Nifty staring at negative 1-yr returns, margin level receding, says Ambit Capital; check top stock picks

Nitin Bhasin, Head of Institutional Equities, Ambit Capital

Benchmark Nifty 50 index may be staring at negative one-year returns from hereon, struggling with overvaluation and margin challenges, said Ambit Capital. In a conversation with Moneycontrol, Nitin Bhasin, Head of Institutional Equities, and Ashwin Mehta, Head of Equity Research, explained why metal and EMS companies are currently good picks and why they are bearish on IT companies.

Here are the edited excerpts:

What is your market outlook?

The Indian markets have seen continuous capital inflows from domestic investors. This buying from DIIs and retail investors has ensured that the market has not been significantly affected by FII selling.Nifty may deliver negative returns one year from now, as it is currently trading slightly in the overvalued zone. The trajectory of Nifty's EPS estimates is not expected to be the same as FY21-24, especially as the “margin expansion” lever recedes.

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What sector are you bullish on and which are the ones you are bearish on?

We favour banks, particularly private banks, due to reasonable valuations, and strong credit growth despite the pressures of NIM and slower deposit growth risks. Metals appear promising due to the demand scenario. Additionally, the sector has undergone significant capital expenditure. While it heavily relies on China, domestic demand remains robust.

EMS is another sector that we favour, but valuations are expensive. EMS companies have an opportunity to achieve global scale, given the government's push towards import substitution and PLI incentives for exports. Amber Enterprises is our top pick in this sector, where we have a buy call. It has been diversifying away from RAC to other RAC/non-RAC components, thus expanding its target market. However, we are bearish on Dixon Technologies, as valuations are reflecting extreme optimism.
In IT, we have been cautious for quite some time. The valuations are expensive, and we don’t have a clear path on the demand recovery. We remain 'sell' on this space until we get more clarity regarding spending recovery.

Ashwin Mehta, Head of Equity Research, Ambit Capital

What is your outlook on small and midcap stocks?

We prefer large caps over small and mid-caps. The valuation remains expensive, and the growth differential between small and mid-caps and large caps is narrowing. Though small and mid-caps have recovered from the battering in March, the rally has become narrower.

Since February, only 39 percent of small-cap stocks have recovered between February and April peaks of the small cap index. Median stock returns in the year 2024 up to February 8 were 4.3 percent and 2.3 percent, for small & mid-cap indices respectively, but dropped to 2.5 percent and 1.1 percent till the April peak of the small cap index. The divergence between median returns and index returns currently stands at 5.9 percent and 7.4 percent for small & mid-caps respectively in CY24. In CY24, we believe Nifty heavyweight banks are better placed to outperform smaller companies, with FY25 earnings in their favour.

What is your view on the premiumisation trend in India?

The Indian economy's growth has been unequal, with the top one percent getting richer. The rise in income inequality is a problem for sustained economic growth. The trend of premiumisation may slow down as Indian consumers find it difficult to transition to premium products.

Data suggests that premium consumer companies have found India to be a challenging market. Despite being launched in CY16, Netflix has only acquired 6.5 million subscribers in India over the last 7 years. CEOs of Netflix, Spotify, and Uber have been vocal about the challenges they face in the Indian market compared to other global markets. These company leaders have pointed out how Indian customers are sensitive to pricing.