During the initial fiscal year of 2024, the market was forecasting an average earnings growth trajectory of about 14-16% for the Nifty50 index.
The Indian equities concluded the fiscal year with returns well above the long-term average. The Nifty50 index provided an annual return of 29%, 2.25x times higher than the long-term 10years average of 12.8%. Investors are now pondering whether this positive trend will persist into FY25.
Before delving about FY25 outlook, it’s crucial to acknowledge that the consistent improvement in India’s earnings growth played a pivotal role in driving the stock market’s robust performance. During the initial fiscal year of 2024, the market was forecasting an average earnings growth trajectory of about 14-16% for the Nifty50 index. These forecasts were based on the anticipation of a global economic slowdown in CY23-24 due to factors such as hyperinflation and tightening monetary policies. However, the remarkable resilience exhibited by both the US and Indian economies led to continual upgrades in economic growth forecasts.
FED forecasted a recession for the US with a GDP growth rate of 0.5% in CY24, while actual economic growth was 2.5%. Meanwhile, the RBI consistently raised its FY24 GDP growth forecast from 6.4% in February 2023 to 7.6% in April 2024 policy. Currently, Nifty 50 index EPS growth is forecast to grow at 23.5%, including the number of ongoing Q4 results.
The above-mentioned performance of the stock market was also followed by a rampage in retail inflows from both, direct and MF presence. Monthly SIP inflow is constantly rising to all-time high, 40% YoY up in February 2024 at ₹19,187cr and domestic investor trading accounts have crossed 16cr. FIIs net buying also improved during the year given the outperformance of the Indian economy compared to the slowing of other emerging markets. FY24 had closed on a muted note due to heavy selling in the month of March. However, the sessions improved by the end of the month as leverage-based selling stopped and buying improved on a low volume.
Looking ahead to FY25, the year has started with a rebound from the March sell-off. However, the overall level of volatility in the market has increased YTD. And there is a risk that this scepticism may stay put during the year. To reduce the volatility, a positive Q4 results will be crucial, providing clarity on FY25 earnings growth. Currently, the market estimates a slowdown in earnings, Nifty50 EPS growth is forecast to reduce from 23.5% in FY24 to 14-15% in FY25.
This should lead to a drop in valuation, which has started YTD. Nifty50’s one year forward P/E has been reduced to 20.5x from 23.5x. The high level of premium valuation India was accustomed to has moderated to 11% based on the 10yr average P/E of 18x, which is low. Hence, we believe that the Indian market is on a sturdy platform, as long-term earnings growth is stable at 15% and valuations are slightly above average.
The Indian economy is forecast to bear a stable GDP growth of an average 6-7% this decade. Our analysis suggest that India will persist in trading at a premium compared to emerging markets, owing to the underlying robustness of its burgeoning domestic economy. However, should the global economy experience further deceleration, we anticipate a further contraction in valuation, in the short-term.
Presently, market sentiment leans towards a soft landing rather than a recession and favours a rate cut, which is expected to bolster equities. The FED forecasts a 2.1% and 2.0% GDP growth for the US in CY24 and CY25, respectively. Consequently, we foresee the overall risk of a significant contraction in the Indian stock market to be minimal, as the domestic economy is projected to outperform the global average by a good margin.
The RBI has consistently revised upward the growth outlook for the Indian economy over the past two years. For FY25 too, there is a strong likelihood of a further upgrade in the forecast of India’s economic growth. It hints at the rising new investment project announcements and completion of new projects in FY24, as per CMIE. Optimism is expected to persist, driven by the China-Plus strategy and the rejuvenated Make in India policy. The domestic economy is also expected to improve with a boost in the rural economy. The dried-up rural market of 2023-24 by the El Nino is up for a swing in the agriculture sector for 2024-25. The scenario is estimated to improve in anticipation of La Nina, as per IMD and global climate expectations. The current forecast of 7% GDP growth in FY25 by the RBI may boost towards 8% led by high private capex, foreign investment, and upside in the rural economy.
Therefore, assuming India can sustain earnings growth at 15% (without factoring in upside risk) and maintain long-term valuation, Nifty50 could potentially deliver a minimum return of 8%. The prediction is based on the Nifty50 FY25 and FY26 EPS forecasts of ₹1,164 and ₹1,329, respectively. An investor is most likely to foresee a positive return in FY25 with a focus on large caps as Mid & Small caps are relatively expensive. In the end, being in a global high-priced equity market, currency volatility and a higher-than-average cost of funds, can ignite asset class restructuring in CY24.
First published in Mint
