Daily Voice: HDFC Securities' Varun Lohchab sees slight cut to earnings estimates even in March quarter as demand conditions still subdued

We expect consumption to bounce back in FY26 marginally but not sharply. Better than normal rainfall, healthy Rabi sowing, and moderation in inflation have given boost to rural demand, however, concerns persist on urban demand. In our view, consumption is expected to grow moderately in FY26, driven by increased government spending, tax benefits offered in the Union budget and partial benefits of 8th pay commission implementation (Q4FY26 onwards). However, this recovery in consumption wouldn’t be sharp due to uncertain macro and sluggish growth in real income of inflation impacted Indian urban mass.

What do you expect from the March quarter earnings, and will there be any major earnings downgrades?

We believe, a slight cut to earnings estimates is likely even in the March quarter as demand conditions are still subdued as per our checks. As per HSIE estimates for the coverage universe of ~234 stocks, the FY26E earnings growth estimate is ~16% (factoring in the low base effect of FY25E). Furthermore, subdued consumption, growth moderation in capex, uncertain macro environment, and depreciating rupee are resulting into rampant earnings downgrades across sectors. Additionally, the benefits of soft input costs are already present in base year earnings and demand environment is yet to recover substantially; hence, we expect a slight cut to earnings in Q4FY25.

Do you expect more consensus earnings cuts for the IT sector in the March quarter?

In our view, the IT sector will witness some earnings cuts given the uncertainty in client spending, which has increased in the last few months. We believe, IT companies will be cautious in providing outlook and guidance for FY26. Rising macro and geopolitical uncertainties along with puzzling interest rate expectations, particularly in the US, may lead to decreased discretionary spending by clients, impacting Indian IT companies. However, long-term prospects for the IT sector remains sanguine given ongoing trends of digitalisation, cloud migration and AI implementation at play.

Do you think the recent rebound in the equity markets will be sustainable going forward? What would be the triggers and challenges from here on?

This recent rebound in equity markets is a welcome relief after a brutal decline since the start of Q3FY25. At current levels, Nifty is trading at 19.8xFY26E and 17xFY27E, which is very close to the long-term average valuations. Hence, we believe, recent moderation in the valuation has created room for a marginal upside but earnings downgrade risk for FY26 still seems high. Furthermore, Nifty Midcap and Nifty Smallcap indices are trading at premiums of ~67% and ~37% to their historical average valuations, respectively, reflecting their inbuilt riskiness.

In this situation, we believe earnings delivery happens to be the dominant trigger for any further sustainable up move. For specific stocks, any major earnings miss would witness a commensurate decline in valuations and reliable earnings delivery by companies would be rewarded with premium valuations and fresh inflows. A subdued demand environment continues to be a challenge.

Do you believe FIIs have almost finished selling in the cash segment now?

We believe that FII selling is probably at fag end though we don’t expect any major inflows as well in FY26. They key reason is other emerging markets (EMs) being relatively more attractive than India in the near term. Historically, FIIs have never sold more than two quarters at a stretch (barring the GFC of 2008), and going by the historical trends of how much they sell as a percentage of their holdings or buying ofthe  last few years, we believe FII selling is largely done. Furthermore, a weakening dollar and US markets could also help inflows into EMs.

Do you expect a rate cut by the RBI MPC in both the April and June policy meetings?

As per recently released data, CPI moderated to 3.6% in February 2025 from 4.26% in the previous month on the back of lower food inflation. This moderate inflation print offers space for the RBI to deliver another 25bps rate cut in April. It can be noted that post the start of this rate cut cycle in February, inflation has been the key monitorable driving RBI’s rate cut decisions. We believe, beyond April, an additional 25 bps cut could be delivered in the June or August policy meeting depending on the incoming data. We expect cumulative rate cuts of 50- 75bps in this cycle for now.

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