Outlook 2025: Cautiously optimistic on India stock market, Nifty 50 valuations suggest modest upside, says Dhiraj Relli | Stock Market News

The Indian stock market outlook for 2025 remains cautiously optimistic as the Nifty 50 valuations suggest modest upside potential, said Dhiraj Relli, MD & CEO at HDFC Securities. He believes the large-cap indices will likely offer better risk-adjusted returns than the mid-cap and small-caps. In an interview with Livemint, Relli said that foreign portfolio investors (FPIs) will re-enter the Indian market only when corporate earnings growth improves.

According to him, Chemicals, Autos, and Consumer show rich valuations compared to their earnings expectations over the next few quarters. Here are the edited excerpts:

Q. How would you summarize the performance of the Indian equity markets in 2024, given the heightened volatility globally due to key events like US elections, monetary policy easing by central banks, Middle East tensions, and others? What is your advice to the investors citing current market dynamics?

A. In 2024, the benchmark indices Nifty 50 and Sensex rose nearly 10%, followed by a 10% correction from their September highs. Mid-cap and small-cap indices performed even better, gaining 25% to 29%. Key factors for this strong performance included robust GDP growth, resilient corporate earnings, and moderating inflation. The banking sector saw moderate gains of about 6%, while sectors like defense, healthcare, consumer durables, transportation, and automotive achieved impressive gains.

Despite the recent corrections, we are entering 2025 with high valuations as the latest quarterly numbers failed to inspire. This has led to valuations again seeming expensive as Nifty earnings could grow at just 10% in FY25 after growing 18%+ over the last three years.

While India’s story is still alive and kicking, there is a short term pause that could soon end. On an index basis, Indian markets may still seem a tad expensive, but stock wise opportunities abound and may keep throwing up in 2025 also.

Investors should do their asset allocation review and bring it back to the originally planned, by taking profits from equities, if the equities portion has exceeded the planned allocation. In addition, they should also do a portfolio review of their equity holdings and trim holdings in stocks that have run up too fast beyond their fundamental values. They should also be cautious in getting carried away in the IPO mania.

Q. Nifty has risen over 10% this year so far but has seen a sharp correction recently from its peak due to the heavy FII selling. Do you think most of the selling is done now, and can we expect a recovery in early 2025?

A. Foreign portfolio investors (FPIs) may find better return opportunities in other markets, particularly in light of the growth slowdown in India, which has reached a seven-quarter low. We anticipate that FPIs will re-enter the market only once they observe earnings growth in Indian companies, a trend whose clarity may come post the results for Q3FY25 are out. FPIs may also be selling Indian stocks due to calendar year end considerations.

Local buying alone may not lead to markets recovering sharply and seeking new highs. Currently, the Nifty 50 index is trading at approximately 23 times FY25 earnings and around 20.5 times FY26 consensus earnings per share (EPS), suggesting modest upside potential in 2025. We remain cautiously optimistic about the Indian markets in 2025.

We also feel that to withstand the expected volatility in 2025, large-cap stocks may be preferred over mid-cap and small-cap stocks, which have already experienced significant rallies over the past few years.

Q. Are there any segments where you still see overvaluations prevailing?

A. We believe large-cap indices will offer better risk-adjusted returns than mid- and small-cap indices due to better valuations. Currently, many sectors, including Chemicals, Autos, Consumer show rich valuations compared to their earnings expectations over the next few quarters.

Q. As we move into 2025, what are your expectations for Indian and global equity markets? What sectors are you positive on for next year and which do you think may remain under pressure?

A. Both in India and globally, we believe that equities will continue to outperform other asset classes, and investors should adopt a selective investment approach. In terms of India’s GDP rates, we expect them to remain around 6.5% to 7% from 2024 to 2026. Meanwhile, we anticipate that global GDP rates will moderate across major economies such as China, Russia, the US, Korea, Germany, and Japan.

The macroeconomic environment will be crucial for the Indian markets. In addition to GDP performance, we expect moderation in food prices due to the availability of Kharif crops and fresh arrival of Rabi crops. As a result, we estimate CPI inflation to be around 4.8% for the full fiscal year 2025, with further softening expected, settling in the range of 4% to 4.2% for the entire fiscal year 2026.

Regarding our equity strategy in India, we believe that economic growth will be driven by investments and rural consumption in 2025. This growth is expected to positively impact industrial, manufacturing, real estate, and rural economy sectors. We anticipate earnings growth to be particularly strong in the Banking, Financial Services, and Insurance (BFSI), industrials, cement, energy, and IT sectors. Our preferred sectors include large banks, top-tier IT firms, consumer durables, capital goods, real estate, cement, and building materials.

Conversely, we maintain an underweight position in automobiles, consumer staples, mid-cap IT, chemicals, small banks, and non-banking financial companies (NBFCs).

Q. Which stocks form the top stock picks for 2025?

A. We recently launched our annual Strategy Report titled “The Big Review”, which focuses on assessing the past year and outlining expectations for the coming year. As part of the report, our research team recommends that investors consider accumulating shares in companies with strong fundamentals and significant growth potential. Notable mentions include Hindustan Unilever, Bajaj Finance, Mahanagar Gas, IndiaMart InterMesh, Reliance Industries, Sun Pharma, Sobha Developers, State Bank of India, Maruti Suzuki, and Crompton Greaves Consumer.

Q. With increasing retail participation in equity markets, how do you see the discount broking business going ahead? How has your HDFC Sky platform fared so far?

A. Our business has shown consistent growth across all key metrics. A significant portion of our revenue comes from fees, commissions, and interest income, with steady growth in both revenue and profits year-on-year. While our Invest Right platform continues to attract customers seeking RM services, the discount platform HDFC SKY has seen a surge in users and trading volumes recently. We recently launched no-cost ETFs and competitive Margin Trading Facility at 1% per month on HDFC SKY, along with a simplified, one-click IPO investment process. Our new Youth Plan, introduced in November, has received positive feedback.

Q. Before you leave our readers, what is your view on how investors should look at stocks with very low-price points, for instance the small caps and even the slew of IPOs that are hitting the markets?

A. In my view, the enthusiasm surrounding lesser-known small-cap stocks and IPO applications has reached alarming levels, reminiscent of the retail excitement observed in 2007 prior to the global financial crisis. Numerous small and medium-sized enterprises (SMEs) and small-cap companies have seen their valuations double or triple without any significant improvements in their underlying business fundamentals. Furthermore, the IPO market has become incredibly speculative, with recent offerings routinely being oversubscribed by 100 to 200 times in the retail segment.

Retail investors, driven by a fear of missing out (FOMO) and tips shared on social media, have poured money into these stocks without conducting the necessary due diligence. Many investors apply for IPOs without thoroughly reviewing the prospectus, instead relying on “grey market premiums” and social media recommendations.

Caution is essential, a lesson painfully highlighted during the bust of the dot-com bubble between 2000 and 2002. The wisdom of Warren Buffett resonates strongly here: “Be fearful when others are greedy, and greedy when others are fearful.”

As recently stated by former RBI Governor Shaktikanta Das, “What goes up too fast without fundamental support usually disappoints investors.” History teaches us that during such market manias, retail investors often find themselves last to enter and first to face difficulties when the market shifts.

With this perspective in mind, informed and disciplined decision-making can transform this phase into a valuable opportunity for long-term wealth creation.

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.