While the Indian stock market has witnessed a strong rebound in March and turned positive for the year, the Nifty is still 10% down from its peak hit in September 2024, putting it in a correction territory. Against this backdrop, Siddhartha Khemka, Head – Research, Wealth Management, Motilal Oswal Financial Services, has shared his investment strategy in the current market environment. Going ahead, he expects the Q4 earnings season to be weak but believes that capital goods companies and select players in the consumption space can surprise on the upside. Edited excerpts:
The market rebound in March has been quite strong. Do you see it as a blip, or is this trend sustainable?
Indian markets saw a strong recovery in Mar’25, with the Nifty 50 gaining nearly 7%. The benchmark index has now turned positive for CY2025. The main triggers for the recovery included US Fed’s stance to retain its forecast of two rate cuts this year despite the ongoing tariff concerns, strong domestic macros with a cool-down in retail inflation (CPI eased to seven-month low of 3.61% in February, down from 4.31% in January) and improved GDP growth (6.2% in Q3FY25, up from 5.4% in the previous quarter), which uplifted market sentiments. Further, a 25bps rate cut by the RBI after nearly 5 years, along with other liquidity-boosting measures and a smart recovery in INR against the US Dollar supported the Indian economic picture. All these factors together led to foreign portfolio investors (FPIs) returning as buyers, coupled with value buying by domestic institutional and retail investors.
The sustainability of this rally/recovery will rely on multiple global and domestic factors, including clarity on the US reciprocal tariffs slated to be imposed from 2nd April, earnings growth in the upcoming quarterly results, and stability in foreign investor flows.
The March quarter earnings season is just around the corner. What are your expectations? Are there any sectors and stocks that can surprise positively and negatively?
A slowdown in corporate earnings growth has been one of the key factors behind weak market sentiment this year, as Nifty-50 managed only 4% YoY PAT growth in 9MFY25 (vs. a healthy 20%+ CAGR during FY20-24). While 4QFY25 will likely be another weak quarter, with Nifty PAT growth likely at 4% YoY, we expect 16% YoY growth in Nifty PAT in FY26E. Although there could be some risk to FY26E earnings in the current backdrop, we believe that growth would still be in double digits.
On the sectoral front, the management of most capital goods companies were confident about a healthy tendering pipeline materializing into order finalization, which has picked up in 4QFY25 and could present a positive surprise in the upcoming results. In the consumption space, retailers (in grocery, apparel, footwear segments) continue to focus on store productivity and rationalizing unprofitable stores, which could drive profitability during the March quarter.
FPI selling has slowed down, with them turning buyers on select days as well. Where do you see the trend moving in the next few months?
FIIs have been selling extensively (over ₹3 lakh crore) since the domestic indices peaked in Sep’24. Lower corporate earnings growth and a slowing domestic economy have been key domestic factors, while strengthening US bond yields, rising USD Index and China’s AI breakthrough have been key external drivers of the recent bout of FII outflows.
With correction in the Indian market for the past 6 months, Nifty is now trading at a FY26E P/E of 19.5x, i.e. at a 4.9% discount to its 10-year average of 20.5x, indicating valuation comfort. Further, with improvement in the domestic macroeconomic factors and strengthening of the INR against the US Dollar, the buying interest of the FIIs is returning to Indian equities.
The sustainability of FII buying will largely depend on stable economic conditions and strong corporate earnings growth. From the earnings perspective, while 4QFY25 will likely be another weak quarter, we expect double-digit growth in Nifty PAT in FY26E. Also, the Indian fiscal and monetary policies have turned more accommodative, which, in our view, will boost the demand impulse and growth over the coming quarters. So, given these factors pan out as expected, we could see a positive trend in FII flows in the next few months.
For an investor looking to invest ₹10 lakh in this market, what would be the ideal portfolio allocation?
Indian markets have corrected meaningfully over the last five months, with the Nifty-50/Nifty Midcap/Nifty Smallcap down ~10%/15%/18% from its peak. Market valuations have eased, especially in large-cap stocks. The valuations for mid and small-caps are still expensive vis-à-vis their history as well as vs Nifty-50. Therefore, an ideal portfolio should have around 60-65% allocation towards large-caps while the remaining 35-40% can be towards mid & small-caps.
As the earnings growth in Q4FY25 is likely to remain weak, we would suggest that investors stagger their investments and accumulate fundamentally strong stocks over a 2-3-month period. In terms of sectors, we have a preference towards domestic consumption and discretionary themes, banking, NBFCs, durables, beverages, travel & tourism, hotels and telecom.
IT sector has taken a significant hit in 2025 so far. What’s ailing it, and where do you see the stocks headed?
The ongoing geopolitical and tariff risks and the resultant inflationary pressure are weighing on short-term stability for US and European enterprises. The focus is yet to shift away from capex, and companies are still not prioritizing IT service spending. Clients are likely adopting a wait-and-watch approach as the new US administration’s stance on tariffs, along with lingering geopolitical tensions, adds to the volatility and could take time to stabilize. Further, a cautious outlook was reiterated for the technology sector as the global IT giant Accenture tightened its revenue growth guidance to 5-7% CC (from 4-7% CC) for FY25. The top end of the guidance remained unchanged at 7% as Accenture anticipated no near-term recovery in discretionary spending for IT services. Therefore, overall, the sector is likely to underperform; however, we continue to like mid-tier growth names like Coforge and Persistent. They continue to deliver 20%+ earnings growth, with the recent correction offering a good entry point.
Which are the sectors where investors can start nibbling?
We are optimistic about the Consumption and BFSI sectors. In the consumption space, a beaten-down profit base and an expected sequential demand lift post the budget’s consumption push should drive earnings growth in FY26 (Consumer: 13% YoY; Retail: 37% YoY). Further, selective stock picking opportunities have emerged, as consumption indices have significantly underperformed over the past six months.
Within the BFSI sector, while FY26 may begin on a softer note, we believe that the visibility of earnings recovery for banks, margin tailwinds for NBFCs, and a gradual recovery in Capital Markets linked companies, will provide attractive investment opportunities over the year; given most of these stocks are reasonably valued following the recent market correction.
Many new investors are seeing their portfolios in the red for the first time. They entered during the pandemic, after which the market was in a one-way rally. What would be your advice to them?
For new investors in India experiencing their first market downturn, it’s important to understand that market corrections are normal and that volatility is a natural part of investing. If one has invested in fundamentally strong stocks, there’s no need to sell in panic. Instead, focus on long-term financial goals. This is a good time to understand market cycles, valuations, and behavioural finance. One must ensure that the investment portfolio is well-diversified among different sectors and market-cap categories and that the investments align with one’s risk tolerance and financial objectives. Further, corrections can offer good opportunities to buy quality stocks at lower valuations. One can consider the gradual accumulation of such stocks instead of deploying everything at once as a risk-balanced approach.
Disclaimer: This story is for educational purposes only. 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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