Daily Voice: ‘Earnings, valuations have hit bottom,’ this fund manager sees IT as top FY26 bet

Sector rotation has been the theme for making money in large caps over the last few years. That’s essentially the only way fund managers can generate alpha. So, we are always on the lookout for new ideas. Regarding the IT sector, we believe that both earnings and multiples have bottomed out, making this a good contrarian bet.

Consumer stocks have already run up in anticipation of a fantastic Q3. There is little comfort there from a near-term perspective, even though the long-term story remains intact. In summary, IT appears to be a strong investment theme for FY26.

Is the PSU banking sector looking a bit overbought, or do you expect the rally to continue at least until the end of the financial year?

The issue with the BFSI sector has been the lack of a pickup in credit growth within the economy. For a long time, the retail loan book supported overall credit growth; however, that now seems to be a thing of the past.

Private sector capex has picked up, but unfortunately, that has not yet resulted in overall credit growth. That remains the current reality.

So, if at all one has to go long on banks, we would prefer large private sector banks that offer valuation comfort with a relatively more secure loan book.

Were the September quarter earnings slightly better than your expectations?

Yes, marginally. However, that's more because of muted expectations than anything else. The real test for the markets will be Q3. Expectations of a consumption pickup have already been factored into valuations. Any disappointment will lead to a market correction. So, these quarterly results are not something we would pay too much attention to; we are more focused on Q3 earnings.

What is the outlook from management commentaries after the September quarter earnings, specifically for Q3 and the second half of FY26?

The festive season has been good. The commentary from the auto, jewellery, white goods, and brown goods sectors has been quite encouraging. Hence, the expectation is that volume growth leading to overall growth should be quite strong in Q3 in particular and the second half in general.

However, this is where the market needs to exercise some caution. The Nifty is trading near lifetime valuation highs, at over 20x on a one-year forward basis, leaving little room for comfort. If credit growth does not pick up and consumption is even marginally lower than expected, we could see a decent market correction. This is something that all investors should be careful about.

Which sector surprised you positively and which one disappointed you in terms of September quarter earnings performance?

Q2 has not really thrown up any major surprises so far. When you look at sectors like IT, pharma, banks, and consumer, results so far have been largely in line with expectations, which is not very surprising. Markets have already looked beyond Q2 and are focusing more on Q3 rather than this quarter.

How the market behaves in the next one or two months and beyond will largely depend on how Q3 pans out. This is also tricky with regard to valuations and expectations. So, we sense that rather than being sector-focused, investors would do well to look for opportunities in the small-cap space and adopt a bottom-up approach.

Given the current domestic and global factors, do you see more upside than downside for the market from here?

In the near term, we expect the market to remain sideways. The recent rally and the fact that we are just about at the peak make us believe that a large part of the earnings pickup is already factored in. Now, the market will wait for actual delivery. The key drivers would be whether consumption picks up and if credit growth rises to 13–14 percent levels.

While the long-term story remains intact, we would be surprised if, over a three-year period, investors earn anything less than double-digit compounded returns. However, in absolute terms, market movements are likely to remain somewhat sideways.

Do you strongly expect President Trump to cut the additional 25% tariff on Russian oil purchases before the Christmas holiday?

The US-India tariff situation has been rather unpredictable. Trade negotiations have been ongoing for almost the entire CY25. On numerous occasions, there has been the impression that talks were nearing a conclusion, only to realize that no resolution had materialized. This remains a grey area, making any definitive prediction very difficult.

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