Forget the overall exports and the impact of tariffs should they come in at 25% on various sectors. The oil risk where things settle down with Russia seems to be a bit of a niggling worry because it is going to have a bearing on marketing margins, etc, for us.
Gautam Duggad: Absolutely, that is one of the most important commodities for us and it has a bearing on multiple macro parameters, current account deficit, inflation, and obviously consequently the interest rates in the economy. We will have to keep a close eye on where the crude oil settles. But in the last 10 years, barring that one- or two-month period when crude oil spiked up to $130-140 during the Russia-Ukraine crisis in early 2022, most of the last 10 years we have seen oil behaving in a tight range. That has helped us at the margin in so far as macro parameters are concerned. So yes, we will have to keep an eye on it, but there’s very little we can predict and do about it till the time things settle down.
Help us understand which sectors will now need a relook in terms of the earnings projection because for now, the chemicals and textiles are taking a bit of a hit on the stock prices as well. What is your analysis?
Gautam Duggad: So, sectors which add very little to the overall earnings pool are getting hit. The three or four big sectors which contribute almost 65% to 70% of the earnings pool – financials, IT, consumption, auto, and to an extent utilities are not that directly impacted by this tariff related madness. Which is why we are seeing a very mature and a calibrated reaction by stock markets. Our earnings will be a function of two or three important things like how the domestic economy behaves as the after effects of rate cuts and income tax cuts along with improved liquidity and good monsoon take shape; whether we see a pickup in high frequency indicators in early September, October and whether consumption revives because after a long time government has changed its stance and started focusing away from capex towards consumption?
Consumption has almost been dead so far as low ticket items are concerned. In fact, in our model portfolio, we have made consumer staple zero for the first time in the last 10 years. Our entire weight in consumption is allocated towards consumer discretionary.
Third, particularly this quarter and this year too (FY26), smaller sectors are driving the 10% growth that we are talking about. For example, in this quarter, we are expecting private banks to report an earnings decline, PSU banks to post flat numbers and it obviously has done 5-6% growth which was expected. Consumer has shown zero growth, auto a slight bit of a decline because of a decline in some of the heavy OEMs like Tata Motors, Hyundai and Maruti.
So, whatever 10-11% growth that we are pencilling in for this quarter as well as the full year is being led by EMS, and cement. Cement will have a rocking quarter as well as a year after a long time, but it is well expected. Then, pharma is going to post double digit earnings and a little bit of consumer durables and some other smaller sectors. All the big sectors’ performance is going to be very limited both for this quarter as well as for the full year because the big tailwind in the asset quality that we have enjoyed in the financials between FY18 to FY25 when the backing BFSI profit pool in our coverage universe went from Rs 50,000 crore to almost Rs 5 lakh crore in seven years, seems to be settling at 10-12% growth which is broadly converging with your underlying credit growth in the economy and consumption.Till the time it picks up, we will have this very peculiar problem with the three big sectors – banks, consumption and also largecap IT. These three sectors put together account for 55-60% of the profit pool and they are not growing beyond 7-8%. Till the time one of these sector’s earnings picks up, the index earnings are going to be maybe high-single digit or low-double digit. The real alpha therefore will accrue from stock picking and within the sector also, the dispersion of earnings growth is very high. For example, if you were positive on consumption for the last four years and had allocated in HUL and ITC, you made no money. Similarly, in IT, if you were positive and allocated towards largecap IT, you massively underperformed. This may sound like a pure bottom-up stock pickers market and therefore while your sector call can be right, unless the stock call is right, you’ll end up underperforming even there.
