The earnings season has just begun.
Mahesh Patil: Yes, markets have seen a pretty good rally over the last two to three months, not just in India but globally. We’ve seen the S&P and other US indices breach previous peaks, and that’s where the bigger challenge lies. Some of the concerns—be it geopolitical risks or tariffs—are now easing, with a bit more clarity emerging. We’re seeing some trade deals being signed. India too is expected to sign one soon, which may be more favourable compared to others.
So, while there’s some uncertainty, the market doesn’t seem overly concerned. The focus is clearly on earnings growth and whether we’re beginning to see a shift in that trajectory. Over the last three to four quarters, earnings have grown only in single digits. The market is looking for a turnaround. Even this quarter may not be too strong—we’re expecting mid-single-digit growth—but as we move into the second half of the fiscal year, earnings momentum should pick up. That will be driven not just by a lower base but also by a recovery in sectors that were weak last year. This should help shape the market’s course moving forward.
For now, we expect the market to remain in a narrow range. It has become more stock-specific. Clearly, companies that report better-than-expected earnings are being rewarded, while those that disappoint are getting punished. We’re now in a phase where macro factors are subdued, and it’s the micro factors that will drive the markets from here.
You spoke at length about earnings expectations—mid-single-digit growth is what you’re expecting. But which sectors do you believe could outperform on the earnings front, and which ones might underperform?
Mahesh Patil: From an underperformance perspective, some of the larger sectors are dragging overall growth. For example, the banking sector is likely to see muted growth due to NIM compression following rate cuts. In IT, a few results have come in, and again, growth seems lower. Even in the auto sector, growth will likely be somewhat weaker.
On the other hand, sectors that could show higher growth include oil & gas. Last year was a washout, especially for oil marketing companies. With oil prices now down and marketing margins looking strong, we could see a big jump—mostly due to the base effect and improved margins. The cement sector is also recovering after a tough year with EBITDA per tonne at the bottom—so some improvement is expected there.
The telecom and pharma sectors should remain fairly steady. These sectors could see some upside, but the rest will likely perform in line with average growth trends.
The last time we spoke, you said the markets had largely priced in both the positives and negatives, and the range-bound behavior has continued since. Given the ongoing uncertainty around tariffs and lackluster earnings, what could trigger the next leg up in the market?
Mahesh Patil: As I mentioned earlier, the key lies in improving the earnings trajectory. We’ve been stuck in a zone where overall earnings growth has remained in the mid- to high-single digits. The recent GDP print, while strong in real terms, was only around 9.5% nominal, largely because CPI has dropped to about 2.5%. That reflects a lack of pricing power.
However, there are positives: the impact of easy monetary policy, better system liquidity, and a good monsoon could all support a pickup in consumer demand in the second half. That, in turn, should improve pricing power across the board—particularly in consumer and consumer discretionary sectors. This could become the trigger for the market to regain momentum.
Within the consumer discretionary basket, is there any particular segment you favour at this point—autos, retail, or something else?
Mahesh Patil: In the auto sector, two-wheelers could do better in the second half. Some consumer durable companies are going through a weak quarter, partly due to seasonality and the early monsoon. But as we move ahead, we expect this segment to improve.
Also, the transmission of tax cuts and the upcoming Pay Commission revision—a once-in-a-decade event—could lead to higher disposable income for PSU employees. That’s actually a bigger stimulus than the ₹1 lakh tax cut we’re seeing this fiscal year. So, that trend could continue well into the next fiscal.
In this context, consumer durables and retail companies stand to benefit. Even building materials are currently seeing weaker growth, but as new housing construction picks up, we should see demand recover with a lag.
So, I’d say these are the areas where the recent tax benefits and the Pay Commission bonanza could drive growth.
