Expert view: Manufacturing, capital goods to remain high-growth sectors in 2025, says Motilal Oswal Fund Manager

Expert view: Unless a revival in corporate earnings, the new year could be muted for the Indian stock market, says Santosh Kumar Singh, Fund Manager at Motilal Oswal Mutual Fund. In an interview with LiveMint, Singh discusses key triggers for the market for 2025 and which sectors can generate alpha.

Edited excerpts:

Did the Indian stock market meet your expectations in 2024?

Indian stock market has done pretty well in calendar year 2024 (CY24), with the Nifty up almost 14 per cent. 

The first three quarters of the year were good from an earnings perspective, with earnings broadly in line with expectations. 

However, the September quarter disappointed slightly. Hence, purely from a stock price perspective, the markets have delivered despite the correction we saw from the all-time highs.

Do you expect the coming year to be better or weaker than 2024? What are the key triggers that will move the market in 2025?

With the stock prices moving up at a faster pace than EPS (earnings per share) growth in the last four years, we would expect the calendar year 2025 (CY25) to be slightly muted compared to the last few years. 

We have already seen Q2FY25 results being very moderate, with the EPS growth of around 8 per cent for BSE500 (excluding oil marketing companies) companies. 

This is in sharp contrast to more than 20 per cent growth in FY24. Top-line growth has been moderating for multiple quarters, with BSE 500 (excluding oil marketing companies) companies’ growth being sub-10 per cent for almost six quarters. 

Hence, unless we see a sharp recovery in earnings, which is not visible yet, we may see CY25 be muted from a stock price performance perspective. The revival in earnings growth would be a key trigger for the market.

What should be our investment strategy in 2025?

In 2025, investors need to be more choosy. In good times, everything tends to go up; however, when the returns move to realistic numbers, investors need to be much more bottom-up and invest based on the company’s fundamentals. 

Hence, for FY25, we need to follow our quality, growth, longevity, and price (QGLP) strategy much more stringently. We will still find high-growth sectors and themes, and we will keep focussing on that.

In your view, what areas have high growth potential? Which sectors can generate alpha?

Manufacturing may remain a high-growth sector in 2025 as well, given that governments focus on this particular segment.

We would expect the government to focus on capex to remain; hence, capital goods companies may maintain high growth.

Other than these two segments, I would believe that after a couple of years of hiatus, BFSI should make a return as most of the BFSI stocks other than capital market-linked ones are trading at multiples below their long-term average.

There are multiple triggers to this segment: (a) we expect monetary policies to become more accommodative as we are already seeing a moderation in GDP growth, (b) We may see a stable NIM (net interest margin) from hereon, and (c) in my view, most of the pain from the unsecured book is already in the price, and once we see that book recovering we may see the stock performing really well.

India’s GDP has been moderating for three consecutive quarters. Is it time to be cautious about domestic themes?

GDP growth in Q2FY25 moderated to 5.4 per cent from 8.1 per cent in Q2FY24 on a year-on-year (YoY) basis. This was lower than the RBI estimate of 7 per cent.

The slower pace of growth was across sectors, including government spending, exports and imports. GVA growth also moderated to 5.6 per cent.

There are expectations that the second half will be much better as the government capex may pick up, and so would agricultural growth.

However, one needs to be cautious as we are not seeing any revival in consumption yet. We may like to be cautious about some of the segments of the markets.

However, we still see multiple themes like capital goods, manufacturing, etc., growing quickly and providing many bottom-up investment opportunities.

India Inc.’s earnings in the first half of FY25 have been weak. Should we expect a recovery from Q3 or Q4?

As highlighted earlier, the first half saw a single-digit growth in earnings for BSE 500 (excluding oil marketing companies) and started tracking in line with the topline growth rate. 

Consensus earnings were downgraded by almost 3 per cent for these companies. 

We are yet to see data sets that suggest we are seeing a revival in earnings. 

However, the expectation is that driven by government capex and other expenditures, a better crop season may lead to a recovery in earnings in Q3 and Q4.

How should we play the mid and small-cap segments now? Are valuations still at uncomfortable levels in these segments?

Mid and small-cap are not homogeneous, so we can’t comment broadly. 

Some of the segments in mid and small-cap seem to be overheated. However, multiple segments, especially in the BFSI space, are cheap. 

Having said that, the profit growth of this segment, after outpacing large caps in FY24, has started to converge, and hence, the current valuations on an overall basis still seem high. 

However, as we have pointed out, mid- and small-caps tend to be bottom-up segments; hence, we see a lot of high-growth opportunities in the market.

How to protect wealth amid market volatility?

The best way to protect wealth is to have a long-term view of the markets while investing. In the short run, multiple variables affect the stock price and can make investors make decisions that are counterproductive in the long run.

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