market: Market will continue to move sideways with some sector rotation: Seshadri Sen

“We do not see any major upheaval in either direction negative or positive in the second half. Earnings are probably the most stable we have seen in the last two or three years,” says Seshadri Sen, Emkay Global Financial Services.

Well, I am just going through your latest note and it seems like you have raised your target for the Nifty all the way to 26,000 now for September 25. Earlier it was close to 22,000 for June 25. Is it just the market momentum that has made you change it because we are very close to that mark already or do you see a further uptick in the fundamentals versus what you anticipated earlier?
Seshadri Sen: No, the primary driver is that there were a few speed bumps that we were anticipating in the first half and those played out. The market through those speed bumps quite strongly. But we are looking at a much smoother ride in the second half in terms of fundamentals which is why we raised our multiple and that cascaded into a raised Nifty target. We do not see any major upheaval in either direction negative or positive in the second half. Earnings are probably the most stable we have seen in the last two or three years.

Upgrades and downgrades are not moving significantly upwards or downwards. Valuations are a little elevated, but if you look at India’s macro financial stability, that does warrant a somewhat premium valuation.

So, all these combined, yes, we raised our target price and our view is that the market will continue to move sideways in the foreseeable future and with some level of sector rotation. I do not see a significant downside risk, but upside is a little limited given the valuations. So, what I can see here is you have increased the valuation multiple to 22 times from 19 times. What is the kind of earnings growth that you are expecting over the next one year and which sectors will be contributing the most to it?
Seshadri Sen: So, we are looking at Nifty earnings at about 12% for FY25 and around 15 for FY26, that is the consensus number and we think that the market will probably deliver in line with that consensus. This time it is a little more evenly distributed with industrials, durables being very strong sectors in terms of earnings growth. Those are the two main areas where we see some momentum in earnings.You are underweight on the financial space, but do not you think that if there is a rate cut in the next two-three months, that would benefit the sector?
Seshadri Sen: No, actually not. We have been underweight structurally on financials for quite some time, almost a year now. And our view is that, first of all, let us get the rate cut argument out of the way. Yes, it will help their deposit growth. We have argued in the note that the current deposit slowdown is entirely due to macro tightening, nothing to do with allocations to capital markets and that deposit growth will start to recover once the rate cuts start and the RBI starts their easing cycle. But that is a relatively minor positive compared to the big negative that NIMs will start to come under pressure as mortgage reprices, because most of the larger banks are 25% to 30% exposed to mortgages. Those are in turn linked to repo rates. As soon as repo rates get cut, they take it on the chin. It takes at least three-four quarters to recover that from lower cost of funds and that is the immediate cyclical threat to the financial sector.

Structurally as well we believe financials is in a low growth environment compared to history and the downward valuation adjustment is not complete.

We think that the fair value of private sector financials is somewhere in the 1.5 to 1.7 range. None of them are trading there. And this sort of time correction and continued underperformance is not about to end.

What is your view on largecap versus the broader market kind of conundrum because yes, valuations, etc, have been quite frothy in the broader markets, but they continue to move higher. Do you think it is time for largecaps to catch up as has been the case in the last few months or one should have a very balanced view and split between the both?
Seshadri Sen: If you take a two- to three-year view, we continue to believe the small and midcaps will outperform because the earnings momentum is coming from sectors such as industrials and consumer durables which are primarily by small and midcap companies.

The only thing one has to be a little careful about is that many of these small and midcap companies are trading at very frothy valuations, but it is a large universe, you could still find a lot of relative value in the small and midcap space and I do believe from a two- to three-year perspective, they will outperform. In the shorter term, while the market is moving sideways in the next one or two quarters, then you could see a more distributed performance, but being totally invested in largecaps is actually a little risky because I do not think there is an argument that they will structurally outperform the small and midcap.

So, you need to have a mix and in the short term, maybe a little more biased towards largecap, but for two- to three-year perspective, we continue to be bullish on the small and midcap space.

What is the view on consumption because at a time when people are bullish on rural recovery, one would have imagined that you would be positive on staples, but it seems like that you are a bit on the back foot when it comes to consumption. Help us understand your thesis there.
Seshadri Sen: So, we are actually bullish on consumption. Our note says that we think that the rural recovery is here and it will continue for quite some time and not just rural mass consumption across both rural and urban we are expecting it to recover in FY25.

Having said that some of this has played out. We upgraded consumption a few months ago, but now they are all trading at relatively elevated valuations.

So, the stock price movement depends on the valuation moving and once the stocks trade up to plus one standard deviation of historical range, upside on valuations get limited, which is why we downgraded it to a neutral.
We think that there are maybe smaller cap ideas, value retail, some of which we do not cover, so we cannot name names, but those are probably where you can see relative value, but the staples is probably not the best way to play rural recovery because it has already played out in the recent last two-three months.