Daily Voice: Post-Q2, Motilal's Gautam Duggad turns most overweight on non-lending financials; prefers midcap IT over largecaps

Gautam Duggad is the Director & Head of Research, Institutional Equities at MOFSL

Within financials, Gautam Duggad, the Director & Head of Research, Institutional Equities at MOFSL is most overweight on non-lending financials like capital market plays, insurers and asset managers.

Within IT services, he continues to prefer midcap IT names over the largecap owing strong growth visibility, albeit some tactical positioning may be defensible in large cap names offering strong valuation comfort.

Overall, after Q2 earnings, Duggad has raised earnings estimates of coverage universe by 2.3 percentage points for FY26 led by oil & gas, PSU banks, telecom, insurance, and metals.

Were you positively surprised by the Q2 earnings, especially in mid- and small-caps?

The Q2FY26 corporate earnings season concluded on a healthy note, with a better-than-expected performance. The aggregate earnings of the MOFSL Universe (327 companies) grew 12 percent YoY (versus our estimate of 9 percent YoY), while Nifty-50 earnings grew 2 percent YoY (versus our estimate of 5 percent). The overall performance was driven primarily by the Midcap universe (97 companies), which posted strong earnings growth of 34 percent YoY (versus our estimate of 23 percent).

In contrast, the Smallcap universe (142 companies) underperformed, recording a 5 percent YoY earnings decline (versus our expectation of 3 percent growth). However, the broader Smallcap segment within the Nifty-500 universe largely comprising non-coverage companies performed significantly better, delivering a robust 37 percent YoY earnings growth in Q2FY26.

Have you strengthened your bullish stance on the financial space after the Q2 earnings?

Financials, being a large and diverse sector, requires a nuanced approach. Within financials, we are most overweight on non-lending financials like capital market plays, insurers and asset managers. Within lenders we turned a modest underweight in private sectors banks during Q2 preview, while on PSU banks we are neutral.

Q2FY26 earnings turned out to be ahead of estimates for most of the segments particularly exchanges, brokers, wealth managers, gold financiers, CV lenders. While large private banks reported mixed deviations, mid cap private banks were strong. Looking ahead, we expect credit growth to pick up on low base and better on-the-ground economy, engineered by multiple stimulative measures by the government, RBI etc.

Do you believe the worst is over for the IT space now? Is this the right time to take or add exposure to the sector to avoid the risk of missing the potential rally?

Indian IT services have been top underperformer in past 12 months with Nifty IT services index down 14 percent YoY vs. 10 percent YoY growth in Nifty. This has clearly created some room for mean reversion for IT stocks and indeed the sector has started to show signs of turnaround in past 1 month.

We believe that one needs to position granularly in the sector as growth is likely to still be in single digits for most large IT names, as the overhang of AI transition and the flux in US economy continues to keep investor sentiment weak.

However, with the diminishing marginal utility on global AI infrastructure spend, there is a strong likelihood of an inflection in Gen AI services – in which Indian IT services companies possess some strength. Within IT services we are more positive on mid cap IT names but have recently added a large cap IT name on expectations of GenAI service inflection and offering valuation comfort.

What are your expectations for the Q3 earnings season, and which sectors do you see leading the growth?

It is still early days to comment on Q3FY26 earnings season.

Have you raised your earnings estimates for the current financial year and the next year after the September quarter results?

Yes, we have raised earnings estimates of our coverage universe by 2.3 percent for FY26 led by Oil & Gas, PSU Banks, Telecom, Insurance, and Metals. Also, the Nifty EPS witnessed an upgrade of 1.2 percent/0.5 percent to Rs 1,109/Rs 1,280 for FY26E/FY27E. It is noteworthy that this is the first quarter in which we have witnessed upgrade to aggregate earnings after 4 consecutive quarters of earnings upgrades.

Do you advise caution in the new-age tech space, or should investors stay invested?

Some new-age companies have had phenomenal run and valuations may look heady but it is important to appropriately scrutinize investment case in every segment/company.

We are fairly optimistic on the long-term potential for new-age tech companies in quick-commerce, capital markets, logistics and fintech space. Several companies in these segments seem to be maturing very well and the main concern could primarily pertain to valuations.

While initial valuations in the new-age tech space may appear elevated, we believe this needs to be viewed in the context of the underlying opportunity size, scalability, and long-term monetization potential.

Are valuations in the hospital sector still on the higher side?

Valuations in hospital sector have reached a stage where investors may start to take closer look at the near term investment prospect, given the strong structural growth potential owing higher awareness, acceptance and rising health insurance penetration.

Even though optically the valuations in hospital sector may appear elevated, the valuations of covered hospital names have eased materially (~25-40 percent) from the high levels witnessed in H1CY24 – thus allowing room to reassess the near-term investment case for the sector.