Earnings Growth Unlikely to Normalize by Q2FY27, Downgrade Risk Persists: Samco's Umeshkumar Mehta

Uncertainty Looms Large Over Indian Economy

The Indian economy is facing significant uncertainty, with the risk of earnings downgrades still not fully behind us. According to Samco Mutual Fund CIO Umeshkumar Mehta, earnings growth is unlikely to normalise by the second quarter of FY27 due to the full impact of raw material and oil price changes on sensitive sectors not yet being fully reflected.

The ongoing conflict in the Middle East has led to a significant increase in oil prices, which is likely to have a lasting impact on the Indian economy. India is heavily dependent on imports from the Strait of Hormuz, with about 70% of its oil imports and nearly 90% of its LPG imports passing through the region. Every $10 per barrel rise in crude oil prices widens the current account deficit by around $18 billion (around 0.41% of GDP) and adds around 50 basis points to CPI inflation.

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Despite the RBI's latest projections estimating GDP growth at around 6.9 percent for FY27, the risks are clearly tilted to the downside. The ongoing uncertainty is expected to have a significant impact on the earnings of Indian companies, with Mehta warning that the risk of further downgrades still remains. The demand visibility across sectors is still weak, and companies may remain cautious in their guidance.

Mehta also highlighted that India appears less attractive to global investors due to the lack of pure AI-driven plays and the country's positioning as a dividend and buyback way of creating value in IT companies. Foreign investors are facing losses from both market indices declining and rupee depreciation, as well as higher transaction costs following the recent STT (Securities Transaction Tax) hike.

In terms of the defence sector, Mehta is bullish, citing the push for indigenisation and increased budgetary allocations as drivers for strong order inflows and earnings visibility. The ongoing conflict in the Middle East is introducing volatility, but it is also creating opportunities within India's defence ecosystem.

Overall, while a ceasefire provides temporary respite, the risk of further escalations remains high, and the Strait's operations may remain constrained for the foreseeable future. The Indian economy is facing significant uncertainty, and any recovery in earnings is likely to be gradual rather than sharp.

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