Indian stock market is set to continue its bull run powered by earnings growth and normalised monsoons which will boost consumption, according to Siddhartha Khemka, senior group vice president and head of research broking and distribution at Motilal Oswal Financial Services.

In an exclusive conversation with Benzinga India, Khemka pointed out that strong gross domestic product growth and continued government capex augur well for the market.

Regarding the high valuations in the market, Khemka said to focus more on earnings growth than valuation. Here are the edited excerpts from the conversation:

What are your expectations for the coming quarter? The markets have been making all-time highs despite seeing a correction on June 4.

Markets have hit all-time highs after return of the government, which ensures policy continuity and continued momentum for GDP growth. In FY24, the GDP growth was more than 8%. The expectation is at about 6% to 7% for this year’s GDP growth. Global markets are also at an all-time high. They are also coming out of an economic slowdown and inflation has eased.

Although there has been a delay in the U.S. Fed's rate cut from two or three cuts this year to just one cut. The expectation for next year is for three to four rate cuts. The corporate earnings in US markets have been strong so that is also driving the US markets.

For FY25, we are expecting an earnings growth of 15% to 16% on a high base of FY24. On a one-year forward PE (price to earnings), Nifty is trading at 20.5 times. The 10-year average is around 20x, so we are marginally above that. So in terms of valuation, Nifty is not that high and with earnings growth, policy continuity, above normal monsoons would help ease inflation and drive consumption, especially in rural areas.

Finally, FIIs (foreign institutional investors) have been selling in the last couple of months. Once the interest rate cuts start, FIIs are likely to come back and gradually start buying. so these are the factors based on which we believe Market momentum would continue for the next three months or six months.

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Will the government's focus on consumption after the election verdict affect the funding for PSUs, railways and infrastructure?

I don't see government capex spending slowing down. The first decision that the government has taken is to build 3 crore houses under PMAY (Pradhan Mantri Awas Yojna). Recently they gave orders for ₹45,000 crore defence helicopters. Since the election is over, the government will start working on a lot of infrastructure projects.

I don't think the government will worry much about consumption because aggregate demand is improving. Companies are taking price hikes. The government's priority remains in capex for capacity building.

Does the expensive valuation cause problems for the investors?

While Nifty is trading at comfortable valuations, some of the sectors have moved up sharply in a short span and are currently trading at high valuations. If you are looking for fresh entry into some of these sectors, then I would certainly advise some caution or better wait for any correction as an opportunity to enter.

Overall, I would focus more on earnings and sectors which have high earnings outlook. In this regard, auto stocks, banking financials, and capital goods are showing good earnings growth. Cement also has decent earnings growth of 14-15%. We are seeing strong growth for consumer durables with 30% to 40% growth this year. Metals also on a low base would have strong earnings growth.

The earnings growth is weak among chemicals. For IT we are expecting a 12% earnings growth in FY25 compared to 4% in FY24. So there are not many sectors that you can avoid because the overall growth trajectory is decent.

Is private sector capex picking up?

There are some signs it is picking up. But this year it will mostly be government capex doing the heavy lifting. Some of the companies are doing capacity expansion. Especially auto and cement companies. Companies generally start planning for the expansion once capacity utilization reaches 75% to 80%.

The orderbook of capital goods or infrastructure companies also gives indications of whether capex is picking up. If you look at some of these companies like L&T, ABB, and Siemens, they are seeing a good inflow of orders.

What do you make of the SIP Inflows? Data shows retail investors were trying to buy the dip on June 4.

It's a smart and right thing to do. We have been saying that retailers should buy on panic days and not sell. The efforts from AMFI (Association of Mutual Funds in India), SEBI (Securities and Exchange board of India) and AMCs (asset management companies) to educate the retail investors in the last so many years have started to pay off. They are now putting money in equities in a guided way, through a fund manager.

They are not buying for two or three days. They are buying with an investment horizon of five to ten to 15 years. If an investor can add some positions during the dip, they get units at 5% to 6% down which would help in the overall growth. It shows the maturity of the Indian retail investors of not selling on panic days.

I don't see SIP (systematic investment plan) inflows slowing down. Retail penetration in India is still around 4-6%. With more financial awareness more people would come into equities. Fixed deposits can no longer beat inflation. So mutual fund inflows are only going to increase on an aggregate basis. We have around 15 crore demat accounts now. It is expected to double in the next four to five years.

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