Daily Voice: Q4 to see gradual uptick, not breakout rally; Axis MF's Devalkar bets on banks

Shreyash Devalkar is the Head of Equity at Axis Mutual Fund

• Valuations reasonable IT services if there are no earnings cut in near term
• Q4 earnings to improve incrementally rather than materially outperform recent quarters
• Overweight on capital goods, discretionary, automobiles, NBFCs
• Have been increasing exposure to banks

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Shreyash Devalkar, the Head of Equity at Axis Mutual Fund, feels Q4 earnings are expected to improve incrementally rather than materially outperform recent quarters.

"The outlook is supported by gradual recovery in domestic demand, easing cost pressures and stable financial conditions, which should aid profitability and visibility," he said in an interview to Moneycontrol.

After Q3 earnings, he has an overweight rating in capital goods, discretionary, automobiles, NBFCs and has been increasing exposure to banks. "Banks reported healthy profit growth, aided by improvement in core operating performance, stable asset quality trends and a recovery in credit growth," he said.

Do you think global markets are currently overreacting to concerns around IT and AI and their potential impact?

There are limited real-world case studies to support AI cannibalization to traditional software. However, AI scenario is evolving fast, the pace and announcements by AI leaders (Anthropic, Palantir etc) are creating concerns. Based on the information available in the market today, the immediate inference many people draw is that the long term terminal growth of IT services companies is at risk because a large share of repetitive and standardized work will eventually be handled more efficiently by increasingly advanced AI systems, it may lead to low single digit deflation.

Do you believe IT valuations could decline further in the short term?

Post corrections valuations in the context of other sectors in India, are reasonable on FCF (free cash flow) yield basis. However, global IT services companies valuations are more subdued. Hence, if there are no earnings cut in near term, valuations are reasonable.

Have you observed more earnings upgrades than downgrades during the Q3 earnings season? Do you expect Q4 numbers to be significantly better than the previous quarters?

During the Q3 earnings season, the overall trend has tilted modestly in favour of upgrades. While this has not yet turned into a broad based upgrade cycle, earnings expectations have stabilised, with fewer sharp downgrades and selective upgrades driven by better operating performance, margin resilience and steady fundamentals in parts of the domestic economy. That said, downgrades persist in segments facing pricing pressure, global demand headwinds or competitive intensity, keeping the recovery uneven.

Looking ahead, Q4 earnings are expected to improve incrementally rather than materially outperform recent quarters. The outlook is supported by gradual recovery in domestic demand, easing cost pressures and stable financial conditions, which should aid profitability and visibility. The improvement trajectory is in line with expectations that nominal GDP growth will improve from 8% to 10% in next year.

Which sectors have you added to or increased exposure in following the Q3 earnings season?

First let’s talk about results by sectors. The auto OEM segment delivered strong performance, supported by robust revenue momentum and broad based improvement in profitability. Banks reported healthy profit growth, aided by improvement in core operating performance, stable asset quality trends and a recovery in credit growth. Public sector banks saw stronger loan growth, while private banks performed better on net interest income, supported by improvements in loan mix.

Among non bank lenders, select housing finance companies and diversified NBFCs reported strong earnings momentum. The cement sector delivered healthy growth during the December quarter, supported by better-than-expected volume trends, although pricing remained under pressure and overall results were marginally below expectations.

Consumer staples saw an acceleration in growth during the quarter, partly aided by GST rate cuts and EBITDA margins expanded for several companies, driven by easing input cost pressures and improved operating leverage. Within consumer discretionary, segments such as jewellery, internet led businesses, select QSRs and organised retail posted healthy profitability growth.

Electronics manufacturing services companies continued to see strong momentum, supported by robust revenue growth and margin expansion. Oil marketing companies benefited from stronger refining margins, leading to earnings outperformance. The capital goods and infrastructure space delivered better than expected results, supported by margin expansion in construction activities and healthy order inflows.

We have an overweight in capital goods, discretionary, automobiles, NBFCs and have been increasing exposure to banks.

Is this the right time to reduce allocation to precious metals, or should investors continue to stay invested?

The role of precious metals in a well constructed portfolio is less about chasing near term returns and more about providing stability and risk diversification and that role remains highly relevant in the current environment. After the sharp rally, it is reasonable to expect higher volatility and phases of consolidation, rather than a sustained one way move higher, as markets digest gains and respond to macros. That, however, does not dilute the strategic case for holding precious metals. Instead, it reinforces the importance of viewing them as portfolio insurance rather than a return engine.

Investors are better served by maintaining a calibrated, strategic allocation particularly to gold which can help cushion portfolios during periods of equity volatility, geopolitical uncertainty or macro stress, while avoiding the temptation to time short term price movements or treat precious metals as a primary growth asset.

Do you believe there is no need for further rate cuts by the RBI and the Federal Reserve this year?

In our view, the RBI is largely done with rate cuts this year. After a cumulative 125 bps easing since early 2025, policy rates are already accommodative, while growth has remained resilient and broad-based. Moreover, liquidity infusion in last 12 months has been impressive. The RBI has upgraded its growth outlook, next year nominal GDP growth is expected to be 10% vs 8% this year, budgetary capex allocation is good.

Inflation is expected to gradually move back towards the 4% target over the coming quarters, and the policy stance is currently lower for longer. In this backdrop, the central bank’s focus is more likely to be on liquidity management and transmission rather than further rate cuts, unless there is a material downside shock to growth or global financial conditions. Rupee stabilization is good news as well, for stable rates.

For the US Federal Reserve, further cuts are possible but not necessary. Economic growth is holding up and inflation while moderating remains sticky enough to keep the Fed cautious. The Fed may still deliver a single, data-dependent cut if labour markets soften or inflation undershoots, but there is no compelling need to ease further at this stage. However, the correlation between US bonds and Indian bonds is broken to large extent.

Do you expect the market to remain in a consolidation phase until the beginning of the Q4 earnings season?

After the uncertainty overhang on reciprocal tariffs has lifted, markets rebounded. However, with this key trigger out of the way, a phase of consolidation could be likely in the near term. Valuations in growth segment of market are elevated, while in low growth segment they are reasonable. Hence market may continue to undergo consolidation with upward bias as most uncertainties are behind. This is largely driven by an improved earnings outlook going forward and the results so far have been decent.

We expect Nifty 50 earnings to rebound meaningfully with mid-teen growth in FY27 and FY28. Our constructive earnings outlook is underpinned by three key factors: first, an acceleration in nominal GDP growth to around 10% in FY2027 from about 8% in FY2026; second, a recovery in consumption demand from the second half of FY2026, supported by lower GST, income tax and interest rates; and third, stronger export revenues following the anticipated conclusion of the long pending India–US trade agreement. That said, earnings remain vulnerable to downside risks from weaker than expected global growth and potential margin pressures particularly in automobiles and consumer staples arising from raw material costs and/or heightened competition.