Nifty Could Double Gains In Five Years, Says Alchemy Capital's Alok Agarwal

India's benchmark stock index, the Nifty 50, may witness double gains in the next five years if the domestic nominal gross domestic product, or GDP, grows at 11–12%, according to Alchemy Capital Management Pvt.'s Alok Agarwal. He expects a 15% increase in corporate earnings to drive the growth.

Cyclical stocks will lead the benchmark indices in the next five years, the head of quant and portfolio manager at Alchemy told NDTV Profit. These include defence, industrials, railways, and power. According to him, these stocks have seen remarkable recovery due to the government's thrust on infrastructure and capex, as well as an improving demand trajectory after being "butchered" on Dalal Street for over a decade. Agarwal is bullish on them.

"Even if we look at the earnings growth of the benchmark in the next two years, the growth is estimated to be around 15% annualised. And cyclical stocks can report a growth of 20–25% during this period, against the 15%."

While investors seem optimistic about index-heavy financial stocks, Alchemy Capital does not hold a bullish view for the sector, as it is more of a hangover of the pre-Covid era, he said. "The trinity of higher growth, higher margins, and lower credit costs is difficult to achieve going forward."

"The deposits are not coming through at the pace they should. If interest rates are raised, the margins will suffer; if not, they (the financial sector) are unable to raise deposits and can't grow much. So that Goldilock situation for the trinity is not there," Agarwal said.

The financial sector is already "over-owned, and the valuations are not cheap" for the financial stocks. An increase in non-performing assets and a decline in profit from unsecured lending will be key monitorables in the future, according to him.

Business-to-business lending will usher in better growth than business-to-customer lending, as capital expenditure is picking up at a faster pace, Agarwal said. On the other hand, retail lending is not likely to pick up, especially in the consumer space, as the sector is on the verge of a K-shaped recovery where earnings growth is tapering down, he said.

Alchemy Capital is optimistic about real estate from a long-term perspective, despite its underperformance lately.

The portfolio manager attributes the sector's buoyancy to higher demand in the premium segment, along with improvements in discretionary spending and standard of living. "We are not bullish on the sector because it has underperformed in the last 15 years. But things are around the corner for real estate, and much higher growth is expected for this sector in the long term."

Agarwal is also bearish on large-cap consumer and information technology companies, estimating an 11–12% earnings growth against the 15% growth in the benchmark indices over the next two years, largely due to uncertain global macros in the US and sectoral rotation.

Hence, it is important to focus on corporate earnings and company outlook when investing, rather than having biases for stocks, he said.

As for the recent sell-off by foreign institutional investors, it is temporary. According to post-general election results, the markets are likely to show positive momentum in the next six months, Agarwal said.