While such valuations could be justified by high earnings growth, actual EPS performance has been disappointing. FY25 started with expectations of 15% earnings per share, but ended at 3.4%. This year’s projections have been revised down to around 7%, implying modest returns at best. Given this context, Venkatesh believes meaningful gains from the broader indices are unlikely, although individual stocks could still provide opportunities.
“So the earnings have been revised upwards. The same goes for the third quarter, while on a quarter-on-quarter basis the EPS growth may decline a little less and in the fourth quarter there will be an improvement, but these have already been factored into the numbers. I mean, it’s not like the numbers for the index as a whole are being revised upwards and please remember that banks are almost 30% of the index,” he said.
The earnings revaluation appears moderate, especially as banks make up around 30% of the index. While banks’ earnings have slightly exceeded expectations, the broader EPS trajectory remains flat, making double-digit EPS growth unlikely this year. Overvalued sectors include pharmaceuticals and NBFCs, while Venkatesh remains underweight in infrastructure, defense and certain industrial sectors. Metals, meanwhile, are neutral.
On the energy front, the recent US sanctions on Russian oil companies have caused crude oil prices to rise, negatively impacting refiners like Reliance but benefiting upstream producers like Oil India and ONGC, favoring Oil India in a scenario of rising oil prices.
On the IT front, Venkatesh warned that IT growth in large companies will remain limited (~5%) due to factors such as AI-driven deflation. Mid-cap IT names such as Coforge may show stronger growth (15-20%), but large-cap gains are already priced in, justifying a neutral stance. He prefers domestic consumption, especially in cars and catering. In automobiles, Maruti Suzuki and Mahindra & Mahindra are top picks for four-wheelers, while Hero MotoCorp and TVS Motor lead in two-wheelers, driven by strong demand and adoption of electric vehicles. For the hospitality industry, Leela and Ventive are preferred due to strong demand and underinvestment in hotel supply. “Consumption is strong and there is gross underinvestment when it comes to hotel infrastructure in India. So while demand is growing at 8%, supply is only growing at 5%. So we remain very bullish on hotels. The problem with hotels is that everyone is always scared when the new hotels come online,” he said.
On IPOs, Venkatesh noted that market exuberance and rapid revaluations indicate expensive valuations, supported by mutual fund inflows despite FII sales. Finally, on financial services, he has moderated his previous negative stance but remains cautious. He is waiting for full earnings results before potentially adjusting sector allocations.
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