Dear Investor,
In this edition we would cover the following
- Results and macros
- Global trade wars
- Uptick in private sector capex
- Flows
- Valuations
Results and macros
The quarter one result season has started. Few large IT companies and banks have declared their results. The results have been in line or slightly below reduced expectations in the case of IT. For banks also, the results have been on the weaker side. Brokers had a weak quarter as indicated in recent sector updates, while AMCs were relatively fine. However, market has been resilient with only small cuts seen on below expectation results. In the new tech space one result has come out and execution was better than expected.
Economic momentum appears to be sustaining. Both the services and manufacturing PMIs recorded strong readings in the month of June 2025. Crude prices continue to be below USD70, INR has been stable, Forex reserves have come close to all time high and trade and current account deficits are in control. In fact, in Q4, the country recorded USD13.5bn current account surplus (1.3% of GDP). Precious metals continue to hold strong.
Global trade wars
The past period was witness to rollout of duties for several countries by the US. Mostly, the duties were lower than Apr 2 levels and in some cases, significantly lower. Indonesia has settled for a 19% US import tariffs while Vietnam would see 20% import duties on its goods and 40% on trans-shipments. US has indicated that a potential Indian deal could be on the lines of Indonesian deal.
There have also been indications that the US aim to de-couple from China. It has proposed higher import duties on battery chemicals sourced from China. Also, US wants to encourage production of solar cells and panels in the US and has proposed an import duty. Indian battery chemical businesses and solar businesses which have manufacturing in the US are well placed.
Overall, duties should only modestly change the competitive advantages that one nation has over the other. They are not expected to materially alter the trade dynamics in the short term. While China+1 sentiment is strong, moving away from China is not easy. While some contours of Indian deal may be known by the time this comes out, it should be neutral to slightly positive for the country’s ability to support labour-intensive manufacturing for the US market. Duties on pharmaceuticals is another area of interest to us. If we look at our portfolios, our linkage to external facing businesses is very low. We have a solar company which has manufacturing in the US and a chemical company which may export batter chemicals. These exposures are well placed. We also have exposure to cables, an area where India has demonstrated export competitiveness. We would have to track this space for final outcomes but barring a no deal scenario, the impact appears manageable based on current information.
Our deals with UK and EU are progressing well. The deal with ASEAN, which has not been favourable for India, is sought to be re-negotiated. If we are able to improve the terms of trade, it could provide meaningful support to the Make in India initiative. In any case, the sentiment to de-risk from single country risk works in our favour.
Private sector capex is picking up
After a long while, corporate capex is picking up. Corporate capex of the listed non-financial space breached INR 11trn in FY25 (20% YoY), thereby outpacing the central government capex at INR 10.5trn. FY25 corporate capex spending pattern saw broad-based growth, wherein 157 corporates embarked on capex of >USD 100mn which is reported to be the highest number of companies since 2013, based on publicly available data. Public sector corporate capex growth (26% YoY) outpaced private sector capex growth (18%) in FY25.
- The Government’s fiscal deficit is expected to reduce further to ~4.4% of GDP which will not pressurize credit markets for funding private capex. Also, despite a falling fiscal deficit, the six-month government capex reached a record INR 7.5trn, supported by back-ended FY25 and front-ended FY26 expenditure, even though the FY26 budget outlay was underwhelming at ~INR 11trn. This early capex deployment may lead to a potential upward revision in the FY26 budget estimate, as was seen in the FY25 revised estimate.
- Monetary policy remained focused on supporting growth since Dec’24 when the first CRR cut of 50bps was announced followed by a slew of measures to boost liquidity in the system, including another 100bps CRR cut to be implemented in tranches over CY25, and 100bps of repo rate cuts implemented CY-TD.
