‘Manufacturing, exports and banking are the themes which can deliver’

In FY25 and FY26, stocks were saddled with high valuation and decelerating earnings. But valuations are now correcting and earnings growth is supported by higher nominal GDP growth, improving the outlook for Indian equity, R Sivakumar, CIO, Axis Mutual Fund, told businessline.

Revenue as well as earnings growth were pretty robust in the first quarter of FY27 despite the US-Iran war. What is the outlook for rest of this year?

To set the context, we were on very low earnings growth over the last couple of years, primarily due to low nominal GDP growth. That’s the growth which can be expected from corporate sales and earnings since total gross value added, in a sense, is a measure of profits in the economy. But in the March quarter of FY26 and June quarter of FY27, we moved into double digits nominal GDP growth.

Last year, CPI inflation was between 0 and 2 per cent. So even though we had 7 per cent real GDP growth, we had only 8 per cent nominal growth. Now, CPI is accelerating. So that same 7 per cent real growth is translating into 11-12 per cent normal growth.

That 8.5 per cent nominal GDP growth in FY26 is the slowest annual growth since fiscal 2003, except for the Covid year. So, we are bouncing off a 23-year low into a more normal double-digit growth for the economy. We expect the momentum to continue for some time. The RBI forecasts inflation of around 5 per cent for the coming year. If that holds, we should see earnings growth well into double digits for the rest of the year and potentially beyond.

In aggregate, yes. The companies which consume commodities will suffer a little bit when commodity prices rise, but commodity producers will gain. So yes, there are winners and losers in this, but in aggregate things are looking up.

For buyers of commodities, operating leverage comes into play. If fixed costs stay relatively stable, even if your margins shrink, with your overall business expanding rapidly, profits will still grow, even if your margins come down slightly on a unit basis. Another aspect is the sharply depreciating rupee. This, while not good at one level, has supported the export sector, which is relatively high value added and more profitable. These factors explain why, despite the rising commodity prices, we are seeing margins and profits holding up.

Indian market is one of the worst performing this year. Has it helped cool some of the overvaluation?

If you go back two years ago, which is when the correction started, Nifty was trading at 23, 24 times earnings. And earnings growth was in single digits. That became a big problem in attracting foreign investors. On the other hand, if you look at the rest of the world, thanks to the AI boom, countries like US, China, Korea and Taiwan benefitted from accelerating earnings, but valuations were more reasonable there.

But now, at Nifty level, valuations are down from some 24 times to 18 times. Second, earnings have started accelerating. So, in comparison to the rest of the world, the Indian story has improved. Today, many of the other markets have suddenly become as expensive or more expensive than India. I think, this will lead to rotation of funds back into India. The other factor favourable to India is, the doubts being raised about AI and the profitability of AI companies.

At index level, valuations have come down because of specific sectors. Banks, IT, some consumer stocks and oil and gas stocks have become cheaper. These four sectors make up almost 50-60 per cent of the Nifty50. The rest of the market is still not cheap.

When you look beyond large-cap, mid-cap and small-caps have continued to run up and have become more expensive. But that is because that’s where earnings growth is. So, market today is very clearly distinguishing between companies which are able to deliver earnings growth, where stocks are being re-rated.