Downgrades slow down, Q4 could mark a turnaround
Data from the National Stock Exchange of India (NSE 500 universe) shows a clear moderation in downgrades:
- Four to five quarters ago, downgrades were 4.5 times upgrades.
- That ratio gradually dropped to 3.5 and then to 2.5.
- In the second quarter this dropped to 1.2 times.
- In the third quarter, downgrades were about 1.3 to 1.4 times upgrades.
“We are not yet neutral, but monetary easing, interest rate cuts and reform measures should help improve earnings in the fourth quarter,” Giri said.
An encouraging sign came from the small caps, where earnings growth accelerated to 24% year-on-year in the third quarter, up from 18% in the second quarter. This points to improving momentum at the broader market level.
IT sector: more pain ahead?
Despite some valuation correction in IT stocks, Giri believes operational challenges remain unresolved.
The main concern: Artificial intelligence (AI) is rapidly changing the way software is built and deployed. Traditional models – where global software companies build platforms and Indian IT companies deploy them – may face structural disruption.
The main risks include:
- AI-generated, purpose-driven software reduces repetitive implementation work.
- Potential reduction of 20-30% in manpower needs over a period of 3-4 years.
- Prolonged revenue weakness as workforce shrinks.
Adding to the pressure, global IT giants like Accenture and Cognizant are trading at lower valuations than Indian peers, reducing the justification for premiums.“There could be further deratings and profit cuts in the IT sector of large companies,” Giri warned.
Midcap IT could outperform large caps
While large IT companies face margin protection challenges, mid-cap IT companies could be better positioned in the near term.
Giri emphasized that midcaps:
- Operate with lower margins (17–18% vs. 26–27% for large caps), making margin defense less challenging.
- In some cases are more product-oriented.
- Can benefit from AI allowing them to carry out larger projects.
Companies like Persistent Systems and Coforge could experience less disruption over the next one to two years compared to larger peers.
Banking, pharmaceuticals and metals are preferred over IT
Giri said his firm has remained underweight in the IT sector, while favoring banks, metals and Indian pharmaceuticals. These sectors have shown stronger IT performance in recent months.
Metals are entering a strong bull phase
The metals sector, and in particular the steel sector, is experiencing what Giri described as a “very good bull run”, driven by supportive global and domestic macro factors.
Key drivers include:
- Stimulus momentum in the US, Japan and Europe.
- Budget relaxation in Germany.
- China limits steel exports.
- First signs of revival of domestic capital investment in India.
Bank credit growth has improved from 10.5% to 14.5%, indicating a potential acceleration in capital expenditure in FY27.
Top metal picks
Giri’s preferred names in the sector include: Jindal Steel and Power (top pick), Tata Steel and JSW Steel.
Among non-ferrous players, Hindalco Industries remains attractive, although Giri prefers steel over aluminum.
Market Outlook: Stock Picker Phase
With IT under pressure but metals, PSU banks and pharmaceuticals showing resilience, Giri believes the broader index may remain within a range while sectoral opportunities continue to emerge.
“Earnings increases could start in the fourth quarter, but sector selection will be key,” he said.
For investors, the message is clear: stay selective, keep a close eye on earnings revisions and focus on sectors facing macroeconomic tailwinds rather than structural headwinds.
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