Fuzzy outlook
Hope invariably pervades the globe in the New Year as it embarks on its long walkathon. Maybe it is the whiff of fresh air everywhere, except Delhi! Maybe it is the groggy mind, befuddled after the New Year’s Eve party, trying to come to grips with the dawn of 2025. There could be a thousand more reasons why the New Year invariably begins on a cheerful note. Let the dead, or not-so-dead, past bury itself.
The war between Israel and the Houthis, Hamas and Hezbollah, and Russia and Ukraine, the simmering problems arising from the impending change of guard in the US, new issues surfacing in the neighbourhood, and, more importantly, the visible slowdown in the economy, are like bad dreams to be pushed into the abyss of the brain.
The naysayers who had a field day in December, predicting a grim year for the Indian economy, with capex slowing down, corporate results taking a big hit, and AI, the new unknown, threatening to swamp IT companies worldwide – starting with India – are merely biding their time. They know the festive season will not last forever.
There will be challenges once the euphoria simmers down. While the uncertainty surrounding the general elections is over, two important state elections – Delhi and Bihar – are scheduled for 2025. Quarterly GDP growth, which had dipped to 5.4 per cent, requires an all-round effort from both the government and the private sector to push it back up to 7 per cent or more in FY 2024-25 and beyond.
Most international trade and commerce will be guided by the US, the world’s largest exporter and importer of goods and services. Accounting for a fourth of global GDP, the US plays a pivotal role. This is why the biggest challenge lies in the potential taxes that may be imposed by the new Trump government, particularly on Indian goods.
While some believe Trump’s anti-China policy could benefit India, there is no certainty about what might actually transpire. Trump will undoubtedly support US businesses, but whether the US can re-establish itself as a global manufacturing hub remains a million-dollar question. It is, however, poised to strengthen its dominance in AI and benefit from its growing technological prowess.
The growth of IT companies will largely depend on how H-1B visa policies evolve. The restriction of immigration may not necessarily limit the import of a talented workforce. While a stronger dollar – a Trump dream – may aid IT exports, there is concern that AI’s growth could reduce the demand for coding experts, potentially impacting Indian IT companies. India has thus far managed to leverage the export income generated by the growth of Global Capability Centres (GCCs). The GCC sector continues to thrive, with income expected to surpass $100 billion by 2030. Besides foreign exchange, these centres create valuable employment opportunities across Indian cities.
FPIs may buy heavily in 2025
Trump may, however, deprioritise green energy projects, favouring an expansion of fossil fuel portfolios. This could stabilise crude oil prices further, benefiting India. While US policies will become clearer over the next fortnight, what is more significant for India and its stock markets is how the US markets perform and, in turn, shape FPI policies on emerging markets. This is crucial, as Foreign Portfolio Investors (FPIs) have been net buyers of equity shares to the extent of just Rs427 crore during the calendar year 2024, according to NSDL data. In contrast, FPIs were net buyers of Rs1.71 lakh crore in 2024.
FPIs typically buy heavily in years following significant sell-offs. For example, in 2022, they were net sellers to the tune of Rs1.21 lakh crore but bought substantially in 2024. Similarly, they were net sellers of Rs33,014 crore in 2018 but bought upwards of Rs1.01 lakh crore in 2019. In 2011, they sold equity worth Rs2,714 crore but more than compensated by purchasing shares worth Rs1.28 lakh crore the following year. (See table: FPI investments in equity since 2010.) Over the past 15 years, FPIs have been net sellers only three times.
In 2024, FPIs were net sellers in the secondary market to the tune of Rs1.19 lakh crore but invested more in the primary markets, which neutralised their sales in the secondary market. FII sales were largely absorbed by domestic institutions and mutual funds, driven by a sharp increase in the investor base.
