Ajit Banerjee of Shriram Life Insurance expects the Indian auto sector to witness moderate growth in the first quarter of FY26. In an interview with Moneycontrol, he noted that performance will be mixed across segments, with two-wheelers and exports likely to drive growth, while passenger vehicles (PVs) and commercial vehicles (CVs) may see relatively muted demand. He believes reducing interest rates will be a key positive to drive growth during the year.
Further, he is of the view that overall FY26 earnings at a broader market level will improve from here onwards (Q1FY26). However, "the quantum of improvements will be more from H2 FY26 onwards unless some external risks unfold with the potential to derail the market momentum," said the President and Chief Investment Officer at Shriram Life Insurance.
Considering the sharp rebound, do you think the risk of the Middle East conflict is fully priced in, and that the market has started focusing on the tariff deadline and the upcoming earnings season next month?
Markets are forward-looking by nature, and perhaps, due to the continuing geopolitical crisis, some geographies or others have, from February 2022 onwards, reconciled to this new normal world order. Therefore, if there is limited conflict comprising of mainly airstrikes, it carries on with the assumption that collateral damages will be manageable, and hence, the impact on the market won’t be substantial. Likewise, the present Israel-Iran war also has mainly been an aerial warfare. Even though the threat of suspension of fleet movement in the Strait of Hormuz was looming large, it didn’t turn out to be a reality, as it appears.
Further, due to firm assurance from the Union Petroleum Minister about the adequate petroleum reserves and alternate supply chain in place, Indian markets have responded very minimally. The markets, therefore, have turned their focus to the US for July 9, i.e., the day the temporary tariff suspension period expires, and are looking forward to hearing from President Trump on his next course of action on tariffs.
The Indian economy has shown significant resilience amidst all these turmoil and is once again drawing lot of attention from FIIs, so the street expectation on Q1 is gradual improvement in results as compared to the previous quarter and the same period last year.
Do you strongly believe that FY26 earnings may not face further cuts?
We have seen a recovery trend in earnings at a broader level from Q4 FY25 onwards, with Nifty revenue, EBITDA, and PAT (YoY) growth at 7 percent, 4 percent, and 7 percent, respectively, versus expectations of 4 percent, 5 percent, and 6 percent.
Revenue was in line or ahead of expectations for most companies, PAT was above expectations, while EBITDA was a mixed bag. Now with strong support coming from the monetary policy side —including a 100 bps rate cut over three MPC meetings, 100 bps CRR cut, and the RBI ensuring adequate liquidity in the market—accompanied by continued government capex, and the flow of higher disposable income into the market through fiscal policy support, the stage is set for a very conducive domestic environment for consumption to pick up.
Further, monsoon has arrived this time earlier in India, with expectations of abundant rainfall compared to the LPA (long period average). The rural consumption is expected to continue and accelerate. However, the geopolitical and the tariff-related risks remain since both of these have become very unpredictable, to say the least.
Having said that, the solace lies in the fact that 56 percent of our GDP comes from domestic consumption. So, the impact of external risks will be relatively less as compared to other countries. Hence, we can, probably with reasonable confidence, assume that the FY26 earnings at a broader market level will improve from here onwards. However, the quantum of improvements will be more from H2 FY26 onwards unless some external risks unfold with the potential to derail the market momentum.
Do you expect midcap and small cap companies to report better growth than large caps?
There is gradual optimism building that corporate earnings are expected to pick up in FY26, with some early signs visible in the June FY26 quarter and more pronounced growth in subsequent quarters.
Valuations appear more reasonable (20.7x forward P/E) in large cap stocks as compared to mid (28.3x) and small cap (27.2x) stocks. This combination of favourable valuation in favour of large cap stocks accompanied with better earning prospect is drawing some of the investors’ preference in favour of large cap stocks as compared to mid and small caps.
As per the latest report released by one of the leading institutional broking houses, small caps led the earnings cuts, with a 6 percent reduction in FY26 EPS estimates compared to a 2 percent cut for large caps and 3 percent for midcaps. Having said this, there are still some stocks within the IT, Pharma, and BFSI sectors that are expected to report better earnings growth than their large-cap peers.
Hence, a bottom-up scan within the mid cap and small cap sector will be a better approach in this regard.
Do you think IT companies will not provide strong guidance in Q1FY26?
The Indian IT sector is poised for moderate growth in Q1 FY26. The performance will be influenced by global economic conditions and client spending behaviours. The sector faces challenges from global economic uncertainties, including potential US trade tariffs and macroeconomic headwinds in major markets such as the US and Europe.
These factors are expected to weigh on growth prospects and may lead to a cautious approach in client spending. Companies that effectively leverage advancements in Generative AI and focus on cost-efficiency measures may be better positioned to navigate these challenges.
Mid-tier companies are expected to outperform large caps in terms of growth. However, their cash flow conversion is weaker, client concentration is higher, and valuations are stretched. Most IT companies have provided guidance indicating moderation in growth, in contrast to earlier indications that FY26 will be better than FY25. Many have expanded their guidance bands to allow for possible challenges. Discretionary demand continues to be weak; however, few clients are proactive and want to be leaders in their sectors in terms of technology.
Do you see a risk of the rupee appreciating against the US dollar?
In view of the domestic economic activity holding firm, duly aided by a lower current account deficit, crude prices coming back to favourable pre-conflict levels augur well for the stability of the rupee against the US dollar. However, the USD is showing signs of softening due to various statements issued by President Trump, the involvement of the US in the West Asia conflict, and the Euro strengthening against the USD, which may also lead to the rupee appreciating against the US Dollar.
Are you bullish on the auto and auto ancillary sectors?
The Indian automobile sector is projected to experience moderate growth in Q1 FY26. The growth in the sector is primarily expected to be driven by the two-wheeler segment, benefiting from a resurgence in rural demand supported by favourable agricultural conditions and improved liquidity. However, the passenger vehicle (PV) segment faces challenges, with expected growth limited due to a high base effect, subdued urban demand and affordability concerns. In contrast, the commercial vehicle (CV) segment is projected to see a modest increase in sales, bolstered by a recovery in infrastructure activities and government-led capital expenditure. Export performance is expected to remain robust for FY26.
Despite these positive indicators, the sector faces headwinds from rising input costs, particularly steel, due to the imposition of a 12 percent safeguard duty, which may impact margins, especially in the CV and two-wheeler segments. Additionally, global uncertainties and potential supply chain disruptions pose risks to the sector's growth trajectory.
In summary, while the Indian auto sector is set to achieve moderate growth in Q1 FY26, performance will vary across segments, with two-wheelers and exports showing strength, while PVs and CVs face more subdued prospects. Reducing interest rates will be a key positive to drive growth during the year.
The auto ancillary sector, which is part of the global auto manufacturers supply chain—especially the US—runs a larger risk from the tariff impact that is expected to be levied after July 9. Companies that are part of the domestic auto manufacturers' OEM segment are expected to experience reasonable growth in FY26, more skewed towards two-wheelers, three-wheelers, and tractor segments.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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