Caution advised on high-PE stocks amid market optimism: Deepak Shenoy

"We do not seem to see a stagnation in earnings growth, 14% is quite decent for the Nifty 500 as a median number and I also believe that a lot of revenue growth at least for the domestic story is up ahead of us from a perspective of increased consumption because perhaps of the tax cuts which are applicable from April onwards and also because of lower interest rates which are applicable again from April," says Deepak Shenoy, Founder, Capital Mind.
ADVERTISEMENT What is your current view on the markets because though we are witnessing the global uncertainties and that has been a course for the day, and day in and day out we get to hear from President Trump as well, but back home the earning season has not been that disappointing so far, so help us understand what do you make out of it.
Deepak Shenoy: Yes, the big thing, the problem right now has been the uncertainty from tariffs, from geopolitical situations, both India-Pakistan and perhaps complexities in the Israel, the Middle East and in Ukraine and Russia as well. On top of that you have got other uncertainties which are slowly evening out in terms of whatever our earnings situation is. Now, if you look at overall Nifty 500 earnings so far, the median earnings have grown about 14% which is actually not bad at all, 350 companies odd have put out their results.
So, we do not seem to see a stagnation in earnings growth, 14% is quite decent for the Nifty 500 as a median number and I also believe that a lot of revenue growth at least for the domestic story is up ahead of us from a perspective of increased consumption because perhaps of the tax cuts which are applicable from April onwards and also because of lower interest rates which are applicable again from April.
So, it will take us about three or four months for the rates to trickle down to corporate borrowing rates, to domestic retail borrowing rates as well, but that will also drive up more consumption, more revenues therefore for companies going forward and perhaps some more capex as well. So, India as a country remains quite strong from that perspective. There are some worldwide headwinds in terms of world interest rates going up in terms of yields. So, you are seeing American 30-year yields flirting with 5%, Japanese 40-year yields at 3%, even yields in Germany and in UK going up so that has an overall broad macro-ish concern. But I mean, India is in a much better situation than most of the rest of the world and perhaps what India was also maybe six to eight months ago.
ADVERTISEMENT Now, while you did speak about how India is resilient and you spoke about the consumption space as well, I want to understand, like we are five months into 2025. Are you seeing any signs of sector rotation? Which pockets are losing steam and where is leadership emerging from?
Deepak Shenoy: So, clearly, we have had a sector fall in terms of both to a certain extent pharma but very largely it, so it has not recovered meaningfully. Banks on the other hand have recovered quite meaningfully since the Feb and the April rate cuts. We have had some NBFC start to come back as well. Not all of them, but some. We have also seen FII resurgence in May, which is the first time we are actually seeing any kind of inward flows, so net about 10,000, 15,000 crores in May but it is actually quite reversal from the first few months of the year. Overall, the sector rotation, we have started to see a lot of the mid and smallcaps recover quite sharply from the Feb lows.
ADVERTISEMENT We are seeing this overall as market cap based, but we are seeing some of the domestic manufacturing and industrial plays start to demonstrate much better both in terms of earnings, in terms of stock price movements, a better performance, and also better economic outlays for the future. So, every few months there will be something new that kind of comes and takes the charge, but domestic consumption in terms of the large FMCG names I do not think there is a meaningful recovery over there yet and because of their pricing and their valuations being very high compared to their growth, they continue to be a little bit more suspect in terms of taking the bet on them going forward, but industrials, manufacturing, defence these continue to remain good interesting themes for us to look at going forward. You are going to be very happy for the next six months because there is still a lot of uncertainty, tariffs, there is deals that are coming up, there is perhaps the end of these wars that are happening and when we see the end of the wars, when we see the tariff thing kind of uncertainty go away, that is when the markets will be more happy.
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But given the fact that some of these companies and if I can name one is Dixon Technologies, when we talk about that company what a multi-bagger it has been, we are all aware about the growth and the kind of business that the company is doing and not just that, even delivering but the valuations are a bit of a concern. Do you believe now is the time wherein such high PE companies can also take a bit of a backseat because they have been richly valued and very well appreciated by the market participants as well. What is your take?
Deepak Shenoy: No, every company will go through a phase of very high momentum and then perhaps high expectations. Sometimes, it is up to the company to meet those expectations. Now Dixon as a company I would not comment on any individual stock, but every of these companies have perhaps looked at high valuations in the past as well. Some of them have actually outperformed those numbers and in terms of growing fast enough so that you can justify those PEs. In other cases, the stock prices have corrected to reflect lower levels of growth as well.
ADVERTISEMENT So, to a certain extent we should look at some of these things from a perspective of can they do that kind of earnings growth that they are expecting and overall the last three months have been kind to the pack because, because of the tariffs, because of all of this stuff it becomes more evident that we have to make more of this stuff in India, for India so that kind of reinforces the message going forward. So, there is perhaps more happening than what is just currently visible to us.
So, at some point that may provide an upward surprise, but short of that you are going to always have to be careful when you buy high PE companies, that any negative news can hurt them a lot more disproportionately than a company that has reasonable PE.
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