Shift to 12-13% growth will create a selective market: Vinit Sambre

Says caution is warranted for segments with stretched valuations and peaking business cycles, such as engineering and capital goods or automotive

Corporate India is transitioning from a period of exceptional earnings growth — exceeding 25 per cent over the past two to three years — to a more sustainable growth trajectory of 12-13 per cent over the next few years, says VINIT SAMBRE, head — equities at DSP Mutual Fund (MF). In an interview with Abhishek Kumar in Mumbai, Sambre explains how this shift will likely create a more selective market environment. Edited excerpts:

 

2024 proved to be another year of strong equity MF returns across categories. What drove the rally? How is the environment looking for 2025?

  The gains were largely backended, with the Nifty 50 showing minimal returns until the general elections. The formation of a stable government and expectations of policy continuity improved investor sentiment.

 

One key development has been the shift in market dynamics, with the quality factor gaining prominence. As earnings growth moderates, we believe it’s important to be selective and focus on companies with strong earnings visibility and solid business fundamentals.

 

As we enter 2025, the outlook remains cautious. Sluggish corporate earnings growth, coupled with macroeconomic challenges such as softer gross domestic product growth, currency pressures, and emerging asset quality concerns in certain sectors, is weighing on market sentiment.

 

When do you see the earnings growth momentum picking up again? Do you see the market remaining range-bound until then?

  Earnings growth momentum has been affected by subdued government spending in the first half of 2024-25 (FY25). While a gradual recovery is expected in the fourth quarter of FY25, it may still fall short of budgeted targets. State capital expenditure is also likely to be constrained as more funds are allocated to welfare programmes.

 

On the consumption side, the outlook remains weak. Slower job creation, muted salary growth, and poor credit expansion are impacting urban consumption, while rural consumption is showing early signs of improvement.

 

Earnings have been moderating sequentially for the past three to four quarters, and I believe earnings could establish a low base over the next one or two quarters, setting the stage for potential improvement thereafter. The markets are likely to remain range-bound until a clear recovery in earnings growth takes place.

 

Any other possible positive triggers for the Indian markets ahead? What are some of the headwinds that investors should be mindful of?

  There has been an improvement in real rural income levels, which marks a positive shift after a prolonged period. In addition, welfare schemes introduced by various states are expected to foster optimism, particularly among entry- to mid-income consumers who have faced difficulties over the past two years. We are also optimistic about increased central government spending going forward, which had been limited due to the elections.

 

However, inflation remains a big risk. Both domestic and global inflation trends will be critical factors. Any sharp increase could undermine the case for moderating interest rates and negatively impact global economic growth.

 

Which sectors could be impacted by Donald Trump’s policies?

  Speculating on the impact of Trump’s policies remains difficult without more clarity on the finer details. However, we believe the rhetoric is less negative towards India than China. India’s trade surplus with the US is much smaller than China’s, and key exports like generic medicines and software services are driven by strong competitive advantages that align with US interests.

 

As a result, we do not anticipate major risks at this stage. On the contrary, India could benefit as the US and other developed nations look to diversify their supply chains and reduce dependence on China.

 

What’s your take on valuations? Are there pockets where you see value? Any sectors you’d like to avoid?

  While recent moderation in corporate earnings growth could lead to some softening of valuations, we believe India is structurally positioned to maintain a premium valuation zone. This resilience is supported by the expectation of consistent superior earnings growth and exceptional return on equity (RoE). India stands out globally with the highest number of companies delivering over 15 per cent RoE, thanks to an exceptionally capital-efficient approach by Indian entrepreneurs.

 

Investors need to become comfortable with these premium valuations and leverage periodic market corrections — like the ones occurring today — as strategic opportunities for long-term investment.

 

On the sectoral front, caution is warranted for segments with stretched valuations and peaking business cycles, such as engineering and capital goods or automotive. Similarly, sectors like paint, which face irrational competitive pressures, are vulnerable to valuation derating and should be approached with caution.

 

Are you making any sectoral shifts in your portfolios?

  We are transitioning from a period of exceptional earnings growth — exceeding 25 per cent over the past two to three years — to a more sustainable growth trajectory of 12-13 per cent over the next few years. This shift will likely create a more selective market environment, in contrast to the broad-based rallies of recent years.

 

Aligned with this outlook, we are focusing on sectors with strong earnings visibility, such as healthcare, software, power equipment, and select consumer discretionary names. We are also exploring opportunities in sectors currently at the trough of their business cycles, including cement, consumer goods, and non-banking financial companies.