Daily Voice: Post tariffs, IIFL's R Venkataraman expects further monetary policy easing, reforms

The Nifty is today trading at 22 times one-year forward earnings, and earnings downgrades are continuing. For instance, there has been almost a 1.5% EPS downgrade for Nifty in the last 45 days. So growth challenges continue and the tariff uncertainty will hold back investments and dampen future growth, in which case we think that the worst case for the markets is flat markets for the next one year.

Which sectors are likely to be most impacted by Trump’s tariff announcements?

Textiles, gems, auto components, footwear are industries, which will be adversely impacted by Trump's tariff announcements. We are at a serious risk of becoming uncompetitive to other countries like Vietnam and Bangladesh. If these tariffs kick in from August 27, we'll be only 5% below China's 55% overall tariff. In addition, that could come off if there is a new deal struck between China and the US, at least in terms of broad headline tariffs.

Some of the sectors, not immediately impacted where we have exports to the US, are electronics and pharma because these sectors continue to be under Section 232 investigations.

Do you expect the market to consolidate over the next two quarters before entering a phase of strong momentum?

That would be a very reasonable expectation to have. We see continued tariff uncertainty, weakness in government revenue collection, weakness in consumption demand, and tariff uncertainty related postponement of capex as drivers of low economic growth and corporate earnings growth, for the foreseeable future. However, monetary policy will loosen further and provide a fillip to the economy along with reforms such as power sector reforms and the new labour code in all likelihood within FY26.

Do you believe the downside for IT stocks is limited from this point onward?

We cannot strictly say that because IT stocks have also seen earnings downgrades in the last 3 months. For instance, we have seen 1.3% downgrade for Persistent, 2.6% for HCL Technologies, etc. Trump is also likely to continue his hostile stance on India for the foreseeable future, and his attention may come on H1B Visa quotas. Finally, the US economy itself is seeing a very sharp deceleration of corporate earnings, ex of the top seven tech companies, and in the US also a capex holdup because of tariff uncertainty will cramp growth going forward.

Based on the June quarter earnings announced so far, what are your expectations for the Q2FY26 earnings season?

In the listed universe so far, the revenue growth in the last three quarters has been 7.6%, 6.9%, and 6.8%. The EBITDA growth has had a faster pace of decline, and the PAT growth has been 14.2%, 12.2%, and 7.5% respectively. Some of the factors, which were impacting growth in the previous quarters, were:
1. A stiff repo rate by RBI
2. A general slowdown in capex led by private sector sluggishness, which has worsened. Government capex has also come off.
3. The uncertainty of the trump tariff fluctuations.

In a period of uncertainty, investment is unlikely to bounce back and growth unlikely to resume in the short term. We feel that deceleration will be a continuing trend at least for the second quarter of FY26 before things show signs of troughing out.

Do you think the RBI will maintain its pause in the September policy meeting as well?

Growth in the Indian economy shows some signs of slowing down. High-frequency indicators are faltering - for instance, electricity production in the first quarter was -1.6%. Two-wheeler volumes in July have been -0.7%. GST collections are growing at a mere 6% in the last three to four months. On the inflation front, while sequentially it has been taking up, soft crude, tepid capex and uncertainty on global growth means that overall there will be a dampening effect globally and in India. Based on this, we think that the Reserve Bank will cut rates in its next policy meet and we expect the cut to be 25 basis points. We also expect the cut to be another 25 basis points within FY26.

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