Edited excerpts from a conversation with the senior fund manager:
The market has been stuck in a consolidation phase for a year and a half. Now that earnings downgrades have subsided and uncertainty over US trade deals has disappeared, what’s holding the market back?In recent weeks, India has signed a trade deal with two of its largest trading partners, the EU and the US, which together have a ~37% share of India’s total merchandise exports. Overall, the trade agreements are expected to be particularly beneficial in increasing market access and improving export competitiveness for India.
Second, incoming data indicate that the growth momentum from the third quarter of 2026 will continue into the fourth quarter. Overall, growth prospects remain constructive, with the RBI raising its GDP forecast for FY 2026 to 7.4% and the Economic Survey predicting 7.4% for FY 2026 and 6.8-7.2% for FY 2027, supported by domestic demand and ongoing reforms.
While we do not take a top-down view on the market, the recent correction means that Indian equity markets are trading at or around the ten-year average on a relative basis, while the relative premium for emerging market countries has fallen to 45%, below the long-term historical range, and far from the highs of 90% between 2022 and 2024. Over the past five years, India has posted the highest annualized earnings growth among its peers at around 10%. It is expected to maintain a healthy growth trajectory of 14 to 15% going forward, although admittedly the country will not be significantly ahead of other major emerging countries in the coming years.
While the macro implications of technology evolution remain uncertain, India’s diversified sectoral composition and relatively lower market volatility support a more stable and resilient earnings cycle.
Consumption was touted as a big theme after the GST cuts were introduced ahead of Diwali. Since then, the car seems to be the only winner in the consumption cycle. Are you disappointed with the impact of GST on overall consumption in India?
Consumer-facing sectors saw sequential improvement in profits this quarter, although the recovery remains somewhat mixed across categories. In the auto sector, sales growth was supported by festive demand and VAT rationalization, along with a recovery in CVs. Basic consumer goods successively delivered decent figures, led by rural growth. Premiumization trends remain strong and emerging channels such as e-commerce and high-speed commerce continue to scale well. Jewelery companies reported strong performance on the back of rising gold prices, which is both a headwind and a tailwind for the category, coupled with the ongoing trend of formalization of the sector in India. There is a view among the relatively smaller companies in the discretionary lifestyle consumption of tickets category that the customers initially seem to have prioritized purchasing larger ticket products with higher GST rebate benefits, which should change in the times to come to drive demand for their products.Trends in the media and retail sectors are largely business and event driven, with seasonality playing a role in some businesses. More importantly, the earnings revision cycle remains uneven: the auto sector is seeing the first signs of estimated upgrades, but upward revisions in other consumer segments are relatively muted.
Smaller private banks and PSU banks have reported double-digit gold loan mix. Is this a healthy trend for their balance sheets?
Gold loans are considered lower-risk retail products because (1) they are collateralized, (2) recovery is relatively faster through auction, and (3) borrower behavior is often disciplined and driven by the emotional and sentimental value placed on the pledged items. Recent trends in asset quality, with CRIF data showing PAR >90 days below 1% across the system, are much better than unsecured retail or MFI loans.
That said, we believe that any excessive exposure to a single segment increases the lender’s risk, especially if collateral values are affected during periods of volatility, as can happen with precious metals. While most private and PSU banks have robust risk management frameworks in place to mitigate such risks through prudent LTVs and monitoring mechanisms, concentration risk remains an important consideration.
Like any product, gold loans can be attractive from a margin perspective, provided exposure remains well calibrated and within a diversified portfolio framework.
Loan growth at many PSU banks was higher than that of their private sector peers in the third quarter. Do PSU bank stocks look more attractive? Are the valuations good enough to buy?
Yes, the recent trends in asset quality and growth at large PSU banks are similar to large peer banks in the private sector. For any sub-segment, rather than taking a top-down view, we prefer to identify bottom-up opportunities.
Historically, the valuation gap between PSU and private banks reflects differences in RoAs as well as governance and capital allocation constraints. It should also not be missed that well-managed private sector banks have gained market share over time compared to PSU banks.
On an aggregate basis, the banking sector offers opportunities across the market capitalization spectrum, and valuations do not appear exaggerated, with earnings expectations in the mid-teens.
Which sectors appear to be structurally well positioned over the next three to five years, and why?
As a house, we are very driven by stock selection and do not make top-down thematic or sectoral decisions, because these are risky without adding returns. Our sector overweights and underweights are the result of bottom-up stock selection opportunities at a given point in time, rather than an input to our portfolio construction. For the all-cap portfolio, from a bottom-up perspective, there are certain sectors where we consistently find more opportunities. Currently, we see promising prospects within private sector finance, consumer discretionary, communications services, healthcare, REITs and invitations. While this isn’t a generalization, it is certain sub-segments and individual companies within them that resonate with the team.
Do you think the small cap sell-off we have seen over the last year and a half is over and that we will see a gradual recovery in the next two quarters?
Since peaking in September 2024, small caps have undergone a meaningful correction due to a combination of tighter liquidity, higher interest rates and downward earnings revisions. Much of this adjustment appears to have already taken place and recent earnings trends within the small and mid caps have been ahead of the large caps. That said, a broad-based recovery in stock prices typically requires sustained improvements in earnings momentum, cash flows and risk appetite, which often lag behind market corrections, especially after extended periods of adjustment.
Historically, we find a greater number of opportunities among mid- and small-cap companies and non-benchmark companies. We believe that these market segments tend to be less well researched and therefore more inefficient, offering strong alpha generation potential.
While we tend to work bottom-up, as we look ahead to the next few quarters, a gradual and selective recovery is a reasonable base case rather than a sharp recovery.
What stood out to you in the third quarter earnings season? Are you more hopeful for broad-based growth than before?
Earnings growth in the third quarter was stronger than in recent quarters, with the Nifty-500 Index returning 14% overall, with SMIDs outpacing large-cap gains. We see healthy earnings growth from the auto, capital goods and utilities sectors, while consumption has been gradual but uneven.
However, we would like to see a few more quarters of consistent earnings performance before we gain more confidence in a sustainable recovery in the earnings trajectory.
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