The influx of new investors during Covid, who are younger, more tech-savvy, and remarkably patient, has changed the market dynamics. With strong conviction in India’s long-term growth story, these investors have steadily increased their investments, both directly and through SIPs in mutual funds. For the calendar year 2024, monthly SIP inflows are expected to touch Rs2.60 lakh crore. To put this in perspective, this figure exceeds the highest annual FPI inflow of Rs2.57 lakh crore recorded in 2021 over the past 15 years. Going forward, mutual funds and domestic institutions are likely to set the market trend. While FPI inflows will remain important, they will no longer be the sole market influencers.
While SIP inflows more than offset FPI outflows at the gross level, a significant boost to the market will occur when FPIs also become significant buyers in both the primary and secondary markets.
This turnaround could happen when expectations of US market returns begin to decline. Over the past two years, the S&P 500 has delivered 20 per cent+ returns – a record in itself. Treasury yields at 4.5 per cent remain attractive as well. The critical question is whether the US will continue reducing interest rates at the same pace as before. One perspective suggests that if the US economy strengthens, the Federal Reserve may refrain from cutting rates by 0.25 per cent twice in 2025. There is also the possibility of a rate hike if inflationary pressures re-emerge.
In India, the Sensex’s returns have been sub-10 per cent in 2024, with five-year annualised returns at 15 per cent. For FPIs to return in a significant way, Sensex returns must align with these five-year averages. Meanwhile, a wildcard factor is the HMPV virus, which has begun spreading fears globally.
GDP and corporate profitability
India is still grappling with the slowdown seen in Q2 FY25, when GDP growth stood at 5.4 per cent. For the first half of FY25, GDP growth has averaged around 6.0 per cent, with the RBI maintaining projections of 6.5-7 per cent for the full fiscal year. The slowdown has been attributed to subdued urban spending, inflation, and lower capital expenditure due to election-related uncertainty. Finance Minister Nirmala Sitharaman has described the Q3 GDP dip as a temporary blip, with expectations of a rebound in the coming months.
One factor likely to aid this rebound is increased government capital expenditure. As of September, effective capital expenditure (budgeted capital outlay plus grants-in-aid) accounted for just 37.5 per cent of the total budgeted Rs11.11 lakh crore. A higher capex allocation of nearly Rs7 lakh crore could provide much-needed growth impetus, though this will need to be supported by private sector participation.
Signals of a capex revival in the private sector remain unclear. According to the 27th RBI Systemic Risk Survey, 52 per cent of respondents were not optimistic about private sector revival in H2 FY25, compared to 42 per cent who were optimistic. However, the new RBI Governor, Sanjay Malhotra, remains positive, citing high business confidence, robust corporate profitability, and healthy balance sheets as drivers of improved investment prospects in the second half.
Apart from greenfield investments, M&A activity has seen notable traction. While acquisitions do not directly create new assets, transferring ownership to stronger hands can lead to better asset utilisation and productivity. The cement industry has been a hotspot for M&A, with titans like Adani and the Birlas competing fiercely.
Since 2023, Adani’s cement arm, Ambuja Cement, has acquired Pennar Cement, Orient Cement, and Sanghi Cement. Meanwhile, UltraTech has bought India Cements, Kesoram Industries’ cement division, and Star Cement. Dalmia Cement has acquired Jaypee Cement. This wave of consolidation signals the promoters’ bullish outlook on capital expenditure and their ability to capitalise on future opportunities.
Corporate profitability in H1 FY25 has been muted. According to a study by CareEdge Ratings and ACE, 2,337 non-financial companies reported subdued topline growth across both quarters. In Q2 FY25, net sales grew by just 5 per cent YoY, compared to 6.4 per cent in Q1. Operating profit margins were 17.2 per cent in Q2 and 16 per cent in Q1. PAT growth was negative at -0.4 per cent in Q2 and -2 per cent in Q1.
In Q2, sectors such as cement, real estate, aviation, iron & steel, power, and media & entertainment reported 0 per cent or negative YoY growth in operating profits. In contrast, telecom, logistics, hospitality, non-ferrous metals, capital goods, and retailing saw over 15 per cent growth in operating profits. Sectors like automobiles, FMCG, IT, and infrastructure reported operating profit growth between 0 per cent and 15 per cent, according to CareEdge.
