India Inc.’s earnings recovery will take longer than expected as higher energy prices amid the West Asia conflict could squeeze margins, according to the investment head of Standard Chartered Securities (India).
“The consensus about a month back was building around 14-15% kind of (earnings) growth, which might come to low double-digits because of these changes in the input cost,” said Gaurav Dua, chief investment officer at the broking firm.
For a year and a half, India Inc has been in an earnings downgrade cycle that was expected to bottom out, Dua said. But the rising energy prices could prolong the recovery, he said. “Despite this, we believe that the worst of the cycle is now behind us.”
Edited excerpts:
These are volatile times, and investors often panic. How should they navigate this–stay put or sell as fear sets in?
Annual 10-12% pullbacks are normal and occur every year; in hindsight, these dips from recent highs are actually investment opportunities. Most investors fail by trying to time the market, which results in them not being optimally invested. Looking at the decade from 2016 to 2025, despite major domestic and global events like demonetization, goods and services tax (GST), bank non-performing assets (NPAs), the IL&FS fiasco, Covid and various wars, the Nifty has consistently ended in the green. The market delivered a 13% CAGR during this period, proving that time spent in equity markets is more important than trying to time the market.
The noise has drowned out the index investing narrative. What’s your view on index funds and exchange-traded funds (ETFs) for the long term now?
In a growing market like India, active funds have the scope to outperform indices and create alpha for investors. However, there is also growing interest in passive investments, which now contribute around 14% to 15% of equity assets under management (AUM). This represents a substantial exposure, indicating demand for both types of products.
For a medium-risk investor, what should the ideal allocation across large-, mid-, and small-caps look like?
There is never a fixed template investment. It will vary from investor to investor. But a basic rule is that a retail investor should not get skewed either to one class of assets or one part of the market. When the industry cycles or the asset cycles turn, most retail investors are not able to anticipate it and they get stuck on the wrong side. As a thumb rule, 50 to 70% should be in your core compounding kind of stocks, depending on your objective and your appetite. Rest could be in select bottom-up picks from the broader market.
The Nifty 50 is down around 10% in the past month. Given the current global macro backdrop, how are you looking at the returns in the coming months?
In the past 18 months, the Nifty 50 has dropped 12% to 13% from its peak, even as earnings achieved double-digit growth. This combination has led to a valuation moderation of 20% to 22%, meaning valuations are no longer stretched. These corrective phases are beneficial as they help remove speculative froth from the market. While short-term index movements over the next month or two are difficult to predict, Nifty earnings for FY27 and FY28 are likely to remain in the double-digit range. Consequently, the Nifty should provide returns that are at least in line with this earnings growth.
Do you think the war in West Asia will impact the earnings growth?
It will, because higher prices of energy will have an impact on margins. The consensus about a month back was building around 14-15% kind of a growth, which might come to low double-digits because of these changes in input costs.
Which sectors stand out to you as potential winners or losers in this environment?
Refining companies and private refineries are direct winners due to higher crude prices and refining capacity issues. Upstream players also tend to perform better when crude oil prices rise. Additionally, many exporting companies could see a positive impact due to the pressure on the rupee. On the negative side, sectors like paints are likely to be affected because they rely on oil derivatives.
What macro factors should investors watch out for, and how long-drawn could this war be?
History shows that the bulk of global market damage typically occurs within the first month of a geopolitical event, and then the markets start absorbing it and normalize. Once crude prices cross the $100-110 per barrel mark, they begin to have a more significant impact on the fiscal side. Domestically, India remains in a strong position in terms of inflation and GDP growth. The current risks are primarily tied to global issues rather than domestic factors.
Is the earnings downgrade risk for India Inc. high?
We have been in an earnings downgrade cycle for one-and-a-half years, which was expected to be bottoming out. However, the emerging situation with energy prices could prolong the recovery in the earnings growth cycle. Despite this, we believe that the worst of the cycle is now behind us.
For the markets to recover, what could be the next potential trigger?
A sustained market rally requires both liquidity and earnings growth. While earnings were expected to grow at a mid-double-digit CAGR, energy prices might reduce this by a couple of percentage points. Domestic liquidity remains strong, and although foreign institutional investors (FIIs) are unpredictable, Indian valuations have moderated to average or below-average levels.
Selling pressure would ease if energy prices soften or the global environment improves.
Do you think we are underestimating global slowdown or recession risks?
Historically, limited geographical wars or geopolitical conflicts haven't typically led to global recessions. In fact, they often provide an upside for the industry as significant government spending benefits defence and industrial players. The bigger risks to watch are a potential US private credit crisis and the global demand for the monetization of AI investments. Since India was previously seen as a "non-tech" or "anti-AI" trade, it may now see a better outlook as AI deployment creates new business opportunities for the Indian IT industry.
In February, foreign investors bought power stocks as a proxy play for data centres and AI. How do you view the power sector now?
Power in India remains a structural story, though the focus is now shifting from generation to transmission. While significant capex has addressed power generation, the transmission network remains weak, causing regional power gluts and shortages. The government recognizes this gap, making power transmission the primary opportunity for the next five to eight years. Supplying power to data centres acts as an additional "kicker" to this ongoing structural narrative.
For investors looking to play this, is the traction in traditional utilities or renewables?
The play is actually more on the transmission equipment side and EPC (engineering, procurement, and construction) companies. Utilities are often regulated businesses with capped returns. Investors can also look at the financial entities that are going to fund these massive transmission projects.