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The CROSSOVER quarter!

As we step into the 1QFY26 earnings season, the first six months of 2025 have proven to be one of the most eventful periods, characterized by heightened geopolitical tensions and international economic hostilities, culminating into both kinetic and nonkinetic wars. This spawned not just heightened market volatility (S&P 500 VIX touching 50%+ and India VIX touching 20%+) but also a high level of economic uncertainty and ambivalent signals for monetary policymakers, adversely affecting corporate earnings visibility. Despite such an adverse backdrop for equities, the global equity markets, including India, have shown impressive resilience in 2025, with Korea (+25% in 6M), China (+20%), Germany (+19%), and Brazil (+19%) leading the way, while India has also recouped 6% since Jan’25.

Markets seeing beyond the haze; India stays an oasis of relative stability

Investors have chosen to look beyond the near-term geopolitical haze and focus more on long-term market cycles. While the Indian equity market has underperformed EM in CYTD25, it has still risen by 6% during the year, despite facing its own geopolitical challenges and a full-scale kinetic war. Amidst the pall of geopolitical gloom, the Indian economy is standing out for its relative economic stability, with several macro parameters turning favorable and corporate earnings expected to be on a progressively improving cycle going forward. We expect MOFSL/Nifty to post full-year PAT growth of 14%/11% in FY26 compared to 4%/5% in FY25.

Government and policymakers doing ‘whatever it takes’

A key standout feature in 1HCY25 has been the policymakers’ and government’s swift response to address economic challenges. The Reserve Bank of India (RBI) has adopted a highly accommodative stance, implementing an unexpected 100bp cut in the repo rate during CY25TD and a cumulative staggered reduction of 150bp in the Cash Reserve Ratio (CRR). This has been complemented by injecting liquidity into both the money and foreign exchange markets through multiple rounds of Open Market Operations (OMOs) and foreign exchange swaps, along with regulatory support by rolling back restrictions on various lenders. The government had also foregone INR1tn of personal income tax in the FY26 Union budget and has undertaken few confidencebuilding measures. The government has also received a record INR2.7tn in RBI dividend, which will find its way through the course of the year. Moreover, after a prolonged uncharacteristic slack in capex in 9MFY25, the government has again embarked on big capital spends (INR 2.4t in Mar’25 was a record), with the past five months' (Jan-May’25) capital spending growing at 41% YoY vs. 2% YoY in 9MFY25.

Macros improving; contained inflation, bountiful monsoon hold promise

Various macro parameters have started to exhibit signs of improvement. Most strikingly, inflationary impulses have been effectively managed, with the latest CPI print reading at 2.8% and WPI print at 0.4%, despite potentially inflation-stoking developments such as the tariff war, ongoing conflict in the Middle East, and the Russia-Ukraine war. The real GDP growth for 4QFY25 surprised materially on the upside (7.4% YoY), while FY26 real GDP growth expectations stand at 6.4% and nominal GDP growth at 10.5% YoY. Monsoon rainfall to date has been bountiful (10% above LPA) and reasonably well distributed both temporally and geographically. This holds promise for a strong Kharif output and is likely to further bolster rural sentiment, where rural spending has already grown impressively at an 11-quarter high of 6.6% in 4QFY25. Conversely, urban consumption should witness a boost, as the effects of personal income tax forbearance begin to materialize, with households anticipated to adjust their spending budgets to account for tax savings over the next few quarters. Domestic systemic liquidity, which experienced a deficit in 2024, has returned to surplus, prompting the RBI to intervene and absorb some excess short-term liquidity through the Variable Rate Reverse Repo (VRRR) window.

Domestic equity flows remain a key pillar of strength; FIIs return

The flows into Indian equity mutual funds have continued unabated despite all the worries of the past five months, serving as a cornerstone of the Indian equity markets. For 1HCY25, DII inflows have reached USD42b, as retail investors have maintained their confidence in Indian equities. In addition, the FII flows, which had turned sharply negative in the first few months of CY25 due to the then strength of USD and expectations of US economic resilience, have also reversed course. This shift comes amid an altered perception over the sustainability of US dollar as reserve currency and the weakness of US economy, following the announcement of reciprocal tariffs. While FII flows for the year still stand at a negative USD8.2b, the past three months (AprJun’25) have witnessed successive inflows of ~USD5.4b – indicating foreign investors' renewed faith in Indian equities.

