Earnings Recovery Could Reverse India's Global Underperformance
India's recent underperformance in global markets could see a significant reversal if corporate earnings show sustained improvement, according to Trideep Bhattacharya, President and Chief Investment Officer-Equities at Edelweiss Mutual Fund. In an exclusive interview, Bhattacharya emphasized that earnings turnaround is the critical factor that could improve foreign institutional investor sentiment over the next 12 months.
Three Major Headwinds Impacting Indian Markets
Bhattacharya identified three primary challenges that have weighed on Indian markets over the past year. The earnings downgrade cycle that began in June-July last year has resulted in a significant 12-13% erosion. Additionally, higher tariffs have become a macro drag despite early optimism around Indo-US relations. Finally, India is perceived as an anti-AI trade compared to North Asian markets, reducing its appeal among global investors.
Currently, India isn't a favourite among emerging markets due to weak earnings, Bhattacharya noted. However, he expressed optimism that recent management commentaries and September-quarter earnings suggest potential for 1-2% earnings upgrades after nearly 18 months of stagnation.
Valuation Correction Creates Room for Growth
Despite concerns about expensive valuations, Bhattacharya provided crucial context about current market levels. While the Nifty 50 traded at a 10-15% premium to its 10-year average in September 2024, it has now corrected to roughly par levels at around 20.5 times one-year forward earnings, aligning with its long-term average.
Similarly, midcaps have seen their premium reduce from 25-30% to approximately 10-15%. This normalization, combined with earnings growth over the past 12-18 months, creates room for multiple expansion if earnings upgrades materialize.
Sectoral Opportunities and Investment Strategy
Bhattacharya expects a broad-based recovery with leadership emerging from specific sectors. Consumer discretionary stands to benefit from GST rationalization, tax cuts amounting to 0.5-0.6% of GDP, and approximately 100 basis points of rate cuts, boosting disposable income and festival spending.
Financials show promise with credit growth rebounding from 8-9% to about 11%, potentially creating a sweet spot for private banks and NBFCs. Government capex spending is driving fresh contract flows in defense, infrastructure, and railways following accelerated decision-making.
The fund house maintains an underweight position in hard commodity-linked sectors, utilities, and telecom, while using these as funding sources for overweight positions in promising sectors. Notably, Edelweiss MF has shifted from underweight to neutral on IT, viewing it as a contrarian call with potential upside as earnings appear to be bottoming out.
Bhattacharya, who manages domestic equity funds worth ₹31,092 crore, emphasized that the firm always keeps some powder dry to deploy when earnings momentum picks up, following a disciplined approach guided by their FAIR framework focusing on financial forensics, acceptable pricing, and robust return metrics.
