Dhiraj Relli, MD & CEO of HDFC Securities, has provided a cautiously optimistic outlook for the Indian stock market in 2025, citing that the Nifty 50 valuations suggest only modest upside potential. He highlighted that large-cap indices are likely to offer better risk-adjusted returns than mid-cap and small-cap stocks, which have already experienced significant rallies in recent years. The re-entry of foreign portfolio investors (FPIs) into the Indian market is contingent upon an improvement in corporate earnings growth, which may become clearer after the Q3FY25 results.
2024 Review and Advice for Investors
In his interview with Livemint, Relli summarized 2024 as a year where the Nifty 50 and Sensex rose by nearly 10%, followed by a 10% correction from their September highs. The mid-cap and small-cap indices outperformed with gains of 25% to 29%. Strong GDP growth, resilient corporate earnings, and moderating inflation were the key drivers behind this performance. However, Relli cautioned that despite the strong performance, the market is entering 2025 with high valuations, and the latest quarterly results failed to inspire.
He advised investors to conduct an asset allocation review and trim overvalued stocks while being cautious about getting carried away by the IPO mania. He also suggested that if the equity portion of the portfolio exceeds the planned allocation, profits should be taken.
Nifty’s Outlook and Foreign Investor Sentiment
Relli indicated that the Nifty 50 is currently trading at about 23 times FY25 earnings, with a modest upside potential for 2025. He believes that FPIs may stay on the sidelines until they see clearer signs of earnings growth in Indian companies, especially after Q3FY25 results. Local buying alone is unlikely to lead to a significant market recovery, and investors should be cautious about expecting sharp gains in the short term.
Sectors to Watch in 2025
Relli noted that while India’s economic growth remains strong, some sectors are facing rich valuations. Chemicals, Autos, and Consumer sectors are currently overvalued compared to their earnings expectations for the coming quarters. He prefers large-cap stocks for their better valuations, while mid-cap and small-cap stocks may face more challenges in the near term due to already-high valuations.
Indian and Global Macroeconomic Expectations
Looking ahead, Relli expects India’s GDP to grow at a rate of 6.5% to 7% from 2024 to 2026. He also expects moderation in global GDP growth, particularly in major economies such as China, US, Germany, and Japan. He anticipates CPI inflation in India to be around 4.8% for FY2025, with further softening expected in FY2026.
Investment Strategy and Stock Picks
In terms of stock picks, Relli’s preferred sectors for 2025 include Banking, Financial Services, Insurance (BFSI), Industrials, Cement, and IT. He recommended stocks such as Hindustan Unilever, Bajaj Finance, Mahanagar Gas, Reliance Industries, Sun Pharma, Sobha Developers, and State Bank of India as part of a long-term investment strategy.
On the other hand, Relli remains cautious about sectors like automobiles, consumer staples, mid-cap IT, chemicals, and small banks, suggesting that these segments may face continued challenges due to overvaluation.
Retail Participation and Discount Broking
With an increase in retail participation in equity markets, Relli noted the growth in the discount broking business, particularly through platforms like HDFC SKY. The platform has witnessed a surge in users and trading volumes, with recent offerings such as no-cost ETFs, margin trading facilities, and a simplified IPO investment process. Despite this growth, Relli emphasized the importance of informed decision-making, especially for investors participating in speculative sectors like small-cap stocks and IPOs.
Caution on Small-Cap Stocks and IPOs
Relli warned about the enthusiasm surrounding small-cap stocks and IPOs, drawing parallels with the 2007 market and the dot-com bubble. Many small-cap companies have seen their valuations soar without significant improvements in their business fundamentals. He cautioned that retail investors, driven by FOMO (fear of missing out), often enter these markets without sufficient research, which can lead to significant losses when market sentiment shifts.
Disclaimer: The views and recommendations mentioned are those of the individual analyst or brokerage firm and may not necessarily reflect those of HDFC Securities.
