Large Caps Offer Better Risk-reward; Healthcare, IT Attractive For H2: Sriram Of ...
Indian equities enter the second half of calendar year 2026 against a backdrop of geopolitical uncertainty, elevated crude oil prices, cautious corporate earnings expectations and resilient domestic liquidity. While foreign institutional investors have remained selective, sustained SIP inflows and strong domestic participation continue to provide a cushion to the market. Investors are now closely watching the June quarter earnings season for signs of a recovery in corporate profitability and clearer guidance for the months ahead.In an interaction with BW Businessworld, Jitendra Sriram, Fund Manager at Baroda BNP Paribas Mutual Fund, said the near-term outlook may remain range-bound as companies absorb the impact of higher input costs and supply chain disruptions. However, he expects sentiment to improve in the latter half of the year as earnings normalise and festive demand gathers pace.
Edited excerpts:
The first half of CY26 has been dominated by geopolitical tensions, elevated crude prices and global policy uncertainty. What is your outlook for Indian equities in the second half of the calendar year?
In our view, the early part of the second half coinciding with 1QFY27 results could be challenging as the entire impact of high cost crude/gas, disruption in supply lines, impact of higher freight costs (diesel price hikes) would be felt through this earnings season. The return of normalcy into the September earnings followed by the advent of the festive season should rub off positively on sentiment. We would therefore expect markets to be range bound in the early part with some improvements coming through in the latter part.
The recent US-Iran conflict has pushed crude prices higher and raised input costs for several sectors. How do you expect this to affect June quarter earnings?
Corporate earnings through the April- June quarter are likely to be weaker with the broader market likely to show a flat to marginal decline in earnings per share (EPS) year-on-year (YoY). Large caps may actually hold ground and show some modest growth in earnings. We see dollar sensitive sectors like metals, IT doing better than average, whereas commodity users such as autos, paints, tyres, parts of building materials etc showing some margin headwinds. Sectors like telecom may reflect largely insulated earnings.
Despite heightened volatility, SIP inflows have remained resilient in June. Do you believe Indian retail investors have become structurally more disciplined, or could a prolonged correction still test their conviction?
It is an interesting point that is raised because drawing a generic conclusion from a heterogenous underlying data set is always a tricky part. Observing aggregates, we do feel that the spread of equity cult especially post covid lockdowns has been more prevalent and various distribution channels like banks, national distributors, local individual distributors have consistently emphasised the need to be long term into equity. Financial literacy related campaigns from the industry body AMFI have also helped moderate and shape more realistic expectations.
In our own experience, we do pick up a sense that so long as investors are getting returns superior to other competing investment avenues (deposits etc) on a post tax basis they are by and large fine with persisting with equity and this has been a large part of the success story of the SIP resilience.
However, as maths teaches you, the average is just an aggregation of multiple expectations of multiple investors and there would certainly be some investors expecting or hopeful of high returns despite the heightened volatility who may be disappointed. In our view, one could see some ups and downs in the SIP amounts coming into the industry from Indian retail but structurally the industry has definitely moved up a few notches from where it was pre-covid.
Which sectors currently offer the best combination of reasonable valuations, earnings visibility and long-term growth potential?
To our mind healthcare, utilities and surprisingly IT at this juncture does offer the combination of reasonable valuations, earnings visibility and long term growth. There are parts of industries too such as power equipment which may be elevated on valuations but also offer reasonably high growth potential with reasonable visibility.
Mid and small-cap stocks have significantly outperformed over the past few years, do you still see attractive opportunities in this segment?
From a valuation standpoint relative to their own history, large cap valuations have compressed the most given the over USD 40 billion of FII selling (who are most exposed to large caps) from CY25 to CY26year to date. This segment therefore has one of the better risk-return tradeoffs. Mid and small caps one would need to relatively be more selective to pin point resilience of earnings and the ability to sustain valuations relative to growth.
What parameters should retail investors use to distinguish quality mid-cap businesses from companies whose valuations have become difficult to justify?
As a house, we tend to use a triangulation of our BMV framework - Business (ability to sustain earnings momentum etc), Management (walking the talk, good governance etc) and Valuations (risk-reward tradeoff etc) to zero in on businesses.
For retail investors, we would recommend investors to pay attention to return ratios (ROE, ROCE etc) and free cash flow generation ability at the least to separate the wheat from the chaff or in this case, genuine shareholder rewarding businesses from “hope” businesses.
FIIs have turned more selective this year, while DIIs flows continue to provide stability. What will it take for sustained FII inflows to return to Indian equities?
The biggest difference for DII’s versus FII’s is the availability of choice. DII’s are largely wedded to the local market dynamics while FII’s have a choice whether India or Asia, emerging markets or developed markets. The basic issue with Indian markets for the last two years has been a weaker earnings profile which for an overseas investor has been further impaired with the cost of taxation and the cost of currency (rupee depreciation) taking their expected return to even lower levels. Some of these pillars need to change.
A lift up in corporate earnings momentum to a high teens level or stability in currency markets (the recent FCNR notifications from the RBI could well address that) could provide the flip. In addition, India is generally tagged as a crude sensitive economy and any resolution to the West Asia conflict and a material easing off on crude prices could well be a catalyst to enthuse FII investors to come back to our markets.
From a supply perspective too, the proposed listing of India’s largest bourse, the largest telecom company, the largest asset manager etc could also be a catalyst for FII’s to take a fresh relook at India.
Global investors continue to favor AI-linked businesses. Do you believe Indian markets have enough listed beneficiaries of the AI theme?
Our participation in the AI related hardware (semicon chips etc) is limited as we are just commencing our journey into the semicon landscape. However, this is not to say that we are completely aloof to this change dominating global headlines.
At build out, the ecosystem requires power, back up power, chemicals, optic fibre connectivity etc where there are companies that can benefit from this capex. Coming to operations and deployment of AI, services companies would be required to make the data AI compatible and drive productivity gains for enterprises globally. In our view, it would open up opportunities for service providers as well.
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