Indian Stock Exchanges continued their progress even though foreign institutional investors remain largely apart. Investor attention has increasingly focused on earnings performance and stock-specific opportunities rather than just overall market dynamics.
Speaking to ET Now, Shreyash Devalkarhead of equities at Axis MF, said the June quarter earnings season has so far been more resilient than initially feared, with listed companies reporting only a limited impact from geopolitical tensions and inflationary pressures.
Earnings Resilience despite macroeconomic concerns
Devalkar believes that attention has returned to business profits after the results season. Although smaller companies have faced some challenges, the publicly traded universe as a whole has remained relatively isolated.
“We looked at the internals of the market. They are still driven by earnings growth, and that’s ultimately what the market came back to after earnings season. Previously, it was expected that the June quarter would see a significant impact from war and inflation. While this has definitely affected smaller companies, feedback from listed companies has largely suggested that the impact has been benign,” he said.
He added that higher nominal GDP growth and higher inflation could actually support income growth in several sectors.
“Higher nominal GDP growth and inflation would actually contribute to revenue growth this quarter in many segments. There have been price increases, which are reflected in improved credit growth. We are looking at companies where higher prices and stronger revenue growth will have minimal impact on margins. In some segments, higher prices could more than offset higher raw material costs, allowing margins to remain broadly intact,” he added.
Large caps could finally catch up
Mid-cap companies have consistently reported stronger earnings growth than large-cap companies in recent quarters. However, Devalkar believes that an improvement in nominal GDP growth could help narrow this gap.
“This has been the case for many quarters now. Mid-caps have consistently reported stronger growth, while large-cap growth has remained subdued. In my view, large-cap companies generally cannot grow too far from nominal GDP growth. With nominal GDP growth improving due to inflation, there is good reason for large-caps to experience an uptick in revenue growth,” he said.
IT still lacks growth triggers
Despite attractive valuations, Devalkar believes the IT sector needs stronger revenue growth before it becomes attractive again.
“When a sector’s growth is less than 5%, it becomes difficult to generate meaningful stock returns. Even combining low dollar revenue growth with rupee depreciation, free cash flow returns, dividends and buybacks, the overall return is only reasonable, not exciting. Unless dollar revenue growth improves beyond 5%, it becomes difficult to build a strong investment case,” he said.
He also highlighted that some global IT peers benefiting from the AI wave are trading at lower valuation multiples.
“One should not just look at valuations. Since growth so far is less than 5%, returns need to be assessed more holistically,” he said.
Automotive Accessories Preferred to OEMs
In the automotive sector, Devalkar said his preference remains firmly tilted towards automobile auxiliary companies rather than car manufacturers.
“Generally speaking, we are more positive about auto ancillary companies than auto OEMs. Traditionally, auto ancillary companies were heavily dependent on the domestic automotive cycle. Today, many of them have diversified into non-automotive businesses and exports, making them an attractive part of India’s manufacturing history. That is why we continue to have significant exposure to this space,” he said.
Pharma and healthcare remain portfolio favorites
Devalkar said the case for investment in pharmaceuticals has evolved, with domestic companies generating steady growth while international operations have stabilized.
“The pharmaceutical sector is two-fold: domestic and international. The international business is generally establishing itself on a footing and is reasonably priced. Domestically, growth remains strong and is comparable or better than many FMCG companies. Therefore, the pharmaceutical sector continues to fit well into our portfolio,” he said.
He added that the company’s exposure to healthcare extends beyond pharmaceuticals.
“Our exposure is not only to the pharmaceutical sector but also to healthcare, including hospitals and diagnostics. We remain positive on the entire healthcare sector,” he said.
Defense remains a structural sector, but valuations must be prudent
While maintaining a positive long-term view on defence, Devalkar advised investors to be selective as valuations have become richer.
“Defense is a long-term structural story, and there is no doubt about that. However, unlike three years ago, these structural themes are no longer in their infancy. Whether it is energy or defense, these sectors have now been discovered. Investors need to be careful because of the valuations,” he said.
Crude oil remains the biggest risk
On market risks, Devalkar believes recent developments have largely supported stocks, although crude oil prices continue to warrant close monitoring.
“There have been more positives than negatives. Cooling crude prices and actions taken by the government and central bank have been supportive. The biggest risk remains in crude oil as it remains very unpredictable. Monsoon is also a risk, but it is widely known and largely priced in,” he said.
