Varun Lohchab, Head of Institutional Research at HDFC Securities expects a pickup in earnings growth from Q2FY26 onwards, supported by a favourable base effect and early onset of the festive season.
Additionally, key sectors such as BFSI, consumption, and IT are expected to bottom out by then, which will contribute to earnings growth at the aggregate level, he said in an interview to Moneycontrol.
However, he believes the large-cap IT space—which is significantly linked to the US economy—will likely remain in a low-growth phase over the next year.
Do you think the large-cap IT space will remain in a low-growth environment over the next one year?
Given the macroeconomic uncertainty in the United States, Indian IT companies continue to face demand challenges. While cost optimisation projects are ongoing, the pipeline for long-term transformation projects remains soft. The order book across various sectors is not translating into topline growth due to revenue leakage, as customers lack clarity about the medium-term outlook.
Ongoing trade negotiations pose a risk to US inflation and, consequently, its interest rate trajectory. In this context, we believe the large-cap IT space—which is significantly linked to the US economy—will likely remain in a low-growth phase over the next year.
Most experts are betting on a strong earnings growth outlook in H2FY26 and expect 11–12% growth for the full year. Are you in the same camp?
Yes, we also believe that the earnings growth outlook will improve as the year progresses. We expect a pickup in earnings growth from Q2FY26 onwards, supported by a favourable base effect and early onset of the festive season. Additionally, key sectors such as BFSI, consumption, and IT are expected to bottom out by then, which will contribute to earnings growth at the aggregate level. Favourable earnings base for large earning sectors such as Oil & Gas and Metals will help overall Nifty earnings growth in FY26.
Do you expect rural growth to outpace urban growth going forward? If so, does that imply FMCG stocks are a good buy?
Driven by a favourable monsoon so far and service sector–led growth in the rural economy, we believe rural growth is indeed expected to outpace urban growth going forward. However, this does not make FMCG stocks an unequivocal buy.
We expect FMCG companies to deliver only mid- to high-single-digit earnings growth this fiscal year, while these stocks are trading at rich valuations.
Therefore, rural economic growth outpacing urban growth does not necessarily make leading FMCG stocks a clear buy. We remain selective in the FMCG sector despite expectations of improving volume growth in FY26.
Do you think the equity market appears expensive given the slowing earnings momentum and global trade uncertainty?
With respect to the equity markets, we remain cautiously optimistic at the current juncture. In our view, the weak earnings momentum observed over the past few quarters has already been reflected in the subdued returns over the trailing twelve months. Looking ahead, we expect low double-digit earnings growth in FY26, as the base becomes more favourable from Q2 onwards and large sectors such as BFSI, IT, and consumption begin contributing more meaningfully to overall growth. At 18.5x FY27E earnings, the Nifty appears only moderately expensive; therefore, index returns are likely to mirror earnings growth over the next year.
What are the key triggers for the market in the remaining part of 2025?
As India awaits the finalisation of its trade deal with the United States, this development remains a key trigger closely watched by market participants.
Additionally, the global trade environment poses risks to US inflation and interest rates, which could, in turn, influence the Reserve Bank of India's domestic monetary policy. This may impact the domestic interest rate cycle and, consequently, the equity markets.
On the domestic front, the monsoon is a critical factor to monitor. A favourable monsoon could boost agricultural output and rural consumption, benefiting sectors such as FMCG, automobiles, and other consumer-driven industries. Furthermore, healthy corporate earnings expected from Q2FY26 onwards are also anticipated to act as a significant catalyst for market performance.
Are you strongly optimistic about significant government capex in the second half of FY26? Could it be a major market trigger?
Government capex has commenced with strong execution, as the first two months of the fiscal recorded spending of Rs 2.2 trillion—approximately 20% of the FY26 Budget Estimate (BE). Early execution strength has been demonstrated by ministries such as Road Transport and Railways. In our view, the government is front-loading capex to stimulate private investment by creating a conducive environment for capital expenditure.
With 20% of the budgeted capex already utilised in the initial two months, we expect the pace of execution to moderate over the remainder of the year. However, the year is likely to conclude on a healthy note, achieving the targeted 10% year-on-year growth compared to FY25.
However, we don’t expect government capex to be a major market trigger as it’s already built-in estimates and rich valuations of capital goods stocks. Market triggers are more likely to come from a pick-up in domestic consumption and/or banking sector credit growth in 2HFY26.
Does the delay in the India–US trade deal worry you?
While we remain watchful of the ongoing trade negotiations, we are not overly concerned, as the delay does not yet indicate a standoff. The discussions involve sensitive sectors, and the trade deal will have long-term implications for both countries. Therefore, it is prudent for India to maintain a firm strategic stance to safeguard its domestic industry, sovereignty, and data privacy.
Although the delay has caused some business volatility for Indian exporters, there has been neither a significant outflow of foreign investments nor any abrupt currency fluctuations. Hence, we remain optimistic about the possibility of a balanced deal, especially as the US is keen to tap into India’s growing consumer base and digital market.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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