Daily Voice: No earnings downgrades expected after Q2 FY26? This investment manager calls it overly optimistic

The earnings downgrade cycle in India is showing signs of bottoming out rather than completely stabilizing yet. The recent quarter experienced the weakest level of earnings downgrades in the past year, suggesting the worst may be behind us. However, downgrades have not disappeared entirely. The banking sector continues to face pressure, with all six Nifty50 banks seeing earnings cuts in recent months. Mid-size private banks with higher exposure to unsecured retail loans recorded sharp declines of 41-95 percent in FY26 earnings over the past year.

Similarly, seven out of eight consumer staples companies have witnessed downward earnings revisions. The forward outlook is cautiously optimistic: the NSE's latest corporate review projects aggregate earnings growth of about 11.6 percent for FY26 and 15 percent for FY27 among the top 200 companies. While the intensity of downgrades has eased notably and the trough seems near, expecting no further downgrades from Q2 FY26 onwards is overly optimistic.

Recovery will likely be gradual and uneven across sectors, with large-cap firms showing greater resilience compared to mid- and small-caps, which continue to face earnings pressure. Despite some stabilization driven by deposit repricing and phased cash reserve ratio cuts in banking, complete immunity from downgrades will require sustained improvements in underlying demand.

Do you expect the anticipated earnings recovery to be sustainable in the coming years?

The earnings recovery in India looks promising, but is unlikely to be smooth or uninterrupted. Recent data suggests that the top 200 companies are expected to see earnings growth of about 11.6 percent in FY26, accelerating to 15 percent in FY27. This growth is supported by solid domestic demand and favourable government policies such as tax cuts, RBI’s accommodative monetary stance, and GST rate restructuring.

Certain sectors like automobiles, manufacturing, and select financial services are already showing strong signs of recovery due to reforms, a revival in capital expenditure, and government infrastructure spending. The banking sector is also improving, with better asset quality providing additional support to the broader market’s earnings. However, challenges remain, including global economic uncertainties, sectoral differences in growth prospects, and the need for sustained domestic consumption.

As a result, while the overall earnings picture is improving, the recovery will be uneven across sectors and influenced by how both domestic and global factors evolve in the near term.

In summary, while a cyclical upswing in earnings is underway and could accelerate into FY27, the path is likely to be uneven, and there will be sectoral divergences depending on policy support, global growth stability, and domestic consumption trends.

With the hope of earnings recovery and the delay in the India-US trade deal, do you see any potential threats to the Indian equity markets?

Yes, the delay in the India-US trade deal presents significant threats to Indian equity markets that could potentially undermine the anticipated earnings recovery. The current 50 percent tariff structure affects $48.2 billion worth of Indian exports, with GTRI projecting a potential 43 percent decline in exports to the US, dropping from $86.5 billion to $49.6 billion in FY26. This creates immediate pressure on export-dependent sectors where textiles and apparel now confront 61 percent total tariffs compared to 31 percent for Bangladesh and Vietnam competitors, making Indian products commercially unviable.

The gems and jewellery sector, which sends 40 percent of exports to the US worth $10 billion annually, faces tariff increases from 2.1 percent to 52.1 percent, while shrimp exporters encounter 60 percent combined duties compared to just 15 percent for Ecuador.

While pharmaceuticals ($12.7 billion), electronics ($10.6 billion), and petroleum products remain exempt, the affected sectors employ millions in labour-intensive operations. The timing coincides with India's manufacturing push, potentially derailing private capex momentum in export-oriented industries. Capital flight concerns and investor sentiment deterioration could amplify equity market volatility beyond fundamental sectoral impacts.

Do you think the consumer staples sector is unlikely to experience significant changes due to the GST cut? Are you a buyer in consumer staples?

The consumer staples sector is likely to experience noticeable changes due to the recent GST reform, but the overall impact will be mixed and gradual. The GST Council’s overhaul, effective from September 22, 2025, has simplified the tax structure into two main slabs of 5 percent and 18 percent, with many essential goods, including personal care items (soaps, shampoos, toothpaste) and processed foods (biscuits, dairy products), moving to the concessional 5 percent rate. This is expected to reduce retail prices and input costs for manufacturers, potentially stimulating consumption volumes, especially in price-sensitive rural and semi-urban markets.

