Daily Voice: Worst of earnings downgrades over; GST, RBI, Budget support may drive rebound from Q3FY26, says this fund manager

Do you see the earnings downgrade cycle coming to an end soon, with a sharp recovery in earnings expected from Q3FY26 onwards, especially in light of recent measures by the RBI and the government?

Yes, the worst of the earnings downgrades is behind us. Take the GST reform as an example: the government is ready to take a Rs 90,000 crore annual revenue hit from GST rationalisation, something no one anticipated. Such a massive tax cut directly reduces costs for consumers and businesses, boosting disposable incomes and demand.

Coupled with the RBI’s calibrated rate policy easing credit availability, this lays a strong foundation for earnings to meaningfully rebound, likely to be visible from Q3 FY26 onwards. Simply put, when households and companies pay less tax, real spending and profits follow.

Do you believe that a revival in credit growth and the consumer discretionary segment will be the key triggers for equity markets going forward?

Absolutely. History and data back this. When credit picks up from about 8-9% to a healthier 15-18%, consumers get more purchasing power. Couple that with GST-driven price reductions ranging between 5-12% on key products, and you ignite volume growth. We see autos, FMCG, and retail sectors as prime beneficiaries, with volume surges between 8-20%, driving profits and market returns. Demand fuels profits; profits fuel markets.

Which sectors or stocks are you inclined to bet on post-GST rationalisation? Do you see consumption emerging as a strong investment theme?

Focus on durable consumption sectors—household staples, autos, financials, enabling consumption. These aren’t fads; they’re the heartbeat of the economy. Our approach is clear: seek companies with strong pricing power, demonstrated volume growth potential post-tax reforms, and sustainable competitive moats. Brands that customers trust, buying more due to lower prices and credit availability, will drive long-term wealth creation.

Following the GST 2.0 reforms, what additional policy measures do you believe are necessary to ensure sustainable economic growth and consistent FII inflows?

Three critical policies stand out. One, sustain affordable credit flow—small rate cuts can add 20-30 basis points to GDP growth. Two, simplify business operations and reduce input credit hassles, easing compliance burdens and improving cash flows. Three, and most importantly, preserve policy clarity and stability. FII inflows aren’t attracted by one reform alone; they respond to consistent, transparent policies backed by steady, predictable economic growth.

Are you overweight in the entire auto and auto ancillary space, or are you taking a more selective approach within the sector?

Selective. Not all autos are created equal. Post-GST reforms, volume growth is concentrated in affordable vehicles -- two-wheelers and small cars -- where we see an incremental volume potential of 10-15%. Ancillaries supporting these segments and the EV ecosystem also look attractive. We emphasize quality balance sheets and resistance to cyclicality. Disciplined stock picking beats blanket sector bets any day.

Do you see a possibility of the IT services segment coming under the purview of Trump-era tariffs or similar protectionist measures?

Data confirm what the market sees: the IT sector faces multiple headwinds -- growth slowdown, AI-led layoffs, and the real risk of Trump-style tariffs or protectionist measures. The Nifty IT index has declined roughly 9% in six months and nearly 18% over the past year, pricing in these risks.

While these headwinds won’t disappear quickly, shrewd IT companies are pivoting—diversifying geographies and automating operations to soften the impact. In the long term, digital transformation demand remains strong. Our stance: recognize risk, but invest in companies proving resilience rather than chasing headlines.

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