The month of February 2025 has brought a pivotal shift in India's monetary and fiscal policy direction. The new RBI governor kick-started a rate cut cycle with a 25bps rate cut after 2 years of stable rates. They also eased liquidity constraints, signaling a pro-growth approach. The Union Budget, while maintaining fiscal prudence, provided relief in income tax slabs. This potentially creates a base for a consumption boost of Rs.1 lakh crs. This, coupled with recent state government benefit transfers, upcoming 8th pay commission recommendations for government employees, and the expectation of a normal monsoon, can create a base for sustained consumption pickup after a subdued show over the last few years.

On the global front, Mr. Trump's Tariff Tantrum, immigration policies, stance on global warming, withdrawal of military support to Ukraine, potential exit from NATO, etc., have led to increased uncertainty on global trade and changes in political priorities. While it may take a few quarters for the policy uncertainty to resolve, the recent correction in DXY and cooling of US treasury yields provide much needed relief to the markets.

For Nifty 50 companies, Q3 FY25 Revenue/PAT (yoy) growth was 6%/6% vs. expectations of 8%/8%. Ex-financials, Revenue/PAT growth stood at 5%/7%. Metals, Pharma, Cement, Banks, and Telecom sectors saw earnings beating estimates. Discretionary consumption, Automobile, Energy, and Capital Goods sectors saw earnings missing estimates. Consensus EPS downgrades outnumbered upgrades during the quarter. IT services were the only sector that saw more upgrades for FY27.

Where are we in the cycle?
While the Nifty500 Index is down by 19%, the median stock in the NSE500 Index is down by around 33% from the peak. This signifies a larger correction in the small/mid cap space. This is also accompanied by sector rotation. The erstwhile outperforming sectors of Capital Goods, PSE, Realty, Energy, EMS, and Capital Markets have started to show signs of slowdown. Sectors like Financials, Consumption, Metals, Chemicals, and IT services, which have seen time correction over the last few years, have started to show strength on the back of an improving outlook. This bodes well for our AMC as most of our funds are overweight in these sectors which are showing signs of improvement.

As can be seen from the chart below, despite the recent correction, Mid Cap and Small Cap indices continue to trade at a premium to their 10-year average PE Ratio. The Nifty Index PE is close to its 10-year average. This, along with more pronounced earnings downgrades in the small/mid cap space, signifies a better margin of safety in Large Cap stocks. Accordingly, we continue to prefer large cap/asset allocation schemes over small/mid cap schemes to tide over the current volatility.



Multi-baggers Study:
While a top-down view helps in identifying the right investing themes, it's equally important to get the bottom-up framework right. This is where our study of multi-baggers over the last two decades comes in handy. We define multi-baggers as stocks delivering at least 10x returns in 10 years (i.e., 25% annualized returns). In the last two decades, around 15% of all stocks have crossed this hurdle. Almost 95% of companies have come from the small/mid cap universe. It's interesting to note that across sectors, there are some common traits of multi-bagger stocks. Almost all multi-baggers have seen profit growth higher than sales growth. This leads to ROCE improvement and consequent PE multiple expansion, as can be seen in the below table. This highlights the importance of investing in companies with durable and improving economic moats. A strong capital allocation framework is needed to generate higher cash flows on incremental investment.



Lastly, as the markets go through a phase of consolidation and sector rotation, it's important to have a balanced asset allocation. This goes a long way in achieving an investor's long-term return objectives while at the same time providing protection against drawdowns.

Happy Investing!
        Source: Bloomberg, MOFSL, ABSLAMC Internal Research

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