Daily Voice: Meaningful wave of earnings upgrades still distant, but worst of downgrades likely over, says Samco CIO

The proposed US-India trade deal holds strong potential to be a game changer for export-oriented sectors like automobiles and textiles. For the textile industry, reduced tariffs and improved market access could significantly enhance competitiveness, especially as global buyers look to diversify sourcing beyond China. India’s strong manufacturing base and cost advantage, position it well to capture a larger share of the US apparel and textile market.

The imposition of 35% tariff on Bangladesh, a key low-cost textile exporter, is expected to enhance the competitiveness of Indian textile exports in the US market. This development creates a strategic advantage for India, particularly in segments like garments, home textiles, and cotton-based products. With improved relative pricing and quality capabilities, Indian exporters could capitalize on this opportunity to capture greater market share, as global buyers seek alternative sourcing destinations. Combined with potential tariff relief under the US-India trade deal, this shift could provide a substantial boost to the textile sector.

In the automobile and auto components space, while current export volumes to the US are relatively modest, the deal could open new avenues, particularly for EVs and high-quality components, if tariff barriers are eased.

Have you observed a significant pickup in government capex in FY26?

There has been an uptick in Government capex as compared to last year as the capex remained subdued due to the general elections. Additionally, the dividend the RBI has paid to the government allows room for some additional capex in the current financial year. Capex will incrementally go to defence, space and satellites Development programme.

Do you see a high possibility of GDP growth in FY26 surpassing the RBI’s target of 6.5 percent?

Given the current geopolitical landscape, we cannot be certain whether the target can be achieved but India’s GDP growth in FY26 should be around this mark. India’s macroeconomic environment continues to remain resilient amid the global uncertainty, supported by strong fundamentals and policy responsiveness. Key indicators such as stable inflation, healthy GST collections, robust forex reserves, and a manageable current account deficit reflect the resilience and stability of the Indian economy.

The Reserve Bank of India (RBI) has adopted a more accommodative stance, recently cutting rates to support growth as inflation moderates. This shift is expected to lower borrowing costs and boost demand across sectors. Additionally, the RBI’s proactive measures, including liquidity support and forex market interventions highlight its agility in maintaining stability while encouraging growth. These factors ensure a supportive backdrop for growth in FY26.

Q: Do you expect a strong pickup in consumption and consumer discretionary starting only from the September quarter of FY26, and not before?

On the consumption front, although the demand has remained somewhat subdued, early signs of recovery, especially in rural areas, are being seen. The tax cuts announced in the February Union Budget will have a positive impact on middle-class households and small businesses, gradually boosting disposable incomes.

In the consumer discretionary space, the premiumization trend continues to remain strong, with consumers increasingly opting for higher quality, branded, and value-added products. This shift is driven by rising aspirations, greater awareness, and improved purchasing power, particularly among urban consumers and the younger demographic. As consumer spending starts to recover, sectors like FMCG, travel, apparel, and dining are poised to gain momentum, presenting strong long-term opportunities for investors looking to tap into India's consumption-driven growth.

Which sectors are expected to drive earnings growth in the Q1FY26 earnings season, which kicks off next week?

As the Q1 FY26 earnings season begins, several sectors are expected to contribute to earnings growth, supported by a combination of policy momentum and improving demand trends. The defense sector stands out as a key driver, backed by strong government support, rising capital allocations, and robust order inflows. Companies in this space are likely to see healthy revenue growth as execution picks up and exports rise.

Rising tensions between India and Pakistan acted as a catalyst for accelerated defense spending and reinforced the government’s commitment to self-reliance and indigenization. With a record number of defense contracts signed and a clear focus on indigenization, domestic defense manufacturers are expected to report healthy order book execution and revenue growth.

Consumer staples may also post modest growth, with a slight sequential uptick in volumes, particularly in rural areas, although margin recovery remains gradual due to lingering input cost pressures. Infrastructure and capital goods are set to benefit from the government’s continued focus on public capex, including investment in railways, roads, and urban development projects.

Meanwhile, the financial sector is expected to hold steady, supported by macroeconomic stability, easing interest rates, and improved credit demand.

Do you foresee more earnings upgrades than downgrades in the Q1FY26 earnings season?

As we enter the Q1 FY26 earnings season, expectations remain tempered, with a likelihood of earnings downgrades continuing as compared to upgrades in the near term. While macro indicators such as easing inflation, improving rural demand, and supportive fiscal policy ensure the stability of the economy, these factors are yet to translate into broad-based earnings momentum. Though the worst of the downgrades may be behind us, a meaningful wave of earnings upgrades is still some distance away and it is likely dependent on stronger visibility in corporate performance and sustained economic recovery in the quarters ahead.

Which sectors are likely to be in the limelight in the second half of 2025?

In the second half of 2025, the pharmaceutical sector is likely to remain in the spotlight, driven by both global and domestic tailwinds. As geopolitical shifts continue, the China+1 strategy has gained significant traction, prompting global companies to diversify their supply chains away from China. This trend positions India advantageously, given its strong foothold in generic drug manufacturing, cost-efficient production, and robust R&D ecosystem. India's reputation for delivering high-quality, affordable medicines enhances its appeal as a global pharmaceutical hub.

In the textiles sector, the recent imposition of higher tariffs on Bangladesh will enhance India’s competitiveness, particularly in garments, home textiles, and cotton-based products. This creates a significant opportunity for Indian textile manufacturers to capture a larger share of the global market, especially in the US. With favorable cost structures and a strong manufacturing base, India is well-positioned to benefit from this shift, alongside the ongoing global trend of supply chain diversification. Combined with growing domestic consumption and export opportunities, the textiles sector is poised for steady growth in the coming months. The benefits of this should be visible in the second half of 2025.

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