Corporate Capex related credit could see acceleration
One of the key reasons for relatively slower, despite rising capex growth in the recent past, has been the elevated ‘cash flow from operations’ generated by the listed space vs capex (hit a cycle high of > 2x in FY21). However, despite robust CFO generation of INR 16trn in FY25, CFO / capex ratio dipped to 1.5x as capex growth outpaced CFO. This could eventually support a pickup in corporate loan growth, though we see continued focus by corporates on maintaining low leverage on balance sheets. System wide loan growth has been low and a pickup in corporate capex could provide some support there.
Flows
After Jan and Feb, which saw strong FPI selling on higher US bond yields, weaker INR and portfolio shift China, CYTD other months have seen FPI turning buyers. This trend appears to be supported by a more stable INR, softening bond yields, a weaker DXY, and ongoing trade developments which could offer incremental benefits to India. Among emerging markets, apart from India, only Brazil witnessed consistent FPI inflows during this period. Inflows after Feb have largely offset the outflows witnessed in that month. However, the Jan outflows of approximately USD 8.5 billion remain unrecovered. July is again seeing modest outflows. Mutual Fund inflows picked up somewhat in June after showing signs of weakness over the past few months
While flows have been there, IPOs, QIPs, PE sales and promoter blocks have been absorbing liquidity from the secondary markets. We had said that we should expect a period of consolidation in the market on this count. Companies with stable shareholding and no immediate fund raising plan and delivering strong financial performance, may be better placed in the market participation perspective, especially in contrast to periods of large liquidity event.
While promoter/ insider selling is seen as a warning signs on valuations, we are seeing much of the money raised come back into the market after a short lag. This indicates that promoters may be diversifying their holdings rather than exiting equity markets entirely. The sales are also providing a fillip to the real economy. Same effect is seen in PE sales where monies are returned to investors and again a new fund is raised. We think this activity is self-balancing and prevents bubble valuations.
Valuations have undergone a correction
Nifty is barely changed over the past one year while earnings have expanded by 8%. This points to a significant valuation correction over past one year. In a period when interest rates have declined and liquidity has improved, this may be notable. Markets like Korea and China have done relatively better. This is surprising given the export intensity of these economies and the global trade headwinds. Even during the past 3 months, India has performed lower than Korea, US, Taiwan, Indonesia, Singapore and Japan. Even over six month Indian performance has trailed most countries.
Given easier liquidity conditions, lower cost of capital and valuation correction, these factors may support a constructive environment for markets going forward. These conditions prevail globally and are tailwinds for risk assets.
We continue to believe that there are opportunities for differentiated performance at a stock selection level. Last quarter result showed relatively higher earnings growth in some of the newer segments we are exposed to, while IT, Banks, commodities, staples, etc which are better represented in the index. We expect an encore this result season also and hence believe that it is time for alpha.
May the Good Times Continue.
Happy Investing
Source: Bloomberg, MOFSL, RBI, NSE Indices, ICICI Securities, Kotak Institutional Equities, MOAMC Internal
Disclaimer: This article has been issued based on internal data, publicly available information, and other sources believed to be reliable. The information contained in this document is for general purposes only and not a complete disclosure of every material fact. These statements are based on current market conditions, which may change, and past performance is not indicative of future results. The Stocks/Sectors mentioned herein are for explaining the concept and shall not be construed as investment advice to any party. The information/data herein alone is not sufficient and shouldn’t be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. The views expressed above are those of the MD and CEO of the AMC and are based on current market conditions and informational purposes only and should not be construed as investment advice. The term ‘alpha’ is used in the context of broader market opportunities for differentiated performance through stock selection. It does not indicate or guarantee outperformance by any specific mutual fund scheme. All opinions, figures, estimates, and data included in this article are as of date. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses, and damages arising out of the use of this information. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on our current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance, or events to differ materially from those expressed or implied in such statements. This material does not compare or promote any specific investment product or strategy over others. References to investor flows or macroeconomic factors are for informational purposes only and should not be construed as market predictions or investment recommendations. Past performance may or may not be sustained in the future. Readers shall be fully responsible/liable for any decision taken based on this article. Investments in the securities market are subject to market risks, read all relevant documents carefully.
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