Short Call | Market Wobble or Bullish Reboot: China’s short-term spark vs India’s long-term fire; Dmart, TCS in focus

Short Call

As Indian markets slumped for the second week in a row, and sell-side research is projecting Q2 earnings to be the lowest in 17 quarters, there are fears over whether the structural bull run could get impeded.

It seems not— a larger section of the market continues to be adamant that the bull market is very much alive and kicking. What we’re seeing, they argue, is a momentary wobble, a knee-jerk reaction to China’s monetary stimulus.

While China may temporarily look more attractive due to its lower valuations, India’s long-term fundamentals are unshaken. In fact, China’s deeper structural challenges run far deeper than a quick monetary fix, and these issues can't be easily resolved by fiscal stimulus either.

India, on the other hand, boasts a stronger macroeconomic profile that is not only unlikely to divert investment flows away from it but will continue to pull in FIIs.

Data speaks volumes—India’s weight in the MSCI Emerging Markets Index has been climbing steadily, now sitting in second place. A Yes Securities analysis of the MSCI China and MSCI India ratio shows that China has seen short-term recovery spurts before, only to slump back down. So, is the recent China rally just a flash in the pan? Many experts think so, expecting the bulls to regain control soon.

Another reason why the current correction isn’t a cause for alarm, experts argue is because it is a much-needed reset after a period of frothy valuations. Even before the benchmark index slipped 6% from its highs, key sectors like Defence and PSUs had already seen substantial corrections.

The small-cap space has seen even more erosion: 41% of stocks in the Small Cap 250 index and over half of the small and micro-cap stocks have declined by more than 20% from their 52-week highs, with nearly one in five micro-cap stocks plunging over 50%.

Despite these steep stock-specific cuts, the correction is viewed as healthy. It's not a market breakdown but a pullback that is reining in overheated stocks, they say. Experts caution that the most overvalued stocks—those trading at 30-40x earnings, with weaker promoter backing—are likely to face more declines in the near term.

However, stocks with solid fundamentals, robust business models, and reasonable valuations are expected to bounce back and deliver strong returns over the next 1-2 years. This recalibration could also shift the spotlight back to large caps, which may gain preference in the coming months.

The bears may be calling the shots for now, but don’t hit the panic button because once valuations cool off and comfort sets in, the bulls are likely to storm back with a vengeance, igniting what could be the next explosive rally for the domestic equities.

Tata Consultancy Services (Rs 4,146, -2%)

Shares slid following lacklustre September-quarter earnings that revealed a weak operational performance, declining margins, and limited sign of recovery.

Bull Case: Order book TCV stood at $8.6 billion, within management's comfort range. Strong client traction in AI, with AI-led TCV doubling every quarter. Fresher hiring for FY25E is on track with 11,000 freshers onboarded and a target of 40,000 by year-end. AI, Cybersecurity, and TCS Interactive showed strong growth in Q2.

Bear Case: EBIT margins dipped to 24.1 percent due to higher third-party costs, ramp up the BSNL deal, talent and infrastructure investments. Demand outlook remains cautious, with themes like cost optimisation and vendor consolidation dominating client priorities. LTM attrition increased marginally by 20 basis points QoQ to 12.3 percent.

Avenue Supermarts (Rs 4,570, -0.81%)

Reported its Q2 earnings, with profit growth sliding far below estimates.

Bull Case: Improving rural sector demand and higher store addition can boost toplines for DMart. The retailer’s online channel DMart Ready business grew by 21.8 percent in H1 FY25.

Bear Case: The company's net profit rose by 5.8 percent, reaching Rs 659.6 crore. This was much under brokerages’ estimates, which predicted profit growth in the high teens. The firm announced it sees the impact of online grocery formats in large metro DMart stores which operate at a very high turnover per square feet of revenue.

(With inputs from Zoya and Neeshita)