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The Nifty 50 index is now trading at 23x FY24 and 20x FY25 consensus EPS, indicating limited upside potential in the next 12 months, says a report by HDFC Securities.

Rich index valuations leave little room for any upside potential, the report said.

Indian economic growth will continue to be led by investments rather than consumption in 2024 indicating growth in industrial, manufacturing, real estate and allied segments.

Earnings growth will be led by BFSI, industrials, autos, cement and pharma sectors, the report said. Margin benefits for commodity consuming sectors due to deflation in commodity prices are largely done, so any growth hereon must be volume led.

Large-cap index to offer better risk adjusted returns vis-à-vis mid/small-cap indices led by higher earnings growth and relatively better valuations.

“Our preferred sectors are large-cap banks, industrial and real estate, power, autos, pharma, OMCs, gas, and capital markets,” the report said.

“We remain underweight on consumer (staples and discretionary), metals, chemicals and small banks/NBFCs”, it added.

Consumption is impacted by curbs on retail lending and job market trends; lower hiring in BFSI and IT gets offset by higher employment in construction/real estate sector. Demand recovery is uneven as sales of highly priced goods & services are still strong, e.g., luxury housing and high-end passengers’ vehicles while low price segment struggles, the report said.

Government capex is robust with focus on roads, railways and defence; rural capex schemes -- water, sanitation & PMAY near completion so will open space for revenue spendings. Private capex in steel, cement and auto visible but broad-based capex pickup elusive, the report said.

Post the recent upmove in the broader markets, large-caps may have higher risk adjusted returns in the near term, though the broader markets will continue to have micro stories.