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Slow going and going slowly

We do not find much value in most parts of the market despite the recent sharp correction in the market. The Indian market may stay lackluster, weighed down by (1) rich valuations across sectors and stocks, (2) potential earnings downgrades and (3) higher-for-longer global interest rates. The 3QFY25 results season did little to change our cautious view of the market. 

Not much value as yet despite sharp correction in parts of the market

We do not find much value in most parts of the market despite the sharp correction in several sectors and stocks in the past few months. Most sectors and stocks are still trading at rich valuations, with the extent of overvaluation rising in inverse correlation to market capitalization, quality and risk.  

FPIs may not return in a hurry; DIIs are buying in a hurry

The battle between FPIs and DIIs will likely continue in the next few months, with (1) FPIs likely to continue with their cautious stance, given a challenging global investment environment for EMs and (2) DIIs likely to deploy aggressively, given (1) high cash positions with MFs and (2) possibly strong (though tapering) inflows from retail investors. However, a period of low trailing returns could dampen return expectations among retail investors and inflows into domestic mutual funds. The 12-month return of the NSE-50 Index, the Nifty Midcap 100 Index and the Nifty 100 Smallcap 100 Index has come down to 5%, 3% and (-)3% with negative returns of 5%, 12% and 15% in the past six months.

Challenges emerging in both macro and micro

India’s macroeconomic position has deteriorated somewhat in the past few months, with (1) a continued slowdown in consumption demand (especially of basic staple items), reflecting the income and inflation challenges for the low-income households, (2) a likely slowdown in government capex (one of the drivers of the economy until recently) and (3) increased pressure on the external position (low BoP surplus, a sharp decline in FX reserves and a weakening INR). 3QFY25 results and management commentary showed (1) a modest deterioration in the asset quality of banks, led by the MFI book of small finance banks and MFI-NBFCs, (2) continued weakness in consumption demand despite some recovery in rural demand, but (3) strong momentum in investment. 

3QFY25 results weak in general; misses punished

3QFY25 net income of the Nifty-50 Index grew 8.8%, moderately ahead of our expectation of 7.8% growth, and 3QFY25 net income of the KIE coverage universe grew 8.2%, moderately below our expectation of a 9.2% increase. 3QFY25 EBITDA of the Nifty-50 Index increased 6.7% versus our expectation of 5.1% growth. The weak 3QFY25 operating results again highlighted some of our long-standing concerns around (1) the Street’s optimistic profitability and volume assumptions and (2) disruption threats across sectors.