Indian stock market is experiencing a dichotomy, with high valuations in some sectors limiting investment opportunities, while robust macroeconomic conditions sustain investor interest in domestic equities, analysts said.
Benchmark equity indices Sensex and Nifty 50 have declined approximately 1% from their record highs, driven by a broader weak sentiment following the Budget 2024 and a disappointing earnings season so far.
“The earnings growth in Q1 so far has been weak. IT companies have performed marginally better. But in the overall market, earnings are not good enough to support upgrades. The valuations are not very expensive for the banking sector and we do not expect a major downfall in bank shares going ahead,” said Vinod Nair, Head of Research, Geojit Financial Services.
Nair said he does not remain positive for the banking sector in the short term but believes the IT sector can be safe to remain invested.
“Current valuations in the market show lack of investment opportunities. But IT can be a safe sector to invest in given the sector enjoying high cash flows and rising deals in Artificial Intelligence (AI),” Nair said.
He believes there is a sectoral churning in the market and suggests booking profits in power stocks and capital goods stocks that have witnessed a steep rally. According to him, earnings growth is expected to improve in the upcoming quarters.
“There are no other major negative factors for the Indian stock market. Only high valuations are a concern. Domestic economic growth remains robust and retail inflation is on a downward trend with rise in wholesale inflation. This is likely to support EBITDA margin and realisations of companies. Hence, we expect earnings growth to improve in the coming quarters,” Nair said.
In the base case, Nifty 50 target for December 2024 is 24,600, while in the bull case, Nifty 50 target is 26,000, Nair said, expected limited upside in the stock market.
Budget Impact
Speaking on Budget 2024, he said the proposals by the government will benefit Aquaculture stocks going ahead given that the valuations in the sector are fair and below long term average. Moreover, manufacturing stocks in the electronics, capital goods and renewables such as solar panels will also benefit from the Budget 2024.
“The government’s intentions to boost the rural economy and agricultural sector along with the hike in MSPs seems positive for FMCG, rural infrastructure, housing and consumption-based sectors,” Nair said.
Sectors to Avoid
According to Nair, valuations in the power sector, capital goods and real estate are very expensive. He suggests avoiding these sectors where the multiples are high.
Coining a similar view, Avinash Gorakshakar, Head Research at Profitmart Securities, also suggests avoiding overhyped and overvalued sectors such as metals and capital goods.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
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