The festive season has started, and so has the earnings season! While the former is a certain bringer of joy, the latter can be quite a bummer - as it is truly being this time around! While just a quarter way through, a lot of the earnings have been below street estimates.
Markets in a Nutshell
The largely disappointing results continue to put pressure on the markets, which has been bogged down for three consecutive weeks now - losing half a percent last week, as the corrective phase continued.
While the benchmark indices initially showed signs of recovery, a lacklustre start to the earnings season and persistent selling by FIIs weighed on sentiment, turning the bias negative. A recovery in banking majors during the final session helped pare some losses though.
Sector performance was mixed, with Banking, Financials and Realty posting decent gains. However, Auto, Metals and FMCG sectors were the top losers. The broader indices reflected a similar trend, as the midcap index lost nearly a percent while smallcap closed slightly positive.
All Eyes on Earnings…
Amid all the noise from global macros to geopolitical stress, what truly matters for the markets, and hence stocks, and hence businesses, and hence investors is - earnings. The markets can dance to the tunes of news and events, but at the end, corporate earnings move the needle.
In line with this, our previous week’s piece was appropriately titled ‘All Eyes on Earnings’. Leaving all the froth aside, investors have been quick to be on the same page, and punish stocks posting disappointing results.
TCS and Infosys have both been bearing the brunt of weak results, and the same can be seen in sectors like Automobiles and FMCG too. Bajaj Auto was a notable one in that, witnessing a significant decline after its results, and appearing as one of the top five biggest losers.
…And on Continued Selling by FIIs
Another factor that we would like to take the opportunity to remind our investors about is the right call we made about FIIs selling. This is important, especially because the broad expectation post-US rate cut was of FIIs buying into emerging markets like India.
In one of our previous notes we had categorically stated:
While it is widely expected that the US Federal rate cut would mean more liquidity and eventually more inflows into the Indian equity market, we opine the inflows in theory may not be occurring as expected.
And since then it has been a constant selling act from the FIIs. We expect FIIs to continue selling till Diwali. We opine the valuations in Indian equities (especially where FII flows are usually seen) are still steep and hence no immediate and significant inflow is expected.
India Equity - Institutional Funds Flow Rs. crore
A counter argument is usually made that DIIs are buying what FIIs sell. We agree to the fact that DIIs are buying, however we are just half way through October, and despite the DIIs buying, we all evidently see the overpowering impact the selling has on the markets.
Furthermore, we also won’t align with the theory of sector based NFOs leading to a lot of liquidity being added to the markets and hence keeping the markets elevated. Reason being, investing is done when you see value, and not liquidity. A liquidity-backed scenario is simply not sustainable.
A Case in Point
While earnings have been disappointing, and stocks have been taking a beating, we reckon this also provides a good opportunity to
Reassess some of the investments made and take corrective action
Grab some good quality stocks at a discount, and
Average out on stocks which may be on the right track, but blipping in the interim.
From the Paterson PMS universe, Havells announced its 2QFY25 results. Healthy revenue growth was supported by high double-digit growth in cables and wires and Lloyds. However margins disappointed on account of volatile raw material prices, high-cost inventory consumption, and elevated marketing and advertising expenses.
While the result is being taken negatively, we are encouraged by (i) strong revenue growth in a seasonally weak quarter, (ii) progress on consumer electronics with strong sales from non-AC products, and (iii) the transient nature of cost pressures.
Despite the minor bump, there are enough signs validating our thesis of superior earnings and valuations stemming from strong underlying demand in cables and the overall movement towards consumer electronics through Lloyds.
What’s Next?
In the absence of any major triggers, the markets are likely to continue focussing on upcoming earnings for direction.
First, they will react to the results of banking heavyweights such as HDFC Bank and Kotak Bank
Later, companies like ITC, Hindustan Unilever, ICICI Bank, BPCL, HPCL, and Ultratech Cement will also announce their earnings
On the economic front, key high-frequency data such as the HSBC Composite PMI, HSBC Manufacturing PMI, and HSBC Services PMI are also expected.
Despite the ongoing positivity in the US markets, the Indian markets have been largely unresponsive, a divergence likely to persist due to continued foreign fund outflows.
Any change in the fund flow pattern would also be on the market’s radar.
Technically, Nifty may see some consolidation following three weeks of declines, but the outlook is likely to stay negative unless it decisively reclaims the 25,150 level. A sustained move above this could fuel a rebound, pushing the index towards the 25,500 zone.
On the downside, the 10-day exponential moving average (DEMA), currently around 24,470, serves as key support, and a break below this level could lead to a drop toward the 24,000 zone.
Sector-wise, IT, Pharma, and Metals continue to show strength despite the mixed trends, and the recent bounce in select banking stocks is promising, though its sustainability remains crucial.
We recommend maintaining positions on both sides, with a focus on risk management by adopting a hedged approach.
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