Indian equities likely to stay buoyant next year; Pvt banks, capital goods, digital commerce to see strong earnings growth

The Indian equity markets remained resilient for a major part of CY 2024, despite challenges posed by sticky inflation, weaker than expected Q2FY25 earnings, general elections outcome, FII outflows and global geopolitical uncertainty. In calendar year 2024, bellwether indices – Nifty 50 and Sensex generated positive returns of 14.32% and 12.55% respectively. While indices related to different market capitalization – Large, Mid and Small represented by Nifty 100, Nifty Mid Cap 150 and Nifty Small Cap 250 were up by 17.80%, 27.60% and 30.71% respectively on an absolute basis. (Data as on 13th Dec 2024).

For the coming year, we expect heightened trade friction, problems in China to continue and global situations to put pressure on the fiscal positions of major economies. In the advanced economies, the focus of policy could shift away from inflation control to job creation and unemployment is likely to be closely tracked. India seems to be no exception to the heightened volatility around, and currently appears to be relatively insulated against global shocks like tariffs levied post change in US Presidency. Various key sectors are poised for a substantial growth, even as the broader economy shows signs of moderation.

The Indian economy has shown positive indicators, including an uptick in Goods and Services Tax (GST) collections and favourable Kharif crop sowing numbers. Rural demand has strengthened, with the Purchasing Managers' Index (PMI) and exports showing positive momentum. Headline inflation in India is expected to average 4.2% year-on-year in the 2025 calendar year, with food inflation at 4.6%, thanks to adequate rainfall, and good sowing of the summer crop. Food supply shocks due to weather-related disruptions remain the key risk to this forecast.

The central bank though has reduced the expected growth rate – India's real GDP growth estimates for FY25 at 6.6% from 7.2% earlier. The decelerated growth rate is, in part, because public capital expenditure growth is declining. The Indian central government’s capex growth declined from 30% year-on-year CAGR between 2021 and 2024 to mid-single digits growth in nominal terms in 2025. Having said that, we expect the structural long-term growth story for India remains intact driven by favourable demographics and stable governance.
Given our view, we expect the following themes / sectors to work in the coming year:

Capex Cycle Revival
India is in the midst of an important, multi-year capital expenditure (capex) cycle, which is expected to provide a strong foundation for future economic growth. Both the central government and listed corporations are expected to increase their investment in 2025. Corporate order books are expanding across various sectors, and the number of ongoing projects has reached its highest levels since 2017. Private sector investment is projected to hit a decadal high of INR 55,122 billion, indicating a broad-based growth phase that could accelerate in the coming years.

Financial Services – Private Banks
The financial services sector in India is showing promising resilience, with a narrowing gap between bank credit growth and deposit growth, which is expected to ease margin pressures. The banking sector, in particular, has posted strong return ratios and improving capital adequacy levels, reducing the need for fresh capital infusion. Valuations of private sector banks are reasonable compared to the broader market, suggesting stability and long-term potential.
Information Technology

India's IT services sector is set to experience a sustained growth trajectory, driven by increasing investments in emerging technologies such as Artificial Intelligence (AI), blockchain, and cybersecurity. Cloud services are expected to see continued demand, positioning India as a significant global player in the technology ecosystem. The rise of generative AI is expected to be a major growth driver, with demand projected to grow 15-fold between 2022 and 2027, presenting a significant opportunity for Indian tech companies.

Healthcare and Pharma
Healthcare spending in India is poised for continued growth, supported by rising per capita GDP and an aging population. India, being a major producer of pharmaceuticals and vaccines, is well-positioned to meet the growing global demand for healthcare services. The country is also emerging as a preferred outsourcing destination, particularly in Contract Development and Manufacturing Organizations (CDMOs), as companies look to diversify their supply chains away from China. Indian CDMO market currently at $22.51 bn (2024) is expected to grow to $44.6 bn by 2029, at a CAGR of 14.7%. Medical Tourism growth is expected to exceed pre-pandemic levels while hospitals and diagnostics are expected to grow steadily. Additionally, the market for small molecule drug discovery is expanding, with notable increases in R&D spending that are expected to bolster the pharma sector further.

Capital Goods
The capital goods sector, which includes sub-sectors like electrical equipment, plant equipment, and mining machinery, is benefiting from the government's higher infrastructure spending and initiatives like the Production Linked Incentive (PLI) scheme. These investments are expected to boost manufacturing capabilities and strengthen the overall industrial base, providing further growth potential for India’s capital goods market.

Quote by Rajesh Bhatia, Chief Investment Officer – ITI AMC
“Indian equities are expected to perform strongly in the coming year. In the short term, though, slowing economic growth, high starting valuations, and weak earnings-per-share revisions could keep markets rangebound. We believe that sectors like Private Banks, IT, Digital Commerce, Capital Goods & Pharma, etc. may have a clearer path to stronger earnings and are expected to perform well.”