Daily Voice: InCred's Aditya Sood expects earnings to grow at a high single-digit pace in FY26 given tariff impact on these 3 sectors

Aditya Sood is the Fund Manager at InCred Asset Management

Growing international tariffs are likely to impact India Inc.'s FY26 earnings, particularly in export-heavy sectors such as IT, metals, and capital goods, said Aditya Sood, the Fund Manager at InCred Asset Management, in an interview with Moneycontrol.

Hence, he expects earnings to grow at a high single-digit pace in FY26. "Tariff-related concerns may drive sector rotation and a flight to sectors less impacted by global trade dynamics," he said.

Among sectors, he maintains a cautious outlook on the IT sector due to persistent global uncertainty and potential disruptions from Trump-era tariff risks, but he acknowledged that the sector—particularly large-cap names—is showing signs of bottoming out.

Do you anticipate a major impact on India Inc.'s earnings in FY26 due to tariff developments? Especially after the tariffs, do you foresee single-digit growth instead of the earlier double-digit growth expectations for FY26?

Growing international tariffs are likely to impact India Inc.'s FY26 earnings, particularly in export-heavy sectors such as IT, metals, and capital goods. However, robust domestic demand and increased US tariffs on China enhance India’s appeal as a manufacturing destination. Global firms are rebalancing their supply chains, and India stands to benefit from improved logistics, production-linked incentive (PLI) schemes, and favourable labour cost dynamics.

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Despite these positives, short-term earnings remain vulnerable to downside risks, largely due to the ~25–30% of Nifty companies whose earnings are tied to exports or global pricing. We expect earnings to grow at a high single-digit pace in FY26. Tariff-related concerns may drive sector rotation and a flight to sectors less impacted by global trade dynamics. We believe concentrated portfolios are likely to outperform diversified ones.

What do you broadly expect in Q4FY25 earnings, and which sectors will drive or drag the final numbers for the quarter?

India Inc.'s earnings for the fourth quarter of FY25 are expected to see modest expansion, influenced by multiple factors. The metals sector is likely to report substantial earnings growth, owing to a low base in the previous year. Healthcare and telecom are expected to deliver strong results, driven by positive industry trends. Conversely, earnings in the oil and gas sector are projected to decline, primarily due to the performance of oil marketing companies (OMCs). Earnings are also likely to disappoint in sectors such as cement and real estate.

Do you expect economic growth to be further impacted due to tariff uncertainty, especially after the RBI already revised its growth forecast for the full year to 6.5 percent, down from 6.7 percent earlier?

The current application of US tariffs is expected to further influence India's economic growth. At this juncture, a weaker USD relative to other emerging market currencies—particularly the INR—could support the RBI’s monetary policy stance. In response to prevailing uncertainties, the RBI has cut the repo rate by 25 basis points, bringing it down to 6%, and shifted its policy stance from "neutral" to "accommodative."

India's energy basket remains highly sensitive to global oil prices, and lower crude prices are advantageous for the country. Additionally, India has been proactively signing free trade agreements with key economies. As global trade dynamics shift, India’s role as a major export hub is strengthening, particularly in sectors such as textiles, electronics, chemicals, and pharmaceuticals. Despite the global uncertainty triggered by tariffs, these measures are expected to help sustain economic growth.

Which sectors would you consider betting on during the current market downturn?

In the current market downturn, sectors with strong domestic demand, tariff immunity, and resilient earnings visibility appear attractive. Healthcare—particularly hospitals and diagnostics—stands out as a defensive play due to its non-cyclical nature. Financials, including NBFCs and insurance firms, offer structural growth supported by improving credit offtake and asset quality. Consumer staples and alco-beverages provide steady cash flows even in weak macro environments, while telecom remains essential, driven by rising ARPUs and 5G monetization. Cement is also well-positioned, benefiting from softening crude oil prices and serving as a long-term infrastructure play as capex accelerates post-election.

Have you increased your exposure to the financial services sector? Additionally, do you think the banking sector will remain strong for at least the next year?

We remain positive on banks. Banking system liquidity has shifted from a deficit in January 2025 to a surplus of Rs 1.5 trillion. Given the RBI's accommodative stance, we expect liquidity to remain supportive, driving deposit and loan growth for banks. Our portfolio NBFCs have more than sufficient capital adequacy, which should help them navigate asset quality challenges and position them to resume growth ahead of peers.

Will you remain bearish on the IT space due to uncertainty caused by Trump tariffs? Do you foresee a cut in discretionary IT spending? What is your take on TCS's numbers?

While we maintain a cautious outlook on the IT sector due to persistent global uncertainty and potential disruptions from Trump-era tariff risks, we acknowledge that the sector—particularly large-cap names—is showing signs of bottoming out. Large-cap IT stocks now present a compelling risk-reward profile, supported by dividend yields nearing 4%, strong free cash flow generation, and reasonable P/E valuations relative to historical averages.

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