Daily Voice | IT sector needs earnings revival before rebound, FMCG valuations remain pricey: Shailendra Kumar

Shailendra Kumar is the Chief Investment Officer at Narnolia Financial Services

Shailendra Kumar, Chief Investment Officer at Narnolia Financial Services said he would maintain cautious stance on the IT sector until strong signs of sector-wide earnings acceleration emerge.

He is selectively considering a small number of companies within the sector that are poised for improved earnings growth.

Meanwhile, according to him, the FMCG sector's valuations remain stretched relative to its earnings growth. "While valuations have cooled over the last five years, the long-term perspective suggests further downside is possible. As a result, our approach is highly stock-specific," he said in an interview to Moneycontrol.

Do you think there will be no earnings estimate cuts going forward?

Corporate earnings have been in a cyclical slowdown since mid-last year, a result of fiscal, monetary, and regulatory tightening that persisted throughout 2024. However, this tightening reversed in the current 2025-26 fiscal year. We expect the positive impact on corporate earnings growth to become visible over the next two quarters, due to the typical reporting lag.

A noteworthy point is the strong resilience of the company’s margin profiles during this slowdown. Furthermore, current earnings growth expectations are conservative, suggesting that further estimate cuts are unlikely.

Do you believe Trump is done with his tariff measures after targeting the pharmaceutical sector, or do you expect more harsh announcements in the coming weeks?

Given the unpredictable nature of current US tariff policy, the possibility of future disruptive trade actions cannot be discounted. It is important not to view recent, seemingly punitive measures against India (like those concerning H1B visas or branded pharmaceuticals) solely as negotiation ploys in the bilateral trade discussions.

Therefore, a high degree of alertness is required to manage portfolio risk related to this shifting geopolitical environment. Two critical factors will help shape the future outlook: the resolution of India-EU trade talks and the definitive ruling from the US Supreme Court on tariff legality.

Do you think Trump is the only risk factor the market has to deal with, and that otherwise there are no risks that could dampen sentiment?

The Indian market is exhibiting a sideways trend, with the next potential decline likely to originate from external pressures. A review of the top 20 global stock market indices reveals a clear pattern of elevated valuations. In numerous major economies, current Price-to-Earnings (P/E) ratios are at or near their highest levels of the past decade.

Examples include the US index trading at a P/E of 32.1 (close to its 5-year high of 33.3) and Germany's DAX at 29.8 (near its 30.3 peak). Furthermore, markets traditionally known for moderate valuations, such as Switzerland and the UK, are trading substantially higher than their historical bottoms. This globally stretched valuation is particularly worrying given that global GDP growth over the last decade has been the weakest since 1965, highlighting a potential disconnect between market pricing and underlying economic fundamentals.

Do you see no major risk to pharma companies’ earnings at the moment, even after Trump’s tariffs? Also, do you see a possibility of US tariffs being imposed on pharma generics as well?

The immediate material impact of current US tariffs on Indian pharma is minimal for several reasons. Primarily, India's exports are predominantly generic drugs, which are not subject to the current tariffs. Additionally, the few companies involved in patented drugs either utilize US-based manufacturing plants or rely on outsourced production, effectively mitigating the direct impact. While the imposition of tariffs on generic pharmaceuticals seems unlikely, the unpredictable nature of the current US administration warrants ongoing vigilance.

Do you believe large-cap IT stocks are at risk now, while mid-cap IT firms with strong domain expertise are better placed?

Our allocation to the IT sector has been underweight for the last three years, driven by slower earnings growth. Crucially, while earnings performance mirrors the 2014-2019 slump, current valuations are much higher than the lows seen back then. Consequently, we remain cautious. We are only selectively considering a small number of companies within the sector that are poised for improved earnings growth. We will maintain our cautious stance until strong signs of sector-wide earnings acceleration emerge.

In the case of FMCG, do you think valuations based on implied growth are very high?

At the broader level, the FMCG sector's valuations remain stretched relative to its earnings growth. While valuations have cooled over the last five years, the long-term perspective suggests further downside is possible. As a result, our approach is highly stock-specific.

This year, we initiated new investments in two companies within the sector. These firms stand out because they have successfully maintained strong leadership in their core categories and used strategic acquisitions to secure top positions in growing new segments, leading to significantly higher growth than the rest of the sector.