Profitability in few sectors is expected to end the year with higher profits. With a plethora of sectors, it is likely that some may experience a slowdown, but others will continue to grow despite challenging times. Even if growth falls short of expectations, many companies will be able to withstand the challenges.
Finance is one such sector. Public sector banks have witnessed a neat 25 per cent growth in PAT, following lower provisioning for NPAs and higher credit from individuals. The total PAT earned in the first half of FY2025 was Rs85,520 crore, as against Rs1.41 lakh crore earned for the entire year in FY2024. Like the PSU banks, there are several other sectors – not to mention companies within these sectors – that have performed well. While past performance is no indication of future performance, chances are that they will have a buffer of profit to stave off a possible slowdown, if at all it happens.
Private sector performance, on the whole, has been subdued, save for a few exceptions like ICICI Bank. HDFC, for instance, has seen very modest growth. Indications are that HDFC will receive the RBI’s permission to take an equity stake in Kotak Mahindra Bank.
In the top 10 gainers of 2024, IT continues to dominate, with companies like HCL Tech, Tech Mahindra, Wipro, and Infosys giving good returns. HCL is in the top five, alongside Zomato, Mahindra & Mahindra, Bharti Airtel, and Sun Pharma (all five from different industries). ICICI Bank is the only finance company in the top 10.
Stock markets, however, do not look at the past to take a considered view of the future. They focus not just on the next six months but also on a year and beyond to set the stage. The RBI, on its part, has infused liquidity by cutting the CRR rate in two tranches in the last fortnight of December, reducing it to 4 per cent from 4.5 per cent earlier. This move is expected to infuse around Rs1.16 lakh crore into the banking system.
Stock markets, which mirror the sentiments of the people, tend to take a futuristic view rather than being guided by past events. In FY24, the Sensex delivered returns of just 8 per cent. From 78,139 on 31 December 2023, the Sensex rose to a high of 85,978 on 27 September 2024 and hit a 52-week low of 70,002 on 24 January 2024. Will 2025 be the same, or will it be different? Given these modest returns, there are differing views on the market’s direction in 2025.
Foreign institutions are more bullish. Morgan Stanley has predicted, with a 33 per cent probability, that the Sensex will touch 105,000. This, of course, is the bull case scenario. The firm reckons that if oil stays around the current levels of $70 a barrel, inflation will remain in check, and the RBI will, in all likelihood, cut interest rates.
CLSA, in its India Strategy, strikes a different note, cautioning investors about muted growth in 2025 due to an uncertain and risky global macro environment, along with a near-term economic slowdown. It cites the underperformance of capex spending versus expectations and the underperformance of consumption.
CLSA remains overweight on staples. The risk-reward in affordable consumption is favourable, it says, and it is bullish on companies like Nestlé and Britannia, which have seen steep corrections. It has added Tata Motors and NTPC to its portfolio while removing HDFC Bank.
Vikaas M Sachdeva, MD of Sundaram Alternatives, also suggests that markets are likely to remain flattish in 2025. He predicts a market for stock pickers, reckoning that Trump’s policies could lead to a flight to safety. As against equity, gold and, to some extent, silver are expected to perform well during this period. Sachdeva believes that earnings may catch up to valuations in the first quarter of 2025, with a potential pick-up in the second quarter.
“There are confusing data points for sure over the last two quarters,” says Ajay Garg, Founder of Equirus Capital, a Mumbai-based investment bank. “While growth is becoming challenging, the momentum going forward is strong. Oil prices are down, which will favour India. There is unprecedented growth in domestic pools of capital, which promises to increase in the years to come. New issues continue to tap the primary markets. There is a long pipeline of issues. I expect both primary and secondary markets to do well.”
