Daily Voice: India Inc enters upgrade cycle as Nifty eyes Diwali highs, says Wright Research’s Sonam Srivastava

Yes, we expect Indian equities to reclaim outperformance in the coming quarters. The underperformance of the last six months stemmed from elevated valuations and sustained FPI outflows as US bond yields rose. With the Fed now cutting rates and the US 10-year yield below 4%, global liquidity is turning favourable.

India offers one of the most attractive earnings profiles globally — consensus projects a 15% CAGR through FY26, compared to low single digits in China and mid-single digits in the US and Europe.

Macro stability — 6.5–7% GDP growth, moderating inflation, and a stable currency — further strengthens the case. We believe the Nifty and Sensex can make fresh highs around Diwali, supported by festive demand, resilient domestic flows, and returning foreign capital.

Do you see India Inc entering an earnings upgrade cycle, with hopes that the downgrade cycle has already peaked?

Yes, we believe the downgrade cycle has already peaked and India Inc is moving into an upgrade phase. Over the last 12–18 months, earnings were pressured by global demand weakness, IT sector slowdown, and margin compression in consumer and manufacturing due to higher input costs. That led to cuts in FY25 estimates. However, the tide is turning — commodity prices have stabilised, IT order inflows are showing signs of bottoming, and financials remain robust with double-digit credit growth.

Nifty earnings grew around 14% in FY24 and are projected to maintain 14–15% CAGR into FY26. The broader earnings base is more diversified now, with BFSI, autos, and capital goods contributing meaningfully. Given the supportive policy backdrop and global liquidity easing, this sets the stage for upgrades rather than downgrades over the coming 2–3 quarters.

Which sectors have you increased allocation to in your portfolios, following recent domestic and global developments?

We have tilted portfolios towards financials, capital goods, and consumption — both staples and discretionary such as autos, while maintaining selective exposure to industrials, materials, and export-linked plays. Financials remain the backbone of earnings growth, with private banks and NBFCs expected to sustain 14–15% credit growth and stable asset quality.

Capital goods and industrials are riding on government-led infrastructure spending — the Union Budget earmarked Rs 11 lakh crore for capex, nearly 3.4% of GDP, while private capex recovery is visible in cement, power, and manufacturing.

On consumption, softer input costs (edible oils, crude-linked packaging), GST rationalisation, and a rural recovery post-normal monsoons are improving margins and demand. We have also cautiously added exposure to select discretionary names and staples benefiting from pricing relief.

Within the BFSI space, which segments are you most optimistic about?

The BFSI sector continues to be a pillar of earnings growth, contributing nearly 35% to Nifty profits, and we see leadership here sustaining. Our strongest conviction is in private sector banks, given their strong liability franchises, double-digit credit growth, and superior asset quality metrics. NBFCs catering to housing finance, consumer lending, and MSMEs are also in a sweet spot as lower rates and rising consumption boost demand.

Insurance remains a structural growth story — penetration in India is around 3.5% of GDP compared to the global average of 7%, leaving significant headroom for growth. We are more cautious on PSBs after their re-rating; asset quality has improved, but margin pressures could weigh on incremental performance.

Do you currently hold exposure to consumer tech platform companies, which have recently been attracting significant investor interest?

Yes, we hold selective exposure to leading consumer tech names where the profitability trajectory has improved. The sector, once criticised for burning cash, has shown significant discipline. For example, Zomato reported its first full-year profit in FY24, driven by scale benefits and efficiency gains, while Nykaa and PolicyBazaar have seen steady margin improvement.

The market is rewarding platforms that combine growth with operating leverage, and we are aligned with that theme. However, valuations remain elevated, and we are cautious to avoid overpaying. We prefer businesses with strong moats — market leadership, network effects, and a clear path to free cash flow generation.

Do you believe infrastructure spending might take a backseat, even as GST rate adjustments, tax cuts, and monetary policy easing are expected to boost earnings?

We don’t expect infrastructure spending to take a backseat. Public capex has more than doubled since FY20 and is at the heart of the government’s growth strategy, particularly in roads, railways, defence, and green energy. While fiscal consolidation is a long-term goal, infra allocation remains politically and economically important and will likely continue.

In fact, private sector capex is reviving — we are seeing announcements in manufacturing, cement, and renewables. At the same time, consumption-oriented measures like GST cuts and tax relief will provide near-term demand support. Both infra and consumption will likely run in parallel, creating a multiplier effect that sustains earnings momentum across sectors.

Do you foresee a significant earnings upgrade in consumption-related stocks?

Yes, consumption looks poised for upgrades. Several tailwinds are converging — GST rate cuts on staples and packaged goods could lift volumes by 200–300 bps, rural demand is expected to pick up with improved kharif output, and lower interest rates will ease urban discretionary spending. Autos are already showing strength, with PV and two-wheeler sales trending above pre-Covid levels, while QSRs and retailers are benefiting from festive demand.

FMCG margins are improving with lower input costs, which could add 150–200 bps to profitability in FY25. Valuations remain rich in staples, but stronger earnings growth can help close the gap. Discretionary and autos, in particular, appear well-positioned for earnings upgrades in FY25–26.

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