Daily Voice: Post Q2 provisional numbers, Gautam Duggad sees banking growth momentum accelerating in 2H on demand recovery, RBI policy push

Indian markets have remained volatile over the past year, driven by a range of factors - with trade tariff concerns being the most recent addition. Much of this volatility stemmed from a slowdown in corporate earnings, elevated valuations, geopolitical tensions, and the ongoing impact of US trade policies, all weighing on market sentiment.

However, many of these headwinds are now beginning to fade, with valuations cooling from their CY24 highs, earnings expected to recover on a weak FY25 base, and geopolitical risks showing signs of easing. Supportive monetary and fiscal measures, along with resilient DII inflows, are also expected to provide a strong cushion to the market.

We believe the current rally is largely driven by expectations of an earnings recovery and the anticipated benefits of policy actions starting to flow through in the second half of the year. While trade tariff concerns remain a near-term overhang, any positive development on this front could further accelerate the upward momentum.

Do you think most global investors believe that India currently has more tailwinds than headwinds?

Global investors remained underweight on India in near term due to variety of reasons mentioned earlier. However, strong macro fundamentals, domestic demand, fuelled by a growing middle-class and government-led infrastructure spending, combined with structural reforms and policy continuity, supports long-term growth visibility.

Earnings growth is expected to rebound in FY26 after a soft FY25, led by sectors such as banks, industrials, and consumption-driven businesses. While near-term risks remain including US trade tariffs, geopolitical tensions, overall sentiment is expected to remain positive, with India offering sustained growth potential and policy-driven stability.

Are you bullish on both PSU and private banks, or are you leaning more toward PSU banks over private banks?

We like both PSU and private banks, given that PSU banks too have been witnessing sustained momentum in RoA profile (~1.0–1.1%) and RoE (~15-18%). However, we are relatively more constructive on select PSUs such as SBI, PNB, and Indian Bank, which combine improving profitability with reasonable valuations (0.8–1.0x P/B). Among private banks, we prefer ICICI Bank and HDFC Bank for their superior RoA and growth consistency.

What is your interpretation of the provisional Q2FY26 numbers from the banking and financial space? Do you think this is the key driver behind the recent rally in banking and financial services indices?

The provisional Q2FY26 numbers for banks were attractive, with most lenders reporting growth ahead of expectations (barring IndusInd Bank and Union Bank). We believe that growth momentum is set to accelerate in 2H, supported by an improving demand outlook and the RBI’s policy push. The recent rally in banking stocks can be attributed to both the positive surprise in provisional credit growth data and the RBI’s recent measures.

Notably, the NBFC-lending segment is expected to post a strong quarter, supported by a soft base, festive season demand, margin improvement from lower borrowing costs as banks pass on MCLR cuts, and better asset quality partly driven by seasonality and improving macro conditions.

Gold financiers are likely to deliver another robust quarter, aided by rising gold prices, while the MFI segment is expected to see stronger recovery momentum. Other lending segments are likely to post stable performance.

Are you playing the AI theme through any Indian companies, or do you believe it's better to focus on overseas players for now?

The current tech cycle isn’t just about AI versus non-AI but rather a hardware versus services cycle. Indian IT services demand tends to lag hardware and AI model maturity, which are still rapidly evolving. Until AI hardware and platforms stabilize; services adoption may remain cautious.

Capital-intensive firms have so far won, but as marginal returns on capex fade, IT services could be back in business. Today’s services weakness mirrors earlier cycles (dotcom to app services, iPhone to enterprise cloud native apps, consumer cloud to PaaS/SaaS), where enterprises only ramped up IT spending once the cutting edge of hardware stabilized.

Do you still view Trump as a risk factor for India, or is the worst already behind us?

Trump continues to be a potential risk factor for India, primarily in terms of trade policy and tariff actions, but the immediacy and severity of this risk appear to have moderated. Much of the uncertainty has already been partially priced in by markets, and India’s proactive policy measures - including efforts to diversify export markets and strengthen domestic demand - provide additional buffers.

While any unexpected developments could influence near-term sentiment, India’s strong fundamentals, supportive fiscal and monetary policies, and anticipated earnings recovery offer resilience against external shocks. Overall, the risk remains, but it is balanced by structural strengths and policy support.

Do you believe the worst is over for the IT sector?

Indian IT sector is currently facing multiple headwinds such as muted demand, deflationary pressures from GenAI productivity gains, and uncertainties around onsite work visas, leading no meaningful improvement in recent quarters. Consequently, the near-term outlook remains cautious, with only modest growth anticipated in Q2FY26.

Meaningful improvement and a sustained earnings upgrade are likely to hinge on the emergence of the next tech cycle, which is expected to be 15–18 months away. Valuations have corrected compared to long-term averages. The top-4 IT services names are trading at their average 10-year P/E and a ~16% discount to their average 5-year P/E.

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