Edited excerpts from a chat:
The market stays caught in a consolidation mode as we strategy the final month of 2025. When do you suppose the tide will begin turning and the way has the outlook modified after the Q2 earnings season?
The broader markets are in a consolidation part, reflecting lacklustre earnings development. Costs are a slave to earnings. We anticipate earnings development to select up considerably in FY27, with early indicators more likely to emerge within the second half of FY26. As soon as earnings development accelerates—and markets sometimes sense this shift a couple of months prematurely—we should always see renewed buoyancy in inventory costs.Regardless of exterior headwinds, India’s home development momentum stays resilient, with FY26 projections little higher than FY25 and outlook for FY27 much more strong.
Double-digit FY27 earnings development may ship sturdy market returns, with mid- and small-cap shares step by step bettering. Present weak spot presents long-term traders alternatives to build up high quality shares at enticing valuations, probably yielding higher returns within the medium to long run.
Indian IT shares are being seen as AI losers. Do you suppose that may be a bonus each time the tide turns in opposition to AI shares?
Indian IT shares are at the moment considered as “AI laggards,” primarily due to their comparatively modest engagement with synthetic intelligence and generative AI applied sciences in comparison with world friends. Know-how giants within the US, China, South Korea, and Taiwan are capitalising on the AI increase by way of deep tech investments and product innovation. On the identical time, Indian corporations have thus far remained centered on conventional outsourcing, enterprise IT, and cost-efficient service supply fashions.
Indian IT corporations, with their diversified service portfolios and robust consumer relationships, are steadily integrating AI instruments into their supply and consulting frameworks.
Indian IT shares might not be front-runners within the ongoing AI rally, however that’s providing affected person traders a chance to build up high quality expertise publicity at cheap costs.
Which themes are you most bullish on for the subsequent 12-18 months?
Our most well-liked sector for the subsequent 12-18 months is banking and financials.
Banking sector outcomes had been higher than expectations, as price of funds declined quicker supporting sturdy NIMs.
Credit score momentum additionally picked up with mortgage development of 11% (vs. ~10% in 1Q). Decrease rates of interest led to softer deposit development of 10%, as banks intentionally moderated high-cost deposit accretion.
Enterprise development confirmed indicators of restoration, with massive non-public banks posting strong mortgage development, leading to the next CD ratio for many of them.
Asset high quality efficiency remained resilient, with bettering gross/internet slippages throughout most banks. Credit score prices declined to 0.6% (vs. 1.0% in 1Q) and are anticipated to remain reasonable for the rest of FY26. Contemporary slippages improved for many banks however remained elevated for some mid-size banks resulting from residual stress in unsecured private and enterprise loans.
A number of banks have guided for additional NIM enchancment in 2HFY26, pushed by advantages of CRR reduce, continued deposit re-pricing and pickup in mortgage development.
Within the final 3 months ever since GST reform was first introduced, auto shares have been the largest winner. Do you suppose the auto rally has simply begun as we’re coming from a low cyclical part?
The current GST charge rationalisation has coincided with a cyclical upturn within the automotive sector, suggesting a structural demand upcycle fairly than a one-time increase. The GST charge rationalisation has acted as a catalyst, bettering affordability and vendor sentiment at a time when alternative demand was already recovering. We’re additionally seeing early indicators of rural demand revival and easing financing circumstances, which ought to assist quantity development throughout segments.
The auto trade was in a slowdown part earlier than the reforms, so the present surge can be seen as a cyclical restoration that may be sustained with improved shopper sentiment and simpler entry to credit score.
The GST charge reduce has not solely improved affordability, particularly on the low finish of the spectrum, nevertheless it has additionally prompted customers to shift from two-wheelers to low-end four-wheelers. This has led to a big inflow of first-time automobile house owners on the vendor’s desk, probably driving a pointy leap in volumes. Additional, the brand new GST regime simplifies the tax construction, eliminates classification disputes, and improves provide chain effectivity, which ought to result in higher margins for producers in the long term.
What do you suppose has been the impression of GST charge cuts if we transcend the auto trade and the seasonal festive demand? And what’s the outlook on shopper shares for 2026?
Past autos, the GST charge cuts have broad-based implications. They’ve enhanced sentiment throughout discretionary classes — from durables to quick-service eating places. In lots of circumstances, it’s not simply the decrease tax charge but in addition the notion of coverage stability and a consumption-friendly intent which have lifted confidence.
We anticipate the buyer sector to stage a gradual restoration in H2FY26 as corporations report constructive offtake in November after the continued transitional impression of the brand new GST regime in October. A robust run-up to the marriage season, bumper harvest from monsoon, benign inflation and a beneficial financial coverage surroundings stay key drivers.
Furthermore, as commodity costs cool off and inflation moderates on the again of beneficial monsoon, we additionally anticipate margins for shopper corporations to enhance late in H2FY26.
Within the broader market, there was greater optimism for midcaps fairly than smallcaps in the previous few months. Do you suppose 2026 may very well be higher for smallcaps?
Liquidity is like mom’s milk to bull markets, particularly for small shares. Tight liquidity results in sub-optimal nominal GDP development and poor earnings development from smaller corporations.
The RBI has adopted an accommodative stance with cumulative 1% charge cuts in 2025 and a steep CRR discount, injecting over ₹5.6 lakh crore into the banking system. This has eased funding circumstances and improved credit score transmission.
Earnings tax reforms—elevating exemptions to ₹12 lakh underneath the brand new regime—have boosted middle-class disposable incomes, stimulating consumption and funding flows.
GST rationalisation from 4 slabs to 2 (5% and 18%) has decreased oblique tax friction, supporting demand revival throughout FMCG, vehicles, and discretionary sectors. These measures collectively create a strong fiscal impulse.
The previous six months proved painful, with FIIs promoting over $15 billion and triggering sharp corrections in mid and small-cap shares. Costly valuations in choose pockets, weak earnings development, and geopolitical uncertainty round tariffs drove the selloff.
Mid and small-cap shares, buying and selling at excessive valuations barring a couple of sectors, underperformed considerably. Nevertheless, valuations have now grow to be cheap following worth and time corrections, although selectivity stays essential given the character of this universe.
Countering FII outflows, DII assist has offered important stability, with India’s expanded home investor base now appearing as a robust counterweight to international outflows.
We anticipate smaller shares to begin attracting investments, as benchmark indices transfer in the direction of new all-time highs within the final quarter of FY26 and within the first half of FY27.
How snug are you on valuations – are we more likely to see a structural re-rating of Indian equities?
Earnings development has not meaningfully picked up throughout the board thus far in H1FY26. Whereas we’ve seen early indicators of revival in earnings development, solely a significant revival will end in a structural re-rating of Indian equities. At the moment, Nifty trades at ~20x FY27E, India’s premium might persist, however traders will should be extra discerning as the straightforward re-rating part is basically behind us.
Following an prolonged consolidation part in Indian equities, particularly in mid- and small-caps, the valuation froth we had seen prior to now couple of years appears to have come off.
The earnings cycle is seen bottoming out, with development anticipated to speed up into double digits. Over the medium time period, we’re extra more likely to see an earnings-led fairly than multiple-led market.
The valuation differential relative to world friends has moderated, which can immediate a return of international traders to the Indian market in calendar 12 months 2026.