Outlook for FY25 and key learnings from FY24 | Niveshaay Investment Advisors

Performance of smallcases in FY24

All of our smallcases have yielded commendable results in FY24, as well as the Smallcap Index. FY23 was not great for small caps, and many companies were available at reasonable valuations last March. We started FY24 by guiding all investors to make lump sum investments to reap the benefits. Following that, there was a great rally in overall mid and small-cap companies.

The small-cap index has demonstrated a 75% return over the past year. And all of our smallcases have performed better than the indices.

*Note: These are factual return information and should not be seen as advertisement or promotion.

Investment Strategy followed for smallcases in FY24

Since our inception, we have been focussing on sectors and industries that could provide high growth rates in terms of revenue, earnings, and cash flow. This could be due to industry-wide healthy tailwinds or the turnaround of a particular company. In the past few years, the number of opportunities available to invest within a particular sector/industry has increased considerably. We have also taken a basket approach in some situations to maximize the potential of the opportunity and diversify within a sector.

We are bullish on a few themes, and we also have thematic smallcases. In these smallcases, our focus is completely on profitable and high-growth companies. We have also launched a thematic smallcase called the “Niveshaay Consumer Trends Portfolio,” and we believe the discretionary consumption theme is going to perform well in the next decade.

Market Trends & Themes which took the spotlight in FY24

Our investment strategy center’s on targeting high-growth sectors poised to outperform, driven by favorable industrial conditions. The themes that worked well for us include transition towards green energy, increased government spending, efforts towards indigenization, import substitution, and the ongoing China Plus One trend. Sectors like Renewables, Capital Goods, Defence, Electronics are particularly influenced by these dynamics. 

Rising trend of China Plus One and increased focus of the government on domestic procurement in the defence sector has helped our portfolio companies like HBL Power and Centum Electronics in a big way.

FY24 was a game-changer for the Indian renewable space. We witnessed a huge surge in renewable sector activities, including a turnaround in the wind sector and significant government capital expenditure boosting the earnings of Sanghvi Movers. Within the consumer discretionary space, the premiumization trend is thriving, supported by projections of a substantial expansion in India’s luxury market by 2030. Our engagements with industry stakeholders across various sectors, including real estate, electronics, automobiles, and branded apparel, confirm the increasing demand for premium products over their affordable counterparts. These trends instilled confidence in our investment in ‘KDDL’

Sectors and Industries to track in FY25

Favorable government policies, increased capital expenditure, indigenization, import substitution, and the “China Plus One” trend continue to influence sectors such as capital goods, defense, electronics, renewables, and textiles.

We are optimistic about the consumption sector due to its pivotal role alongside manufacturing in propelling growth within any nation. Factors such as the government’s dedication to sustainable development, the bolstering of manufacturing, ongoing structural reforms, the considerable presence of middle-income earners, and a sizable youth demographic are recognized as key drivers for medium-term growth, ultimately leading to increased consumption.

 The power sector is witnessing a substantial rise in investment, both internationally and domestically, driven by the energy transition towards renewable sources. This shift, which hasn’t occurred in many years, represents a significant and robust trend. The transition to renewable energy is a major theme.

Potential shifts in sector allocation one can expect in FY25 compared to FY24

Despite some recent corrections in small and mid-cap companies, the overall market has shown no signs of slowing down. It appears that certain micro-cap stocks are currently overvalued, indicating the necessity for caution when making investment decisions. As we enter FY25, it is imperative to exercise greater care in our investment selections and to give proper consideration to valuations and growth trajectory.

We anticipate that the momentum in the same sectors’ business will persist, and it will require diligent effort to identify further opportunities within these sectors.

Our outlook for FY25 remains cautiously optimistic underpinned by strong economic growth, reducing inflationary pressures, potential rate-cut cycle in the second half and resilient earnings trends. 

Various risks foreseen for the Indian markets

Political stability is one of the main reasons for the high-growth environment in the country, and we are confident that the current government will continue, and upcoming elections will not affect the strong government business policies.

Additionally, as central elections are approaching, we may witness some slowdown in order book inflows in many sectors. However, we anticipate that this will recover again. 

It appears that some micro-cap stocks are overvalued, and caution is warranted when selecting investments. The raid on the Dubai operator, coupled with the last date of advance tax payment and regulatory changes by SEBI for mutual funds, has led to a correction in the market.

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Investments in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.