Taking a cue from the ongoing cricket matches, Vikas Khemani, Co-founder of Carnelian Capital, says: “India is structurally well-placed, and we will continue to invest in great companies and businesses, not markets.” Reiterating that India is in the midst of a golden phase of a bull run, albeit not without short-term volatility, he points out: “We are at a juncture in markets where the pitch will not be easy because of the global setup and a few domestic issues. It is during this time that one has to believe in one’s convictions and remain invested. Keep expectations low, avoid excessive risks, and stay invested,” he advises, adding that one must keep scouting for opportunities amidst volatility.
Sectors expected to do well include banking, pharma, IT, and manufacturing, which should perform strongly in 2025. It is true that in any market, whether it remains flattish, bullish, or bearish, there are bound to be opportunities. In 2024, the primary market saw issues worth $19 billion being raised. The market was quite buoyant, with several marquee companies tapping into it.
Mega issues included NTPC Green Energy, Hyundai Motor India, Swiggy, MobiKwik, and Ola Electric. NTPC Green’s market cap stands at over Rs1 lakh crore, while Hyundai Motor is valued at just under Rs1.50 lakh crore. Swiggy, seen as a competitor to Zomato, is valued by the market at Rs1.14 lakh crore compared to Zomato’s nearly Rs2.5 lakh crore. The point is that issues from diverse sectors are being readily taken up by both institutional and retail investors. Besides growing the overall market size, investor sentiment remains buoyant.
IPO companies are also unlocking value by listing their subsidiaries and associate companies. A recent example is ITC Hotels, demerged from its parent company, ITC. Similarly, in 2024, Bajaj Housing Finance was listed as part of the Bajaj Finserv group and currently commands a market cap of over Rs1 lakh crore. Deven Choksey, MD, DR FinServ Pvt Ltd, explains that “all these companies have solid business models and hold cash-generating businesses. During volatile periods, the foremost principle is capital protection. These companies, with strong balance sheets, will be in a better position to withstand shocks than smaller companies”.
While the Sensex and Nifty make headline news, investors need to focus more on how their portfolios are performing. Not many investors’ portfolios mimic the Sensex or are heavily invested in large-cap stocks. Choksey points out that flat or downward-trending markets provide buying opportunities for investors. Choksey, who has created significant wealth for many of his clients, believes that during volatile times, larger companies are better positioned to face challenges.
His top five picks include Reliance Jio Platforms, which is likely to be listed in 2025. Jio Platforms is expected to come out with an IPO worth over Rs40,000 crore. Platform companies generally have a great chance to leverage their technology with minimal variable costs. Choksey also identifies Jio Finance, Bajaj Housing Finance, and Tata Technologies as good options. Another company that could unlock value for investors is Adani Enterprises, which may list its roads and airport assets under a different entity.
Business India has always been bullish on equities for most of its existence. Markets have provided fabulous returns since 1990, when the Sensex crossed 1,000 for the first time. At that time, gold was priced around Rs3,200. Currently, the Sensex is around 78,000 – the same as gold.
However, when considering total returns, equities far outpace the meagre returns provided by gold. Gold bonds are a more recent phenomenon and remain less popular than equities. We continue to remain bullish on equities, as one or two quarters of volatility hardly matter for long-term investors who have witnessed such fluctuations many times throughout their investment journeys.
The new post-Covid investors have also shown an amazing degree of resilience, making good profits during the last 4 years of the bull run. Many such investors have committed part of their investments to mutual funds, which may provide decent returns moving forward. Selective buying in large-cap stocks should be the theme for 2025.
The forthcoming budget will provide the first trigger, as the government steps up plans to exhaust all pending allocations. Incentives for incurring capex through PLI schemes are an ongoing exercise and are yielding results. Adding some more sectors to the scheme could see additional funds being earmarked.
For instance, in speciality steel, the government has ensured that even companies with existing capacities will be eligible. India is the only market to witness a decent increase in steel consumption, driven by its high internal demand. With the government aggressively incurring capex, construction companies, cement, steel, and aluminium industries are set to benefit.
Similarly, the government’s thrust on housing, both urban and rural, will also yield positive results. Inflation, which was largely induced by soaring food prices, is expected to ease as supplies pick up, alleviating concerns.