First quarter likely to be ‘The Crossover’ quarter for earnings

We perceive 1QFY26 as the “Crossover quarter,” which should mark the crossing-over from a subdued low-single-digit earnings growth of FY25 towards a more sustainable double-digit earnings growth over the four subsequent quarters. Bottom-up aggregates of our analyst estimates suggest a 10%/5% YoY growth in 1QFY26 MOFSL/Nifty earnings. For the remainder of FY26, the bottom-up aggregate of our analyst estimates suggests a 12%/15%/14% YoY growth in 2Q/3Q/4Q FY26 PAT of MOFSL universe and 6%/13%/16% YoY growth in NIFTY PAT. Even excluding commodities, MOFSL/Nifty earnings are expected to grow at a much better cadence of 9%/15%/18% and 5%/11%/16%.

Sectoral breadth for earnings in 1QFY26 looks promising

The expectation of a 10% YoY growth in MOFSL 1QFY26 earnings is skewed by a sharp 42% YoY growth in the O&G sector, and excluding global commodities, the growth rate will still be a modest 6%. However, the key highlight of the quarter is anticipated to be the better sectoral breadth of earnings growth. Multiple sectors are expected to post double digit PAT growth in 1QFY26 viz. Cap Goods (+12%), Cement (+35%), Chemicals (+10%), EMS (+46%), Logistics(+20%), Healthcare (+11%), Real Estate (+40%), Retail (+23%), Staffing (+11%), Telecom (Loss to Profit), Utilities (+12%). Lessersectors are likely to experience muted earnings growth or even a decline in earnings. These sectors include: Technology (+7%), Consumer (+3%), BFSI (+3%), Metals (-4%), Autos (-10%). Number of Sectors likely to post negative growth is expected to be lower at 2 (Autos and Metals) in 1QFY26 vs. 6 sectors in FY25 – indicating improving dispersion of growth. Interestingly, for full year FY26 we currently do not factor in any sector to post negative PAT growth.

Stage set for a healthy economy and market performance in 2HFY26

* We believe that all the previously mentioned stimulative monetary, fiscal, and regulatory accommodations should begin to yield significant results starting 2HFY26. This is anticipated to result in improved economic expansion and corporate earnings growth, benefiting from a benign base of 4%/5% FY25 PAT growth for MOFSL/Nifty. While Indian equity market has risen over the past few months based on these expectations, it has still experienced both time and price corrections from the highs reached in Sep’24. Hence, we remain constructive about Indian equities and view India as one of the unique markets that offers an uncommon trifecta of size, growth, and diversification – a theme we have been highlighting . While valuations have crept above long-term averages, with Nifty currently trading at 21.7x 12-month forward – at a 5% premium to LPA, we do not consider it to be in the overheated zone. We see potential for further market upmove, especially in an environment of improving corporate earnings growth, low interest rates, ample liquidity, and macroeconomic recovery. Our model portfolio is tilted towards domestic names, driven by expectations of a domestic recovery. While SMIDs trade at expensive valuations, we have picked select small- and midcap high-conviction names in our portfolio.

Earnings highlights – 1QFY26E | O&G to drive modest earnings growth

* We expect the MOFSL earnings to grow 10% YoY, while those of Nifty would also grow by a modest 5% YoY in 1QFY26. Excluding financials, the earnings are expected to grow 14% YoY and 6% YoY, whereas, excluding global commodities (i.e., Metals and O&G), the MOFSL Universe and Nifty are likely to report 6% and 4% YoY earnings growth, respectively, for the quarter.

* The overall modest earnings growth is expected to be anchored by O&G (+42% YoY), Telecom (loss-to-profit), Technology (+7%), NBFC-Lending (+8%), PSU Banks (+5%), and Healthcare (+11%), which are likely to contribute 89% of the incremental YoY accretion in earnings. Conversely, Automobiles (-10%), Metals (- 4%), and Private Banks (-3%) are likely to contribute adversely to earnings.

* Sales and EBITDA of the MOFSL Universe are likely to grow 4% and 10% YoY, while for the Nifty, we expect sales and EBITDA to improve 7% YoY and 6% YoY, respectively. Ex-Commodities, EBITDA of the MOFSL Universe/Nifty is likely to grow 7%/6% YoY.

