June quarter (Q1FY26) earnings season will kick off next month. Ashwini Shami of OmniScience Capital expects the financial services companies which dominate the large-cap segment to continue to deliver strong earnings growth.
Earnings growth will also be supported by sectors such as defence, engineering and power which have strong order books and capital work in progress, he said in an interview to Moneycontrol.
According to the Executive Vice President & Portfolio Manager of OmniScience Capital, the tariff uncertainties are unlikely to go away any time soon, given that the tariffs have been used as a primary negotiation tool by the current US administration on matters from ranging from defence budgets to regional conflicts.
Do you see early signs of a structural turnaround in PSU banks?
PSBs demonstrated strong growth in the last quarter, outpacing the private sector banks. Advances grew by 12.9% for PSBs versus 8.7% for PVBs. Earnings grew by 13.1% for PSBs indicating strong fundamentals. The Nifty PSU Bank index is at 7 Price to Earnings ratio and a 3.2% dividend yield indicating significant mispricing. The structural turnaround is already underway as seen in the decadal low GNPA and NNPA numbers, and improving return on equity (RoE) ratio for the PSBs.
What do you expect from the June quarter earnings? Also, do you anticipate that the earnings for small-cap stocks will be better than those of large-cap stocks going forward?
We expect the financial services companies which dominate the large-cap segment to continue to deliver strong earnings growth supported by sectors such as defence, engineering and power which have strong order books and capital work in progress. The operating leverage in these sectors will continue to deliver strong earnings momentum for these sectors.
Is it the right time to have a strong position in discretionary consumption, considering the likely turnaround?
Nifty consumer durables index currently has a Price to Earnings (P/E) ratio of 70. While this is 25% down from the peak, it is still significantly away from reasonable valuations. The overall demand and growth outlook for the discretionary consumption remains strong with personal tax cuts and lower interest rates.
However, the valuations are still stretched. We prefer housing finance space as a proxy for this which benefits from both tax cuts and low interest rates while being available at significant discount to its intrinsic value.
Do you believe NATO's defence spending is a big opportunity for India's defence sector?
NATO’s defence spending increase is a strong positive for Indian Defence. The growth outlook for the defence sector remains robust as highlighted in our recent report on defence sector - Operation Sindoor: An inflection point for Bharat’s Omni Defence Strategy. We expect the defence spending as a percentage of GDP to go from current 2% level to 3% or higher considering the evolving geo-strategic situation.
Globally, higher defence spending is the trend and this sets up a strong export market for Indian defence companies beyond the domestic growth opportunity. However, the execution and the valuation risks are to be considered while deciding on any fresh allocation to this space and we recommend a broad based approach should be used from multiple geo-strategic view points such as energy and resource security, logistics, strategic investments in addition to the traditional warfare manufacturers.
Do you think the US may roll over tariffs if there are no negotiations by July 9, but will continue with the 10% baseline tariff?
The tariff conditions will continue to remain uncertain and one can expect volatility as we approach the 90 days mark. As the inflation has trended lower in the last few months and as we see a push towards rate cuts in the US, a measured approach on the tariff negotiations would help to keep the inflation in check and a change of stance from the Fed on rate cuts to support economic growth.
Given that the tariffs have been used as a primary negotiation tool by the current administration on matters from ranging from defence budgets to regional conflicts, it is let likely that the tariff uncertainties are not going to go away any time soon.
Do you think there is no major risk to the equity market in the short term? In fact, are you least concerned about the tariff deadline of July 9 and instead focusing on earnings?
We do not form short-term views on equities. We follow a highly structured, fundamentally driven, bottom up process called Scientific Investing framework to identify investment opportunities from a 3-5 years horizon.
And in the current market condition we see significant growth opportunity in power and energy transition space, banking and housing finance space, logistic and engineering and construction space to name a few sectors where the long-term view is robust and the valuations are favourable for investors who can allocate capital for a 3-5 year horizon – focussing continuously on long-term goals while ignoring the short-term noise and volatility.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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