Daily Voice: Don’t short IT after sharp fall; bullish on banks, auto, chemicals, says HDFC Tru’s Uniyal

Pranab Uniyal is the Head of HDFC Tru (Investment Advisory)

• Don’t anticipate a long-term structural threat to India’s textile sector
• After steep fall, don't try to short IT sector at these levels
• Bullish on large banks, auto, chemicals

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HDFC Securities institutional team is currently neutral on IT sector. But "we would not try to short the sector at these levels," said Pranab Uniyal, the Head of HDFC Tru (Investment Advisory) in an interview to Moneycontrol.

His preferred sectors include large banks, auto, chemicals, insurance, real estate and capital goods.

According to him, valuations for the mid and small-caps are still at a significant premium to large-caps as well as their own historical averages.

"While the balance sheets of small caps have improved materially and a revival in earnings is expected for the small-caps in FY27, he maintains near-term preference for large-caps over mid & small-caps, given the better risk-reward and higher margin of safety.

Do you see a major risk for Indian IT companies due to the renewed AI disruption fears that have surfaced again? Does this mean it is better to stay away from the sector for now, or should investors continue accumulating quality stocks during every major decline despite these recurring AI disruption concerns?

This question has been on investors' minds a lot. Indeed, the sell-off in IT companies has been a global phenomenon. Overall, we do expect AI to replace a lot of mundane jobs.

However, Indian IT companies would be important for implementing many of these enterprise-wide solutions and associated activities like integrating AI with legacy systems and training. These projects could present a reasonable revenue opportunity. Our institutional team is currently neutral on the sector. We would not try to short the sector at these levels.

After the EU and US trade deals, do you think expectations of an earnings recovery are supporting market?

The recent trade agreements with the EU and US have acted as a significant tailwind, however, a run of stronger-than-expected corporate earnings performance in Q3FY26 is lending near-term support to domestic equities. Also, the earnings downgrades cycle for Indian equities is moderating and the market is now expecting a new earnings upgrade cycle to begin soon.

Moreover, renewed portfolio buying by the foreign investors has also kept the market sentiment strong. FIIs February net inflows are at $2.1 billion (versus January net outflows of around $4 billion), marking a material turnaround after three months of heavy selling.

Do you believe that at least 15% earnings growth in FY27 cannot be ruled out, especially as tailwinds have started to outweigh the headwinds seen over the past several months?

While our base case for Nifty-50 FY27 earnings growth is at around 12%, an acceleration toward 15% is plausible as structural tailwinds converge. Corporate profits tend to move in-sync with Nominal GDP growth, which is expected to return back to double-digit (10%) in FY27. The earnings momentum will be underpinned by a definitive pivot in credit and consumption cycles.

The banking sector comprising roughly 35% of the Nifty 50, is poised for a sharp rebound as net interest margins (NIMs) normalize. Concurrently, a multi-pronged recovery in consumer spending, driven by a favourable monsoon, GST stimulus, the 2025 budgetary income tax cuts, and declining EMIs, is expected to revitalize domestic demand, significantly benefitting consumption-oriented sectors such as automobiles, consumer discretionary etc.

After the US deal and considering the recent FII data, are FIIs ready to return to India this year? Also, do you see any valuation concerns from their perspective?

The tide appears to be turning. Since, October 2024, the FIIs have offloaded nearly US$33 billion, leading to India underperforming the MSCI EM Index by around 25% (US$) in CY25, the sharpest relative underperformance in three decades. Moreover, global funds are also now at their most significant underweight position on India in recent history.

From a valuation standpoint, the "India Premium" has finally rationalized. Historically, India trades at a premium to the MSCI EM index; currently, that premium sits at around 60%, almost exactly in line with the long-term average. Similarly, the Nifty 50's 12-month forward P/E of ~20x has gravitated toward its 10-year average.

While valuations are not "cheap," time correction in the Indian markets has made large-cap entries significantly more attractive. Our research suggests that FIIs become net buyers when value emerges. We now see pockets of value in the market which may prompt selective buying by FIIs.

Announcement of the India-US trade deal, recovery in corporate earnings, stability in the INR, and capital rotating away from the AI theme could be triggers for better FII interest in India. We expect FII net inflows to be back-ended in 2026, with outflows turning into net inflows as the year progresses.

Do you expect the coming years to be strong for midcap and smallcap stocks, especially after more than a year of consolidation?

CY25 was a year of stark contrast in the equity markets. While large-cap indices delivered a steady 10% return, the small-cap segment struggled, sliding 5-6%. Infact, the pain in the broader Smallcap universe was even more acute, with nearly 60% of stocks falling by more than 30%, highlighting a period of significant volatility.

Despite this, we note, that valuations for the mid and small-caps are still at a significant premium to large-caps as well as their own historical averages. While the balance sheets of small caps have improved materially and a revival in earnings is expected for the small-caps in FY27, we maintain our near-term preference for large-caps over mid & small-caps, given the better risk-reward and higher margin of safety.

Our stance now is that small caps may be bought selectively. This is a substantial change from our stance 18 months ago when we were struggling to find any value.

We prioritize a disciplined, bottom-up selection process focused on robust earnings growth and fundamental resilience.

Do you see any major risks for the textile sector following the US–Bangladesh trade deal?

While the US-Bangladesh trade deal introduces immediate competitive pressure, the risks to India’s textile sector appear manageable rather than existential. The primary concern lies in the "zero-duty" provision for Bangladeshi garments made with US-sourced cotton give Bangladesh a pricing edge in the American market. This could potentially displace Indian raw material exports, with cotton and yarn exports currently valued at around $1.8 billion.

The new US–Bangladesh trade deal has created two main worries for the Indian textile industry. First, Bangladesh can now export clothes to the US duty-free (0% tax) if they use American cotton. Second, because Bangladesh has to use US cotton to get this benefit, they might stop buying as much cotton from India, which hurts Indian farmers and yarn makers.

More importantly, India’s Commerce Minister, Piyush Goyal, clarified that India is set to receive a similar "zero-duty" deal for using US materials in its final trade agreement. This would put Indian exporters back on a level playing field, ensuring they don't lose their competitive edge in the global market.

With Indian firms already diversifying into high-growth markets like the EU, US and UK, we don’t anticipate a long-term structural threat to India’s textile sector.

Are you bullish on the banking, auto, and chemicals sectors?

Yes, we have a positive / overweight stance on the banking, auto, and chemicals sectors. Our preferred sectors include large banks, auto, chemicals, insurance, real estate and capital goods. While we remain underweight on upstream oil & gas and mid-cap IT.