Primary Market Action Draining Liquidity from Small and Midcap Spaces: JPMorgan's Rajiv Batra

According to Rajiv Batra, Head of India, ASEAN, APAC, Ex-Japan/China Equity Strategy at JPMorgan, the current wave of initial public offerings (IPOs) and other primary market activities is depleting liquidity from the small and midcap sectors in India. Batra noted that while this might lead to a temporary cooling-off in these spaces, the situation also presents a potential opportunity for first-time and foreign investors to enter the market.

During an interview with CNBC-TV18, Batra discussed how market corrections, especially post-COVID-19, have been shorter and less severe. He encouraged retail investors not to chase rebounds, while stating that corrections provide ideal entry points for new and foreign investors who missed earlier rallies in the small and midcap sectors.

Batra highlighted India's significant outperformance in the global market, rallying nearly 660% over the past two decades compared to the U.S.'s 440%. He attributed this to India's strong earnings potential. However, he also acknowledged that the June quarter results were lackluster, and the upcoming September quarter might also underwhelm. Despite this, he expects earnings growth to rebound from the third quarter of FY25 onward.

JPMorgan forecasts a 12-15% earnings growth for Indian equities in FY25, with an uptick likely starting from Q3FY25. The central government's capital expenditure and a revival in the rural economy are seen as key contributors to this recovery. Batra also noted that the worst earnings downturn seems to have passed, based on the poor June quarter results.

Regarding the midcap sector, 52 out of 89 stocks experienced earnings downgrades in Q1FY25, while in the small-cap space, 40 out of 79 stocks faced downgrades during the same period. Despite these declines, Batra remains optimistic about the long-term growth prospects for India Inc.

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Interglobe Aviation Takes a Hit: Investec's 'Sell' Downgrade Signals 15% Slide

Shares of Interglobe Aviation, the parent company of IndiGo, fell by 2% to ₹4,784 on September 20, 2024, following a downgrade by Investec from 'hold' to 'sell.' The brokerage set a target price of ₹4,050, suggesting a potential further decline of 15% from current levels.

Concerns Over Valuation
Investec's decision stems from concerns about an "out-of-sync valuation" that overlooks significant margin risks. The firm predicts lackluster earnings growth for Interglobe over the next three years, particularly given the company's premium valuation in a highly competitive market.

Growth vs. Margin Sensitivity
While Interglobe boasts a substantial order book, which offers growth visibility, Investec emphasizes that this does not ensure earnings growth. The airline's heightened sensitivity to margins could pose challenges, impacting profitability as costs fluctuate.

Market Share Insights
Despite the downgrade, IndiGo's market share has shown resilience, growing to 62.4% in August after a dip earlier in the year. The airline flew approximately 8.19 million passengers that month, indicating strong demand despite broader market challenges.

Analyst Perspectives
In contrast to Investec, Motilal Oswal analysts provided a 'neutral' rating for Interglobe with a target price of ₹4,970. They highlight the airline's ambitious order for nearly 985 aircraft, including Airbus A350-900s, aiming to enhance operational efficiency and meet increasing demand by 2030.

Financial Performance Snapshot
In the June-ended quarter, IndiGo reported a 17.3% increase in revenue from operations, reaching ₹19,570.7 crore compared to ₹16,683.1 crore the previous year. However, the airline's profit experienced a 12% decline year-on-year in Q1 FY25, raising questions about future profitability.

Brokerage Coverage
Currently, 20 brokerages monitor Interglobe Aviation's stock. Out of these, 18 analysts recommend a 'buy,' one suggests 'hold,' and another has issued a 'sell' call, reflecting a divided outlook on the airline's future performance.

Conclusion: Caution Ahead
As Interglobe Aviation navigates through a challenging market landscape, investors should remain vigilant. The contrasting views among analysts highlight the complexity of the airline industry, where growth ambitions must be balanced against potential risks to margins and profitability.

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