The change of guard in the United States, as well as corporate results from October-December and January-March, will set the tone as the year progresses. While geopolitics remains a significant concern, the possibility of a cessation of hostilities in Europe could be a major sentiment booster across global markets, including India.
During gloomy scenarios, everyone tends to look down and tread cautiously, unlike during a bull run when sights are set skyward. Sometimes, it makes sense to look straight ahead – to anticipate pitfalls as well as opportunities unfolding ahead.
Box
Market goes green
Investors seeking sustainable growth and financial backing in their portfolios would do well to take a look at these stocks
Kirloskar Brothers
Kirloskar Brothers Limited (KBL) is committed to green and sustainable growth, incorporating sustainability into its core business strategy in line with the global shift towards eco-friendly technologies in the pump sector. The company has set ESG goals and integrated sustainable practices across its operations. KBL's products employ advanced technology to reduce energy consumption and enhance performance, making them ideal for industries seeking to reduce their carbon footprint.
The company has had strong financial performance. In Q2 2024-25, it achieved a 13 per cent year-on-year revenue growth, driven by robust demand in both domestic and international markets. Its EBIDTA increased by 61 per cent year on year, with margins reaching 13.7 per cent, fuelled by a strong domestic performance, benefits from higher operating leverage, effective cost-control measures and lower raw material costs.
The company has been supplying pumps to development projects, including Metro projects in Mumbai, Agra and Kolkata (underwater), as also large infrastructure, residential, defence and nuclear projects. With projects in the pipeline both in India and overseas, KBL is positioned for sustained growth and expansion. The company has a BUY rating from leading brokerage houses, including Axis and HDFC Securities.
Globe Textiles
Globe Textiles is poised to set new benchmarks for innovation, sustainability and quality in the textiles and apparel industry. The company strives to be at the forefront of developing environmentally friendly, high-performance fabrics, while pushing the limits of fashion and functionality and strengthening its position as an industry leader.
Globe Textiles has shown resilience by navigating market uncertainties, managing costs and maintaining revenue growth. For the quarter ended September 2024, it reported a 102.2 per cent increase in net profit and a 35.12 per cent rise in revenue. This performance underscores Globe Textiles’ ability to adapt to shifting market dynamics, while providing value to its stakeholders.
The company is driven by strategic global expansion, innovation, sustainability and a commitment to meeting customer expectations. Last year, it acquired a 70 per cent stake in Globe Denwash, a move that has bolstered its capabilities in denim washing and finishing. This acquisition has reinforced the company’s presence in global markets too.
The company’s ability to respond to changing consumer preferences, uphold operational excellence and seize emerging trends will be crucial to its success. The outlook for the future remains promising, with Globe Textiles well-positioned to thrive in a dynamic and competitive industry.
Abans Holdings
Abans Holdings Ltd has emerged as a promising name in the Indian financial ecosystem, backed by a strong and diversified portfolio spanning global financial services, commodities trading and investment advisory. The company’s share price remains undervalued, offering a unique opportunity for long-term investors.
One of the stand-out aspects of Abans Holdings is its strong book value, which reflects the company’s robust financial foundation. This strength, coupled with its diversified revenue streams, positions the business to withstand market volatility while delivering consistent performance. The company has also built a solid reputation for its risk management and an ability to adapt to global market trends.
What sets Abans apart is its growth-focussed strategy, which includes leveraging technology, expanding its reach in emerging markets and aligning with global economic mega-trends like sustainable finance. These efforts underscore its commitment to delivering long-term value to shareholders.
The stock’s current market valuation tells a different story. Trading at levels that do not fully reflect its intrinsic worth, the company offers significant upside potential. Its price-to-book ratio highlights this disparity, making it an attractive proposition for value investors looking for untapped growth opportunities.
For those with a long-term outlook, Abans Holdings is a business with solid fundamentals and a clear path for growth. Investors seeking sustainable growth and strong financial backing in their portfolios would do well to take a closer look at Abans Holdings.