based pressure in 3Q with hopes of gradual recovery in 4Q25 and beyond, as calibrated price hikes and cooling off in inflation revives urban demand. 

Retail is on the verge of big transformation as Quick commerce is changing the dynamics of not only grocery but also other discretionary segments.  We believe extension of QC in discretionary segment and Food services can create near term disruptions in respective segments and impact profitability.      

Cement should show better growth and profitability led by revival of construction activity and expected price hikes.  Steel industry fortunes depend upon import duty and trend in global prices.

Banks are likely to see some pressure on credit growth and higher provisions, interest rate cut in Feb25, trend in unsecured loans and MFI NPA remain key monitorable.

Capital goods and defense should see improved ordering momentum and execution in coming quarters. Budget will hold key to sustainability of capex given likely miss in target spending in FY25. However, Defense, Power, Data Centers, railways and energy transition remain a potent theme.

NIFTY EEPS has seen a cut of 3/1/0.7% for FY25/26/27 with 14.1% CAGR over FY24-27 and EPS of Rs1157/1331/11512. Our EPS estimates are lower by 3.2/3.5/4.3% for FY25/26/27. NIFTY is currently trading at 18.2x 1-year forward EPS, which is at a discount of 4.2% to 15-year average of 19x. 

Base Case: We value NIFTY at 2.5% discount to 15-year average (19.0x) PE at 18.5% with Dec 26 EPS of 1467 and arrive at 12-month target of 27172 (27381 earlier). We are applying for a discount as we expect some EPS cut in 3Q25. Bull Case: We value NIFTY at PE of 20.1x and arrive at bull case target of 29263 (28750 earlier). Bear Case: Nifty can trade at 10% discount to LPA with a target of 25082 (24643 earlier).  

Model Portfolio: We are turning IT services to overweight and auto to equal weight. We are increasing weights in Capital goods (540bps overweight now), Healthcare, IT services and Oil and Gas (RIL).  We are removing Hero Moto, Avenue Supermart and Nestle from model portfolio. We are increasing the allocation for L&T, Siemens, HDFC Bank, Maruti, Britannia, HUL, ITC, Max Healthcare, Infosys and Reliance Inds.

High Conviction Picks: We are removing HDFC AMC, Safari Inds, Triveni Turbine and Lupin Labs from conviction picks. We believe HDFC AMC might see some earnings cut due to market volatility while safari has industry led headwinds in the near to medium term. Lupin Labs and Triveni Turbine looks good for long term; however, they offer limited upside at the current juncture. We are adding Britannia Inds, Siemens, Praj Inds, Infosys and Cyient DLM in high conviction picks.   

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