Daily Voice | Q3 earnings mixed; outlook optimistic, downgrades seen easing: Samco MF CIO

Umeshkumar Mehta is the CIO at Samco Mutual Fund

• Extent of earnings downgrades likely to decline meaningfully going forward
• Q4 could potentially be a stronger quarter, supported by seasonal factors and operating leverage in select industries
• Textile sector in India relatively well placed as compared to other countries

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While earnings growth in Q3FY26 has been mixed, management outlooks have remained optimistic, said Umeshkumar Mehta, CIO at Samco Mutual Fund, in an interview with Moneycontrol.

According to him, the recent US trade deal has removed a key overhang that had been weighing on Indian markets. This development, along with stable macroeconomic conditions, suggests that the extent of earnings downgrades is likely to decline meaningfully going forward.

He believes that Q4 could potentially be a stronger quarter, supported by seasonal factors and operating leverage in select industries.

Do you think the major challenges for the equity markets are behind us, especially after the US deal? Is the market now ready to scale new highs, and can a rally of over 15 percent be ruled out?

The recent announcement of India-US trade deal has eased a key headwind for FIIs. India is now in a much more competitive position compared to its peers thanks to an 18% tariff rate. Although the announcement of this trade deal has improved market confidence in the near term, the full impact of this deal will only be known once the details of the agreement are available.

Sectoral outcomes will vary based on specific provisions of the trade deal. The removal of this year-long overhang does open room for optimism; however, markets are likely to stay focused on earnings, FIIs coming back and domestic growth before committing to a sustained move higher. While a rally cannot be ruled out, more clarity will be needed to ensure a sustained rally.

Do you advise investing in textile stocks, particularly after the India–US trade deal eased sector-specific concerns?

The textile sector in India is relatively well placed as compared to other countries following the announcement of the India-US trade deal. Lower tariffs will improve the competitiveness of the sector and support export-oriented players in addition to improving the sector’s medium-term outlook.

However, investment decisions should not be driven solely by tariff advantages or near-term policy developments. Factors such as balance sheet strength, cost efficiency, product mix, capacity utilisation, and demand visibility are equally important factors that one must take into consideration.

Are you bullish on the defence sector, considering the sharp increase in defence spending both in India and globally?

The defence sector remains structurally well-positioned given the government’s clear policy focus in addition to the 18% YoY increase in capital outlay in this year’s Union Budget. This reflects the government’s long-term commitment to strengthening domestic defence capabilities.

Globally as well, geopolitical uncertainties and evolving security dynamics have led to higher defence spending across regions. These trends create a favourable demand environment for defence manufacturers and ancillary players. That said, execution, order visibility, and timely deliveries will be important to monitor. While the long-term outlook remains positive, valuations and company-specific fundamentals should be carefully evaluated before investing.

Given the steady SIP inflows into equity markets, do you expect these flows to continue rising, or could they peak at some point this year?

Continuous SIP inflows reflect strong retail participation, financialization of savings and long-term confidence in equities as an asset class. However, given the high base, some degree of moderation is possible.

If Indian equity markets continue to move in a sideways or volatile manner for an extended period, it could test retail investor’s patience and resilience. Nonetheless, those investors who are disciplined with their SIPs will benefit over the long term despite near-term fluctuations.

Do you see the possibility of IT stocks delivering positive surprises later this year?

Pessimism around Indian IT stocks is currently at its peak, with India being labelled as an anti-Artificial Intelligence (AI) trade. Additionally, the IT index has underperformed amidst this global uncertainty. Furthermore, the sentiment around Indian IT companies has been weighed down by concerns over discretionary spending, pricing pressures, and rapidly evolving technology trends.

Historically, Indian IT companies have been resilient across multiple cycles by adapting their service offerings and cost structures. However, the rapid pace of change in AI and the evolving nature of client demand make it difficult to predict positive surprises in the near term. While selective opportunities may emerge, a broad-based re-rating may require clearer signs of demand recovery and better visibility on AI-led revenue monetization.

What is your assessment of the quarterly earnings announced so far? Do you expect earnings downgrades to decline meaningfully, and could Q4 turn out to be a strong quarter?

The commentary from those companies who have announced their results so far has been largely in line, indicating stabilising demand conditions across several sectors. While the earnings growth has been mixed, management outlooks have remained optimistic in nature.

The recent trade deal has removed a key overhang that was weighing on Indian markets, which, along with stable macroeconomic conditions, suggests that the quantum of earnings downgrades is likely to decline meaningfully going forward. Q4 could potentially be a stronger quarter, supported by seasonal factors and operating leverage in select industries.