HDFC Securities India Equity Strategy – Q4FY26 Quarterly Flipbook: Inflationary environment ahead; Monsoon a key monitorable

AHMEDABAD, 10 JUNE:

Inflationary environment ahead; Monsoon a key monitorable

The aggregate performance of the Q4FY26 earnings season was robust as YoY PAT growth continued its steady improvement supported by healthy demand. Aggregate revenue/PAT grew by 12%/12% YoY and 9%/14% QoQ respectively across the HSIE coverage (~270 stocks). Also, revenue and PAT grew strongly by 7.9%/12.9% respectively in FY26, at aggregate level. It is worth noting that YoY earnings growth in this quarter was primarily led by OMCs, lenders, IT, and insurance while telecom was a key drag.

In Q4FY26, earnings of large caps lagged those of small and midcaps. Earnings of largecap stocks grew by 10.5% YoY (Q3FY26:11.3%) as against 36% YoY of midcaps (Q3FY26:16.5%) and 23.7% YoY of small caps (Q3FY26:23.4%). Double-digit YoY earnings growth was reported by lenders, insurance, capital markets, consumer discretionary, real estate, energy, IT, cement, chemical, metal and power sectors. Further, subdued YoY earnings growth was reported by telecom, industrial/infra, auto, home improvement and pharma sectors.

At the aggregate level, energy, cement, lending financials and auto sectors predominantly led the PAT beat of 9.5% in Q4FY26.Historical trend of the percentage of under-coverage companies beating PAT estimates is shown below:

Lenders, auto, IT, infrastructure, cement, and chemical sectors led majority of the earning downgrades for FY27E in Q4. While OMCs suffered the downgrades, but upstream companies witnessed healthy upgrades resulting in a minor upgrade for the aggregate energy sector. Other sectors which aided upgrades were insurance, capital markets, consumer discretionary, and real estate. Downgrades were mainly led by SBI, ICICI, L&T, Infosys, HPCL, BPCL, IOCL, GAIL, and Ambuja cements. Key companies that witnessed upgrades were ONGC, OIL, LIC, BSE, United spirits, Godrej properties, and Hindalco. Consequently, aggregate earnings estimate for coverage universe saw downgrades of 2.9% and 2.7% in FY27E and FY28E, respectively. These downgrades were observed after healthy upgrades of Q3FY26 reflecting increased business volatilities in the wake of ongoing war in middle east. 

For the HSIE coverage universe, projected earnings growth for FY27E and FY28E stands at 14.4% and 14.6%, respectively. The extraordinary earnings growth CAGR of 18% over FY19-FY24 will be normalized to ~9.5% over FY24-27E. We expect growth outlook at the aggregate level (ex-oil & Gas) to remain steady led by BFSI and consumer sectors. Oil & gas sector driven by OMCs pose downside risk to the aggregate earnings if the war escalates and crude further goes up. We anticipate economy to face inflationary headwinds in FY27 led by commodity price rise and fuel price hikes. Probable El-Nino event may put rural economy under pressure due to reduced monsoon showers. Accordingly, in this inflationary environment, RBI’s stance on interest rates become a key monitorable.

The Nifty 50 index is currently trading at ~18.4x FY27E (10Y avg: 20.4x) based on consensus EPS. Recent index decline has created an upside room of 10-15%. Our preferred sectors are financials, industrials, power, real estate, chemicals, and consumer discretionary. We remain underweight on energy, cement, and telecom.

Model portfolio: Stock-specific bottom-up ideas hold the key for outperformance rather than index or sectoral calls. Among large sectors, we have cut overweight in banks, reduced weight in energy sector and moved IT back to neutral post recent fall.

Key changes in the model portfolio are as follows:

(Disclaimer: The information provided here is investment advice only. Investing in the markets is subject to risks and please consult your advisor before investing.)

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