'Range-bound mkt healthy, earning recovery key'

Investors frequently enough wonder whether extended periods of stagnation in the Indian equity market signal underlying problems or potential opportunities. Recent insights from Sanjay H Parekh, Founder and CIO of Sohum Asset Managers, suggest that this phase of consolidation is not alarming but rather a foundation for more balanced valuations in the coming 12 to 15 months. As market participants seek clarity on earnings trajectories and valuation levels, understanding the nuances behind this market behavior becomes crucial. This article explores the evolving landscape of Indian equities, highlighting key sectors, valuation trends, and strategic portfolio positioning.

Understanding Market Consolidation and Earnings Outlook

According to Parekh, the current lull in the Indian stock market reflects a healthy correction phase rather than a downturn. Earnings growth is projected to be modest, around 10% for the current fiscal year, but is expected to gain momentum over the next two years. He anticipates earnings per share rising from approximately 1,100 this year to 1,300 in the next, and reaching near 1,450 by FY27-28. applying a reasonable price-to-earnings multiple of 20x,this translates to a potential market index level of about 29,000,offering an upside of roughly 11% from present levels. The critical catalyst for this growth will be the strength of earnings recovery, notably from the third quarter onward.

Portfolio Strategy: Emphasizing Stability with Largecaps

Sohum Asset Managers adheres to a disciplined growth-at-a-reasonable-price (GARP) investment ideology, allocating a notable portion-at least 70%-of their portfolios to large-cap stocks. This approach aims to anchor portfolios amid market volatility, leveraging the relative stability and liquidity of established companies. Parekh notes that volatility should be viewed as an chance rather than a threat, enabling selective entry into midcap and smallcap stocks when valuation gaps widen sufficiently. The firm remains cautious but vigilant, ready to capitalize on bottom-up opportunities should further market corrections occur.

Sector Preferences: Favoring Domestic Growth Drivers

The current sectoral tilt favors domestic-facing industries, reflecting confidence in India’s internal economic momentum. Key sectors with overweight positions include consumer discretionary, financial services including NBFCs, capital goods, logistics, and telecommunications. The cement sector is maintained at a neutral stance. This domestic bias aligns with the broader strategy of underweighting global exposures,as Sohum anticipates stronger growth prospects within India’s internal markets over the near term.

Midcap and Smallcap Opportunities: Valuation-Driven Selectivity

While Parekh acknowledges the attractive growth potential in certain midcap and smallcap companies,current valuations remain a barrier to aggressive investment. The firm is actively monitoring these companies but prefers to wait for a more favorable price correction before increasing exposure.this cautious stance underscores the importance of valuation discipline in capturing lasting returns from smaller companies,which tend to be more volatile but can offer significant upside when priced attractively.

Challenges in the IT Sector Amid AI Disruption

Sohum Asset Managers maintains an underweight position in the IT services sector, citing structural headwinds from the rapid adoption of artificial intelligence (AI). While AI is expected to enhance operational efficiencies, it concurrently threatens long-term growth prospects by potentially reducing demand for conventional IT services.Parekh projects a conservative compounded growth rate of 5-6% over the next three years for this sector.Given current valuations in the 20-22x earnings range, the firm finds limited margin of safety for investment at this time.

Market Outlook: Patience and Discipline as Key Drivers

Summarizing the investment climate, Parekh emphasizes the importance of patience and disciplined stock selection over aggressive market plays. Reasonable valuations are unlikely to materialize instantly but will emerge gradually through a combination of market corrections, earnings recovery, and selective opportunities. Investors are encouraged to focus on fundamentals and maintain a long-term viewpoint as the market navigates this transitional phase.

Vital Facts: Key Points to Remember

• Sanjay H Parekh is the Founder and CIO of Sohum Asset Managers.
• Indian equities are undergoing a consolidation phase expected to last 12-15 months.
• Earnings growth forecast: ~10% in the current fiscal year, accelerating in FY27 and FY28.
• Projected earnings per share: 1,100 (current year), 1,300 (next year), 1,450 (FY27-28).
• Fair market valuation estimated at a 20x P/E multiple, implying a potential index level near 29,000.
• Portfolio allocation: minimum 70% in large-cap stocks following a GARP strategy.
• Sector overweight: consumer discretionary, financials (including NBFCs), capital goods, logistics, telecom.
• Midcap and smallcap investments are valuation-dependent and currently selective.
• IT sector underweight due to AI-related structural challenges; expected growth 5-6% CAGR over three years.
• Market approach emphasizes discipline, patience, and selective stock picking amid volatility.

frequently Asked Questions

Q1: Why is the current consolidation in indian equities not a cause for concern? A1: The consolidation is viewed as a healthy correction phase that allows valuations to stabilize and earnings to recover, setting the stage for sustainable growth.

Q2: What is the expected earnings growth for Indian companies in the near future? A2: earnings growth is expected to be around 10% this year, with acceleration anticipated in FY27 and FY28, reaching earnings per share of approximately 1,450.

Q3: How does Sohum Asset Managers approach portfolio allocation during market volatility? A3: They maintain at least 70% allocation in large-cap stocks to ensure stability and selectively invest in midcaps and smallcaps when valuations become attractive.

Q4: Which sectors does Sohum currently favor and why? A4: The firm is overweight in domestic sectors such as consumer discretionary, financials, capital goods, logistics, and telecom, reflecting confidence in India’s internal economic growth.

Q5: Why is the IT sector underweighted in Sohum’s portfolio? A5: Due to the disruptive impact of AI, which may limit long-term growth in IT services, the firm projects modest growth and finds current valuations insufficiently attractive.