Nominal GDP Growth Sparks Large-Cap Recovery Potential, With Pharma and Auto Ancillaries as Top Picks: Insights from Shreyash Devalkar

Indian stock markets are exhibiting a robust upward trajectory despite a notable absence of foreign institutional investors, suggesting a shift in investor sentiment towards earnings performance and stock-specific opportunities. As highlighted by Shreyash Devalkar, Head-Equity at Axis MF, the June-quarter earnings season has exceeded initial apprehensions, revealing minimal repercussions from geopolitical tensions and inflationary pressures on a majority of listed companies. The transition back to a focus on corporate earnings reflects a market environment that favors informed selection over broad-market reliance, with resilience noted particularly among larger entities despite challenges faced by smaller firms.

Moreover, the interplay between higher nominal GDP growth and inflation could potentially bolster revenue growth across various sectors. This improvement in economic indicators, coupled with strategic price increases, is expected to sustain margins for companies within segments where pricing power offsets rising raw material costs. Devalkar posits that while midcap companies have outperformed largecaps in terms of earnings growth, the expected uptick in revenue growth linked to nominal GDP improvements may help larger companies bridge the existing gap in performance moving forward.

In the technology sector, despite attractive valuations, the lack of revenue growth remains a concern, inhibiting a compelling investment case. Devalkar emphasizes the necessity for the IT sector to achieve growth rates exceeding 5% to drive meaningful equity returns, an aspect compounded by competitive global dynamics. Conversely, in the automotive space, a preference for auto ancillary companies over OEMs is advised, given their diversification into non-automotive sectors and exports, thus capitalizing on India’s burgeoning manufacturing narrative.

Lastly, while the pharmaceutical sector continues to thrive and the healthcare space shows extensive growth potential beyond traditional pharmaceuticals, caution is urged regarding investments in defense, as valuations have escalated considerably. The threat posed by crude oil volatility remains a critical concern, with recent developments being largely supportive for equities, although careful monitoring of oil prices is essential to navigate potential market risks effectively.

Source: The Economic Times

(Expert Note: This report was prepared by the Wealthova team.)