Daily Voice: Don’t expect any major downgrades in consumer discretionary, global cyclical sectors, says HDFC Securities' Unmesh Sharma

So far, earnings have turned out broadly in line at an aggregate level. Within sectors, we have observed continued downgrades in sectors such as Banks & NBFCs, capital market, consumer staples, IT, cement, and chemicals. Amid weaker urban demand and softer investment environment, earnings growth expectations are being moderated down. As benefits of softer input costs have already come in the base, earnings growth estimates hereon are relying heavily on a meaningful demand revival, which appear uncertain at current juncture.

Do you expect major downgrades in sectors such as IT services, discretionary consumption, and global cyclicals?

IT sector has witnessed continued downgrades in this quarter too. As per management commentaries, demand environment continues to be uncertain with clients awaiting clarity at global macro front.

Furthermore, we don’t expect any major downgrades in consumer discretionary space as disposable income continues to be healthy for upper middle-income category.

Additionally, we don’t expect any major downgrades in case of global cyclical sectors as well. While tariff wars will pose short term headwinds which will keep oil & metal sectors volatile, but ongoing tariff negotiations are expected to reach a middle ground which will bring normalisation in these sectors.

Do you believe the Nifty 50 has a strong floor at 22,000 now and may hit a record high by the end of this quarter?

At current level (~24,500), Nifty is trading at 18.5x FY27E, which is slightly above its 10-year average historical level(~17.5x). In our assessment, Nifty returns hereon will be commensurate to the earnings growth which are expected to report a low teen CAGR for next two years, with a downside risk (primary led by muted urban demand).

Furthermore, if we consider a scenario of Nifty being at 22,000 it would mean a valuation of ~16.7x FY27E, which would be slightly below 10-year average historical valuation of 17.5x. In the scenario of Nifty going to this level, we expect mean reversion to take place fuelled by strong DII flows which will get reflected in form of a gradual rebound. Having mentioned this, we don’t expect Nifty to hit a record high by this quarter-end as earnings growth estimate for FY26 is softer. We rather believe Nifty will remain rangebound and will be guided by earnings.

Do you expect the broader markets (midcap and smallcap) to underperform the benchmark indices this year?

At current levels, Nifty Midcap 100 and Nifty Smallcap 100, both indices are trading at a premium to their respective historical average valuations. Having mentioned this, we observe that overvaluation within midcap space is more accentuated as compared to the Smallcap stocks. Owing to expensive valuations and uncertainty around earnings growth, we expect mid and Smallcap indices to underperform benchmark indices this year. Hence, in our view, one should be observant of underlying stock specific earnings growth and valuation froth (if any), before picking any investible stock from this space.

Do you think the RBI MPC will pause the rate cut cycle and go slow on rate cuts to support growth?

RBI MPC has delivered two rate cuts of 25bps each in current cycle in CY25 so far. Furthermore, the change in stance from “neutral” to “accommodative” indicates a decisive signal from RBI that more rate cuts are expected in this current cycle. We believe RBI will deliver two more rate cuts in CY25 taking terminal repo rate to 5.5%. In an extreme situation of global trade war escalation, a deeper rate cut cycle can’t be ruled out.

A moderating GDP growth environment warrants an expansionary monetary policy and a softer domestic inflation (sub 4% estimated for next three quarters) gives adequate flexibility to the policy makers.

Are you underweight on the consumer sector given the lack of valuation comfort?

While we have a balanced view on overall consumer sector as reflected in the HSIE model portfolio, we are underweight on consumer staples due to elevated valuations and subdued growth. As per our observations, rural consumption continues to be healthy but consumption in urban mass segment is soft. Having mentioned this, tax benefits offered in the recent Union budget, upcoming implementation of 8th pay commission and sustained healthy rural economy parameters are expected to boost consumption in the coming quarters. We would await a meaningful demand growth delivery before forming a more constructive view on this space.

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