* The MOFSL Financial Universe is expected to post a muted 3% YoY earnings growth, primarily due to weak performance by Private Banks and subdued growth from PSU Banks. The Pvt. Banks sector is projected to report a second quarter of earnings decline (of 3% YoY) since Mar’20, while the PSU Banks Universe is likely to clock moderate earnings growth of 5%, the lowest in 20 quarters. The earnings of Insurance Universe are expected to moderate to 4% YoY. NBFC-lending is likely to post modest 8% YoY growth (sequentially higher), and NBFC non-lending is set to record modest earnings growth of 11% YoY, the lowest in 10 quarters.

* The O&G Universe earnings are expected to grow 42% YoY, fueled by OMCs.

* The Telecom universe is likely to post the third quarter of profit of INR10b in 1QFY26 (vs. a loss of INR17b in 1QFY25 and a profit of INR5b in 4QFY25), mainly led by continued improvement in margins in Bharti Airtel.

* The Capital Goods sector is projected to report a healthy earnings growth of 12% YoY, moderating from a high base of 28% YoY growth in 1QFY25, marking the second consecutive quarter of posting less than 15%+ earnings growth after seven consecutive quarters.

* The Healthcare universe is likely to report 11% YoY earnings growth, moderating after posting eight quarters of 15%+ earnings growth.

* The Cement universe is expected to report strong earnings growth of 35% YoY in 1QFY26. The sector is likely to clock the first quarter of earnings growth after four consecutive quarters of significant earnings decline.

* After a modest performance in 4QFY25, the Real Estate universe is likely to deliver a strong quarter with earnings surging 40% YoY.

* The Chemicals sector is likely to report a 10% YoY earnings growth, the second quarter of earnings growth after declining for seven consecutive quarters.

* The Technology sector is likely to deliver modest earnings growth of 7% YoY in 1Q, the lowest in five quarters, and marking the eighth quarter of single-digit growth.

* The Consumer sector is expected to post weak earnings growth of 3% YoY, following three consecutive quarters of earnings decline.

* The Auto sector is likely to report a weak quarter with a 10% YoY earnings dip.

* The Metals universe is projected to report a 4% YoY decline in profits after reporting four quarters of earnings growth.

* We expect the EBITDA margin (ex-Financials) to expand 140bp for the MOFSL Universe to 18.2%. Conversely, for the Nifty-50, the margin is likely to remain flat at 21.1% (ex-Financials) during the quarter.

* In 1QFY26, the MOFSL large-cap/mid-cap universe is likely to register a PAT growth of 8%/21%, while the small-cap universe earnings during the quarter are projected to remain flat YoY. Moreover, sales for large-/mid-/small-caps are likely to grow 4%/ 3%/3% YoY, and their EBITDA would clock 9%/19%/6% YoY growth for the quarter.

* Sales/EBITDA/PAT of the MOFSL Universe are likely to report a two-year CAGR of 6%/7%/6% over Jun’23-Jun’25.

* FY26E earnings highlights: The MOFSL Universe is likely to deliver sales/EBITDA/ PAT growth of 5%/12%/14% YoY. The Financials, O&G, and Metals sectors are anticipated to be the key earnings drivers with 8%, 19%, and 11% YoY growth in FY26E, respectively. These three sectors are projected to contribute 52% of the incremental earnings for the MOFSL Universe in FY26.

* Nifty EPS cut for FY26E/27E: We reduce our FY26E/FY27E Nifty EPS by 1.2%/ 0.4% and expect it to grow 11%/17% YoY to INR1,122/INR1,308. The BFSI, Auto, Consumer, Healthcare, Metals, and Retail sectors have led to the majority of the earnings cut.

* MOFSL TOP IDEAS: Large-caps – ICICI Bank, Bharti Airtel, L&T, Kotak Mahindra Bank, M&M, Titan, BEL, Ultratech, Macrotech Indian Hotels, and Tech Mahindra; Mid-caps and Small-caps – Dixon Tech, UTI AMC, Suzlon Energy, SRF, Jindal Stainless, Coforge, Page Industries, Kaynes Tech, Niva Bupa, and Supreme Industries.

