What is your market view right now based on where we stand in terms of the risk and the reward ratio?
Sanjeev Prasad: Market view pretty much remains the same here. We are stuck looks like in a narrow band which has been the case for a while now. If you look at the last one-year performance, the market has not done really much. It has been in that 24 plus-minus band for a while now. So, on the one side you have valuations which are pretty expensive and on the other side you have a decent macro, clearly things are looking better over there, hopefully that translates into earnings growth and better earning growth, but let us wait on that because you still have a lot of challenge with respect to domestic growth, we have a lot of issues on global front which we still do not know fully as to exactly how they pan out.
So, yes, so that is where we are. You have I guess equal mix of positive on the one side and very high valuation which will probably make the market stay range bound for some more time.
The macros have turned favourable and do you think that could lead to further earning surprise given that liquidity is back, interest rates are headed lower, crude is down, inflation is down. Are we in for positive earning surprise because of good macros?
Sanjeev Prasad: This is the whole challenge with the construct of the market actually. There is a big disconnect between what is good for the economy need not necessarily be good for the market. If you look at the earnings composition of the market, a lot of earnings actually come from commodity sectors, a lot of earnings come from exporters and at this point in time you clearly have a lot of challenges on the earning numbers of exporters for sure, that is, IT services, parts of pharma, some of the auto companies and also because of lower commodity prices which is good for the economy in general, it is not good for the earning numbers.
Just to give you some more data over here, for the Nifty 50 Index for example we are looking at about 12% growth as far as earnings is concerned for FY2026, but almost 60% of the incremental profits for FY2026 is coming from either the commodity sectors or sectors which are very specific facts, for example tariff increase. So, if you have any risk associated with any of the global factors, that is lower commodity prices and so on and so forth, a decent portion of the earning numbers on incremental basis could get cut. For example, in our numbers about 20 odd percent or 22% to be precise of the incremental profits of the Nifty 50 has actually come from the metal and mining sector, that has got nothing to do with economy to be honest with you, it is more to do with the fact that we have safeguard duties on steel, we should improve the profitability of the steel companies and higher aluminium prices.
Same way 16% incremental profit is coming from ONGC which again got nothing to do with the economy, it is coming because of higher gas prices. There are some risks with lower crude prices over there. Same way between Reliance and Bharti, about 17-18% of the incremental profits of Nifty is actually coming from these two companies tariff increases, again very-very sector and company specific factors.
So, at this point in time, we still have to wait for the good macro to transmit into micro. We have a lot of positive stuff going on over there.
Your note says, the first line says that the Indian market seems to be stuck. Help us understand that what can actually get Indian markets out of this particular zone because on the macro front, like even you have been highlighting a couple of these things are changing, the inflation coming down, we are in the rate cycle and from the earnings as well though the earnings were not that great, but not big disappointment indeed.
Sanjeev Prasad: A lot of good news to be honest with you because a lot of the good news is already priced in, whatever we are talking about macro is a very well-known fact, whether with respect to rate cuts, the market has more or less assumed another three to four rate cuts of 25 basis point each, so that is known; lower inflation; is known; lower commodity prices, at least oil does help a lot, so all that is known.
The question is whether we see any earnings upgrades on the back of a decent macro and that is where the challenge is coming. The immediate impact of this so-called improvement macro is actually a negative impact for large section of the market. Interest rate cut means it is actually negative for parts of the banking sector and depending on how much interest rates get cut, it could be negative to negative especially for some of the private banks or private bank in general who have a very large portion of their loan book linked to external benchmark rate.
Same way if you look at lower crude prices, fantastic for the economy as a whole and just to give you the math, every dollar per barrel is about 1.7-1.8 billion dollar saving for the economy, so that is a lot compared to last year average price of more like 79, but obviously the negative for something like ONGC.
So that is the whole issue over here, this good macro we all know, fine, it is a given and which is in a way supporting the market, but ultimately we are not seeing any great movement on the earnings part and if you look at earnings have been getting cut only for the last, if I look at from let us say the end of third quarter result season and the fourth quarter result season, we have seen about three odd percent earnings cut and so far it does not look like we are seeing any earnings upgrades for sure.