Early indications during the Navratri 2025 festive season showed strong demand growth, with companies reporting spikes in sales from 25 percent to 100 percent across various FMCG categories, reflecting consumer responsiveness to lower prices. The simplified GST regime also encourages better compliance and steadier tax administration, which could help businesses plan long-term investments and manage costs more efficiently.

However, some challenges remain. The benefits may be unevenly spread; certain product categories, like carbonated beverages, have seen a GST increase to 40 percent, which could limit growth in that sub-sector. Additionally, there have been reports of delays or incomplete passing of GST benefits from manufacturers and distributors to end consumers, which might temper volume growth in the short term.

Regarding whether I am a buyer in consumer staples, a balanced approach is advisable given the sector’s characteristics and current environment. Consumer staples historically serve as a defensive sector, providing stable demand and reliable cash flows even in uncertain economic conditions. The recent GST cuts are likely to bring moderate volume growth and some margin benefits over the medium term, particularly benefiting rural and price-sensitive markets.

However, the sector’s growth tends to be slower compared to more cyclical or high-growth sectors, and it faces challenges such as changing consumer preferences, regulatory pressures, and input cost inflation. In the current market context of moderate economic growth and evolving consumption patterns, consumer staples can provide portfolio stability and income, but are unlikely to deliver outsized returns in the near term.

Are you an investor in IPOs? Would you consider taking exposure to Tata Capital and LG Electronics through their IPOs, or would you prefer to wait for their market listing?

I do not invest in IPOs myself. I prefer to wait for the market to settle and for the initial volatility and excitement to subside before considering entry. Once the stock price stabilizes and the market sentiment becomes clearer, I assess valuations and fundamentals to make more informed decisions. This approach helps minimize the risks associated with new issues, such as overvaluation or sudden listing declines, and aligns better with a cautious, long-term investment strategy.

However, from these two IPOs' perspective, Tata Capital's compelling fundamentals at Rs 15,512 crore represent the largest NBFC IPO in Indian history, offering exposure to India's credit growth story through a well-diversified portfolio spanning retail and corporate lending. The Tata Group parentage provides significant comfort on governance and risk management standards. Fresh capital infusion will strengthen Tier-1 capital ratios, positioning the company for aggressive growth in India's underpenetrated financial services market.

LG Electronics' market leadership advantage, with Rs 11,607 crore, provides direct exposure to India's consumer durables leader through an established market presence. LG's brand recall, distribution network, and planned Rs 3,600 crore facility investment demonstrate a long-term commitment to the Indian market. However, being an offer-for-sale means no fresh capital for business expansion, and investors are essentially buying from existing shareholders.

The simultaneous launch creates competition for investor funds, potentially impacting pricing dynamics. For institutional investors, participating in IPO allocations offers better entry pricing versus market premiums. However, retail investors might benefit from post-listing price discovery, especially given current market volatility and rich valuations across sectors.

Given that the IT sector has remained under pressure for several quarters, do you expect single-digit earnings growth going forward?

The IT sector’s earnings trajectory is set to remain in the single-digit range over the next one to two years as multiple headwinds converge to constrain growth and margins. While generative AI and automation are driving productivity improvements of up to 30 percent in development workflows and significant cost savings in support functions, clients are leveraging these efficiencies to demand fixed-price and outcome-based contracts, which compress average billing rates by 3–5 percent.

At the same time, employee costs have climbed to multi-year highs—reaching nearly 60 percent of revenue at several large players—and companies are investing heavily in reskilling programs, AI labs and targeted acquisitions, which further limit margin expansion. Regulatory pressures, such as tighter H-1B visa quotas and travel restrictions, continue to hamper onsite deployments and access to global talent, while cautious spending by North American and European corporates has delayed new large-scale transformation projects.

Despite a healthy pipeline of over $20 billion in half-year deal bookings, the phased ramp-up of these contracts means quarterly revenue growth is likely to hover around 1–3 percent, translating into 3–8 percent earnings growth for FY26 and modest improvement in FY27. A sustained return to double-digit growth will require a broader economic rebound, stronger pricing power in next-generation services and successful monetization of AI-driven offerings, which may only materialize in late FY27 or beyond.

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