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Daily Voice: Q1 crucial for upgrading FY26 earnings growth projection of 12-13%: Narnolia''s Shailendra Kumar

Daily Voice: Q1 Crucial for Upgrading FY26 Earnings Growth Projection of 12-13% - Insights from Narnolia’s Shailendra Kumar

In the ever-evolving landscape of Indian financial markets, expert voices often provide the clarity investors seek amid volatility and uncertainty. Shailendra Kumar, Chief Investment Officer at Narnolia Financial Services, recently shared his perspectives on the current market dynamics, emphasizing the pivotal role of the first-quarter (Q1) earnings season in shaping future projections. According to Kumar, the FY26 earnings growth is currently pegged at a modest 12-13%, but this could see an upward revision depending on how corporate India performs in the ongoing quarter. This outlook comes at a time when the markets are navigating post-election stability, budgetary expectations, and global economic headwinds.

Kumar begins by contextualizing the market's recent performance. The Indian equity markets have shown resilience, with benchmark indices like the Nifty and Sensex scaling new highs despite intermittent corrections. He attributes this to a combination of factors, including robust domestic inflows, a stable macroeconomic environment, and improving corporate balance sheets. However, he cautions that valuations are stretched in certain pockets, particularly in mid- and small-cap segments, where price-to-earnings ratios have outpaced historical averages. "The market is pricing in a lot of optimism," Kumar notes, highlighting that any disappointment in earnings could lead to sharp pullbacks.

Central to his analysis is the earnings growth trajectory. For FY25, Narnolia maintains a conservative estimate of 10-12% growth, influenced by factors such as moderating commodity prices, supply chain stabilizations, and a gradual recovery in consumer demand. But it's FY26 that holds the key to sustained market momentum. Kumar explains that the current projection of 12-13% for FY26 is based on assumptions of normalized growth post the initial post-pandemic rebound. "Q1 results will be the litmus test," he asserts. If companies deliver better-than-expected numbers, driven by volume growth in sectors like consumer goods, automobiles, and IT services, there could be room to upgrade this to 15% or higher. Conversely, persistent inflationary pressures or geopolitical tensions could cap this optimism.

Delving deeper into sectoral preferences, Kumar identifies several areas poised for outperformance. He is particularly bullish on banking and financial services, citing improving asset quality, expanding credit growth, and the potential for interest rate cuts by the Reserve Bank of India (RBI) later in the year. "Banks are well-capitalized and ready to lend aggressively as the capex cycle picks up," he says. In the infrastructure space, he sees opportunities arising from the government's continued focus on capital expenditure, especially in roads, railways, and urban development. The recent budget announcements, if aligned with pre-election promises, could further catalyze this sector.

On the flip side, Kumar expresses caution regarding export-oriented sectors like IT and pharmaceuticals, which are vulnerable to global slowdowns. With the US economy showing signs of softening and Europe grappling with energy crises, demand for Indian IT services might remain subdued in the near term. He advises investors to monitor order books and client spending patterns closely during Q1 earnings calls. Similarly, in commodities, while metal prices have stabilized, any escalation in global trade tensions could disrupt the recovery.

A significant portion of Kumar's commentary revolves around the impact of the recent Lok Sabha elections and the upcoming Union Budget. The formation of a stable coalition government has alleviated fears of policy paralysis, paving the way for continuity in reforms. Kumar believes the budget will prioritize fiscal prudence while boosting rural and agricultural spending to address uneven economic recovery. "Expect measures to enhance disposable income for the lower and middle classes, which could spur consumption," he predicts. This, in turn, would benefit sectors like FMCG and retail, where rural demand has been lagging.

From an investment strategy standpoint, Kumar advocates a balanced approach. He recommends a mix of large-cap stocks for stability and selective mid-caps for growth potential. "Diversification is key in this environment," he stresses, suggesting allocations to defensive sectors like healthcare and utilities to hedge against volatility. For retail investors, he emphasizes the importance of long-term horizons, warning against chasing momentum in overvalued stocks. Systematic investment plans (SIPs) remain his go-to advice, especially with mutual fund inflows hitting record highs.

Kumar also touches on global influences, noting that the Indian market's decoupling from Wall Street has its limits. With the US Federal Reserve signaling a pause in rate hikes, emerging markets like India could attract more foreign institutional investor (FII) flows. However, he warns of risks from currency fluctuations and oil price volatility, particularly if Middle East tensions escalate. "India's forex reserves provide a buffer, but vigilance is essential," he adds.

Looking ahead, Kumar is optimistic about the structural growth story of India. He points to demographic advantages, digital transformation, and manufacturing initiatives like PLI schemes as long-term drivers. "The earnings cycle is intact, and with Q1 as a catalyst, we could see a virtuous cycle of growth and investment," he concludes. However, he tempers this with realism, noting that achieving the projected 12-13% FY26 growth will require consistent execution across quarters.

In terms of market levels, Kumar sees the Nifty potentially testing 24,000-25,000 by year-end if earnings surprise positively, but a 10-15% correction isn't off the table if global cues turn adverse. He advises focusing on quality companies with strong moats and sustainable earnings, rather than speculative bets.

Expanding on the earnings theme, Kumar elaborates on why Q1 is particularly crucial this year. Unlike previous quarters, where base effects from the pandemic skewed comparisons, Q1 FY25 represents a more normalized period. Companies are expected to report on the back of a full year of operational recovery, making these results a true indicator of underlying strength. For instance, in the auto sector, he anticipates volume growth from two-wheelers and passenger vehicles, driven by festive season demand and rural revival. In IT, while top-line growth might be muted, margins could improve due to cost optimizations and currency benefits.

Kumar also discusses the role of corporate governance and ESG factors in investment decisions. At Narnolia, they integrate these metrics into their stock selection process, favoring companies with transparent practices and sustainable models. "In a market where information asymmetry can lead to mispricing, governance is a differentiator," he explains.

On the macroeconomic front, Kumar highlights India's GDP growth projections, which he believes could exceed 7% in FY25, supported by resilient services and manufacturing sectors. Inflation, while a concern, is expected to moderate towards the RBI's 4-6% target band, allowing for monetary policy flexibility.

For fixed-income investors, Kumar suggests that with bond yields stabilizing, government securities and high-quality corporate bonds offer attractive risk-adjusted returns. He sees potential for capital gains if rates are cut, but advises against overexposure to duration in a volatile rate environment.

In summary, Shailendra Kumar's insights paint a picture of cautious optimism for the Indian markets. The FY26 earnings growth projection of 12-13% serves as a baseline, with Q1 results holding the power to elevate it. Investors are encouraged to stay informed, diversified, and focused on fundamentals amid the noise of short-term fluctuations. As the earnings season unfolds, the market's direction will likely hinge on how well corporate India delivers on its promises, setting the tone for the rest of the fiscal year and beyond.

This comprehensive view underscores the interplay between domestic policies, global events, and corporate performance in driving market outcomes. Kumar's balanced perspective reminds us that while opportunities abound, prudence remains the cornerstone of successful investing in India's dynamic economic landscape. (Word count: 1,048)

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