Model portfolio: Key changes

Our model portfolio broadly reflects our preference for growth visibility and domestically focused plays in a challenging global environment. As we anticipate a gradual recovery in earnings by FY26, we marginally raise our weights in mid- and small-cap stocks. We discuss the key changes in our model portfolio below:

* We are OW on BFSI, Industrials, & Healthcare, while we are UW on Oil & Gas, Cement, and Metals. We upgrade Automobiles from UW to Neutral. We have also made several additions from a bottom-up standpoint across sectors.

* FINANCIALS: We retain our OW stance on BFSI and have raised allocation to ICICI Bank further by trimming 100bp from Kotak Mahindra Bank. After a very strong outperformance since our upgrade in Dec’24, we have recently downgraded BSE from BUY to Neutral and replaced BSE with UTI AMC in the model portfolio. We expect UTI AMC to report AUM/revenue/core PAT CAGR of 17%/13%/20% over FY25-27. Sustained strong performance has been a key re-rating driver for AMC stocks. UTI AMC’s discount to other players has widened over the past few months. We are also incorporating Niva Bupa into the model portfolio. We prefer Niva Bupa due to its strong growth, diversified distribution and product mix, and strong management team.

* TECHNOLOGY: We maintain our Neutral stance on IT. We add further weights to Mid-Cap IT by replacing TCS with Hexaware. We are adding Hexaware to the model portfolio as its focus on high-value, scalable clients, as well as its execution through its “Land, Ramp, and Expand” client mining strategy, has driven steady revenue growth. With ~21% EPS CAGR over CY24–26, HEXT sits in the top growth quadrant among mid-cap peers – its strength in client mining and improving margin profile offer compelling risk-reward.

* CONSUMPTION: We continue to remain OW on Discretionary and UW on Staples. We are further reducing our weights in Staples by replacing HUL with Radico Khaitan. We believe that Radico will deliver strong earnings growth over the next 3-5 years, considering the opportunity it has to scale up its P&A portfolio in the industry. Over FY25-28, we expect Radico to deliver a 16% revenue CAGR, fueled by strong growth in the P&A segment. Overall volume growth is projected at 9%, driven by a robust 15% CAGR in the P&A portfolio. Additionally, the EBITDA margin is expected to improve from 13.9% in FY25 to 16.2% in FY28E (similar to FY19), supported by premiumization. We model an EBITDA and APAT CAGR of 22% and 30% over FY25-28E, respectively. We are also replacing Trent with Jubilant Foodworks. JUBI’s focus on customer acquisition and driving order frequency has led to strong delivery growth. Value offerings and product innovation will continue to drive order growth in FY26. We model a recovery in operating margin for the India business to 13.5% in FY27 from 11.9% in FY25, after witnessing a 300bp dip in EBITDA margin (preIND AS) during the last two years.

* AUTOMOBILES: We upgrade Automobiles from UW to Neutral by adding 100bp each to our existing positions in M&M and TVS Motors.

* INDUSTRIALS: This sector remains our favorite theme, and we maintain our OW stance and weights in the sector with allocation towards L&T, Dixon Technologies, and Kaynes. We replace ABB with Bharat Electronics. We are adding BEL to our model portfolio, as we anticipate it will continue to benefit from the increase in defense spending in India, along with the emergency procurement pipeline being developed by the Ministry of Defence (MoD). We expect valuations to remain expensive due to the opening up of export markets for larger platforms and increased TAM for the domestic market.

* HEALTHCARE: We retain our OW stance on Healthcare and maintain our weights in Sun Pharma, Global Health, and Dr. Agarwal’s Health.

* METALS: We are replacing Tata Steel with Jindal Stainless. We are adding Jindal Stainless to the model portfolio because of capacity additions through organic and inorganic routes, market leadership position, increasing share of high-margin value-added products, and cost-saving initiatives (JV for supply of Nickel, captive power, etc.).

* REAL ESTATE: We are adding Macrotech back to the model portfolio. LODHA has delivered steady performance across its key parameters, and as it prepares to capitalize on strong growth and consolidation opportunities, we expect this consistency in operational performance to continue.

* PIPES: We are also introducing Supreme Industries to our model portfolio. Higher government spending, SI’s capacity expansion, and market share gains from unorganized players are expected to drive growth for Supreme. EBITDA margin is likely to expand due to rising EBIT/kg and increasing share of valueadded products, leading to a 14%/20%/23% CAGR in revenue/ EBITDA/Adj. PAT over FY25-28

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