Why Rupen Rajguru sees further upside in Indian equities and which sectors could outperform

The sharp recovery in Indian equities over the past month has improved investor sentiment, but Rupen Rajguru, Head of Equity Investments and Strategy at Julius Baer India, believes there is room for the market to rise further. His optimism is backed by an improvement in corporate earnings, broader participation in the earnings recovery and the possibility of upward revisions to growth estimates.

In an interview with CNBC-TV18, Rajguru said India's earnings growth had become more widespread, with companies across most sectors reporting double-digit growth in the second quarter. He also identified aviation, oil marketing companies (OMCs), consumer-related businesses and cement as potential beneficiaries of lower oil prices. Within cement, he sees better relative opportunities among companies based in southern India.

Why Rajguru believes the market rally has further room to run

The improvement in Indian equities over the past month has been particularly significant for foreign portfolio investors (FPIs). Rajguru pointed out that the Nifty had gained around 14-15% during this period, while the rupee had appreciated by approximately 3%. This translated into returns of nearly 18% in dollar terms for overseas investors.

He said India had been an under-owned and relatively undervalued market from an FPI perspective a month earlier. The shift in global investment sentiment, including developments in the US following the Democratic win and the possibility of a slowdown in the AI trade, had also helped Indian equities.

However, Rajguru believes the more important factor supporting the market is the improvement in corporate earnings.

According to him, aggregate earnings growth in the second quarter was upwards of 20%, based on the results declared at the time of the interview. More importantly, the growth was not restricted to a handful of sectors. Almost every sector, barring one or two, reported double-digit earnings growth.

Around 45% of companies had also beaten earnings estimates, raising the possibility of further upgrades. Rajguru pointed out that the second half of the earnings season in India is typically stronger than the first half. Operating cash flow (OCF) growth was also upwards of 20%.

These indicators have led him to revise his earnings outlook upwards. At the beginning of the year, consensus estimates pointed to earnings growth of around 14-15% for the current year. Rajguru believes this could now move closer to 18-20%.

What kind of returns can investors expect from the Nifty?

Rajguru's market outlook is based on the relationship between economic growth, corporate earnings and index returns.

As a broad rule of thumb, he said index growth tends to be linked to nominal GDP growth, which he estimated at around 10-11%. However, companies listed on the stock market could perform better than the overall economy, allowing for growth of around 12-13%. He described this as the average trend line for the market.

He believes the Nifty could deliver somewhat higher returns over the next two to three years because of its underperformance over the preceding two years. According to Rajguru, the index had delivered zero or negative returns over that period. This creates scope for a catch-up, potentially adding a couple of percentage points to the underlying growth trend.

However, investors should not assume markets will move upwards in a straight line. Rajguru pointed out that just as the market had risen 15% in a month, negative developments could trigger a correction of 5-8% over a similar period.

Despite this volatility, he believes investors should remain invested rather than attempt to time every market movement.

"The rally over the last month has once again proved that you have to be invested in the market," he said, adding that investors could miss a sharp recovery if they remained on the sidelines waiting for the right opportunity.

Which sectors could benefit from lower oil prices?

Beyond the broader market outlook, Rajguru identified aviation, oil marketing companies and consumer-related businesses as potential beneficiaries of lower oil prices.

These sectors could gain because their costs or input expenses are closely linked to crude oil prices. Lower oil prices could therefore provide some relief to their operating costs.

He also sees an opportunity in cement, a sector that has underperformed the broader market.

Cement companies reported robust double-digit volume growth in the second quarter. However, higher input costs weighed on EBITDA growth, preventing the improvement in volumes from translating into stronger profitability.

Rajguru believes lower oil prices, which could ease some of the input cost pressures faced by cement manufacturers, along with price hikes, could improve the sector's prospects. The combination could support better profitability and help cement companies recover from their recent underperformance.

Why South-based cement companies could outperform

Within the cement sector, Rajguru prefers companies based in southern India, where he sees greater scope for price increases.

He pointed to two developments that could improve the industry's pricing environment.

First, despite consolidation in the cement industry, pricing competition has remained intense. Rajguru said two broad groups now own the majority of the country's overall cement capacity.

One of these groups, which has been relatively aggressive on pricing, is now also focusing on profitability, based on the company's channel checks. He believes this change in approach could help improve pricing conditions across the industry.

Second, cement prices in southern India remain significantly lower than those in other parts of the country. This disparity gives South-based manufacturers greater scope to raise prices compared with their peers in other regions.

While Julius Baer India remains positive on the industry's pan-India leader, Rajguru believes some niche cement companies in southern India could deliver relatively better outperformance.

Their potential advantage, therefore, lies in the greater headroom for price increases as the industry's pricing environment improves.

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