Daily Voice: Earnings picking up in broader markets; IT AI panic 'exaggerated,' says LGT's Rajesh Iyer

Rajesh Iyer is the Chief Investment Officer & Managing Director at LGT Wealth India

• Healthy double-digit EPS growth in FY27 looks achievable, supported by recent FTA activity and more favourable global trade environment
• Mid caps and small caps are showing early signs of robust earnings improvement
• BSE 500 poised to outpace large caps over medium to long term, reflecting stronger growth expectations for FY27

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Mid- and small-cap stocks are beginning to show strong signs of earnings recovery, according to Rajesh Iyer, Chief Investment Officer and Managing Director at LGT Wealth India. He noted that the segment posted better-than-expected results in Q3FY26, indicating improving momentum in the broader market.

The BSE 500 is poised to outpace large caps over the medium to long term, reflecting stronger growth expectations for FY27, he believes.

He is of the view that concerns about AI undermining the IT services industry seem overstated. Most organisations are still far from fully scaling AI, meaning core IT services remain essential for implementation, integration, and support, he said in an interview to Moneycontrol.

Do you believe the market is unlikely to witness a sustainable uptrend until earnings growth gathers pace?

Markets have been looking for a clear growth catalyst, and the recently advanced US–India and EU–India FTAs offer that potential. However, these agreements will take time to come into force, and their positive effects on earnings will materialise gradually.

Until sustained earnings momentum becomes visible, or unless a major development—such as disruptive AI innovation—occurs, markets may continue to adopt a cautious “wait and watch” stance.

Are you confident that an earnings recovery is underway and that growth will accelerate in the coming quarters?

Yes, the earnings recovery has started to take shape, as seen in selective EPS upgrades during Q3FY26. This should modestly boost FY26 estimates. The stronger acceleration, however, is expected in FY27, where healthy double-digit EPS growth looks achievable, supported by India’s recent FTA (Free Trade Agreement) activity and a more favourable global trade environment.

Do you think small cap companies are showing healthy earnings growth, and have you observed broad based earnings expansion across mid cap stocks?

Yes, both mid caps and small caps are showing early signs of robust earnings improvement. The BSE 500 is poised to outpace large caps over the medium to long term, reflecting stronger growth expectations for FY27.

In Q3FY26, this segment delivered better than expected earnings, driven particularly by Capital Goods and select Financial Services companies.

Do you believe the real estate sector is clearly undervalued at current levels?

The sector appears fairly valued rather than undervalued. NAV premiums for listed residential developers have compressed slightly in recent quarters despite healthy pre sales. REITs now trade at a modest 3–4% premium to NAV (versus a 20% discount a year ago), supported by rising occupancies, stronger rentals, and improved DPUs—especially in office assets.

While residential pre-sales remain strong YTD, Q3FY26 performance was mixed. Developers with sizeable land banks and pan India presence are better positioned, as they avoid regional concentration risks. Ultimately, sector valuations look justified given current visibility on revenue, launches, and execution.

Would you advise increasing exposure to the defence sector, considering the strong growth tailwinds expected over the next 3–5 years?

The defence sector remains attractive over the longer term. The latest Defence Acquisition Council approvals—worth Rs 3.6 lakh crore —have raised FY26 year to date AoN approvals to Rs 6.9 lakh crore. This round emphasises high value strategic platforms such as MRFA aircraft and advanced missile systems. Initial procurement will involve foreign OEMs, with indigenisation ramping up over time.

The FY27 capital outlay is budgeted at Rs 2.2 lakh crore, up 22% versus FY26 (BE), taking capital expenditure to its highest share of the defence budget since FY15. This demonstrates sustained policy focus on modernisation and capability enhancement, supporting a favourable multi year sector outlook.

Are you concerned about the job market, given that India’s unemployment rate rose to 5% in January from 4.8% the previous month?

The increase is marginal and still low relative to historical trends. The rise appears seasonal, mainly driven by rural softness after the post harvest period. Other economic indicators for January 2026 were strong—UPI transactions hit record levels, GST collections remained robust, the manufacturing PMI expanded, and industrial production grew steadily. These indicators point to underlying strength in job creating sectors such as infrastructure and manufacturing.

Overall, while there is mild softening, the labour market remains broadly resilient.

Do you think concerns about AI’s impact on IT services are overblown?

Concerns about AI undermining the IT services industry seem overstated. Most organisations are still far from fully scaling AI, meaning core IT services remain essential for implementation, integration, and support.

At the same time, AI is expanding demand for specialised IT capabilities, with expectations of strong growth in productivity tools and overall IT services spending. In essence, AI is transforming the industry’s focus rather than reducing its relevance.