Daily Voice: Higher oil prices from Iran conflict may squeeze Q4FY26 margins, says Spark’s Deepan Kapadia

Deepan Kapadia is the Executive Director & CIO – Portfolio Management Services at Spark Capital PWM

• If Iran war persists, higher oil prices could drive input cost inflation and hurt Q4FY26 margins
• Threats to Strait of Hormuz, which, if closed, could shave over 0.5% off India’s GDP
• IT companies are probably close to the bottom but not a sharp recovery yet

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The biggest macro risk from the Iran conflict is oil prices, which could raise inflation and widen India’s current account deficit, said Deepan Kapadia, the Executive Director & CIO – Portfolio Management Services at Spark Capital PWM in an interview to Moneycontrol.

Though overall expectations are continued improvement in earnings growth across sectors in Q4FY26, key thing is to be watched out is the impact both direct and indirect due to the War.

If the war stretches for a longer time frame, then higher oil prices will lead to raw material inflation and thereby impacting margins, according to him.

In case of IT companies, he feels it is probably close to the bottom but not a sharp recovery yet. "The narrative has shifted from "digital transformation" to AI-centric deals, which now form nearly 74% of new contracts for majors companies," he said.

After the recent market decline, which sectors should investors focus on?

Periods of volatility typically create opportunities in structural growth sectors and domestic cyclicals. Overall, India’s domestic economy remains the key driver, so sectors linked to capex and consumption should outperform over time. Preferred sectors now:

Domestic cyclicals: Financials – strong balance sheets, credit growth recovery. Capital Goods / Infrastructure – driven by government capex and private investment revival. Autos & ancillaries – sustained demand and premiumisation trends.

Structural themes: Manufacturing / China+1 beneficiaries, Defence and aerospace (global re-armament cycle), Power equipment

Select defensives: Healthcare /Pharma/Consumer staples

Do you think the possibility of a worst-case scenario in the Iran conflict is now very low?

Not completely. The conflict has already moved beyond proxy tensions with direct military actions involving the US and Israel, increasing geopolitical risk. While markets occasionally "price in" localized strikes, the situation remains fluid. The strikes on Iran have led to:

* Brent Crude climbing above $90/barrel.

* Threats to the Strait of Hormuz, which, if closed, could shave over 0.5% off India’s GDP.

* The "worst-case" (prolonged regional war or regime collapse into chaos) is still a highlighted risk by analysts, keeping the India VIX elevated. It’s premature to call the "all clear."

However, historically, most Middle East conflicts create volatility but limited long-term market impact unless energy supply is disrupted.

Are you bullish on cyclicals at this stage?

I am bullish but selective. The "mid-cycle acceleration" thesis from early 2026 is being tested by high energy costs. While manufacturing and industrials are benefiting from government capex, the concerns on rise in input costs (due to oil) may squeeze margins. The macro backdrop supports cyclicals: India GDP growth remains around 7–7.6%, Balance sheets across banks and corporates are strong and Capex cycle is still early. It’s better to favour cyclicals with strong pricing power rather than commodity-sensitive ones that can't pass on costs.

From here, what do you see as more likely — a 5% market correction or a 5% upside?

Near term, markets are likely to remain range-bound. Indian markets remain supported by strong domestic flows and earnings visibility, which limits big downside from further levels.

Do you think the worst phase for IT services is over now?

We feel we are probably close to the bottom but not a sharp recovery yet. The narrative has shifted from "digital transformation" to AI-centric deals, which now form nearly 74% of new contracts for majors companies. While stock prices are currently pressured by weak US cues, the fundamental "earnings trough" for the sector seems to be behind us. 2026 should see gradual recovery rather than a sharp rebound.

What are your broad expectations for the March 2025 quarter earnings, which will begin to be announced next month?

Overall expectations are continued improvement in earnings growth across sectors in Q4FY26. Key thing is to be watched out is the impact both direct and indirect due to the War. If the war stretches for a longer time frame, then higher oil prices will lead to raw material inflation and thereby impacting margins.

Do you still maintain your forecast of over 7% economic growth for FY26 and FY27 despite the tensions involving Iran?

Yes, the base case remains intact. Key factors are Strong domestic consumption, Infrastructure capex, Manufacturing shift toward India and Services exports resilience. Also, Strong domestic tax collections and new trade deals with the US and EU are acting as a buffer against Middle East tensions.

The biggest macro risk from the Iran conflict is oil prices, which could raise inflation and widen India’s current account deficit.