Key Takeaways:
- Active portfolio constructs have a distinct advantage – The current volatility is not a beta play, and the structure of portfolios plays a critical role.
- Aggregate valuations remain elevated.
- When comparing actual versus consensus earnings expectations, the volume and pricing assumptions show limited indicators to confirm the prevailing trend.
- Current headwinds affecting supply dynamics will require increased effort to maintain the current trajectory.
- Favourable base earnings combined with weak pricing trend to support growth in near medium term.
Q3FY26 earnings broadly came in line, with divergent trends at industry and firm level. Given the phase we are, in terms of volume – pricing at the topline and operating margin level, results didn’t have major negative surprises. While earnings were broad based, quality of earnings is a key factor to watch for. Aggregate trailing twelve months earnings growth was driven primarily by two segments BFSI and Oil& Gas (Accounts for 52% of corporate profits) led by PSU banks, unsecured & gold loan book in NBFCs and downstream PSUs in the oil & gas segment. Certain segments are seeing healthy topline- earnings trajectory but not reflected in aggregate trends. We see mismatch in growth expectations vs the current earnings trajectory and is gradually getting adjusted for.
Table 1: Aggregate net profits and trailing valuations
Chart 1: Q3 FY26 Net Profits
Table 2: Aggregate sector trends and market cap
Portfolio implications & construct
Growth assumptions carry risk of supply side factors which could alter demand, margin trends in the near -medium term and is not priced in the consensus expectations. In this environment we continue to assign high probability to conservative assumption when we build portfolios from a risk management perspective.
With current mix of topline, high volumes – moderate to low pricing and headwinds to margins, we continue to build portfolios with an assumption of ~ 10% CAGR vs consensus of 14%, as we see certain segments with headwinds and segments where expectations are low. Primary differentiation with the consensus remains – volume-pricing assumption, as we see limited indicators to confirm the trend. Current headwinds to supply dynamics added to this would require higher effort to sustain the current trajectory. Key positive remains favourable base and weak pricing behind.
Current stock price volatility is leading to miss pricing, providing opportunity to deploy capital from a bottom-up perspective. As we are close to fiscal year 2026, corporates are seen to end the year with stronger balance sheet metrics. Key trend to watch for would be quality of earnings and valuation compression in which we are currently navigating through.
Our portfolios are positioned based on above assumption and deployment of capital is gradual as we use the market volatility as opportunities to build long term portfolios at favourable risk- reward entry points. Currency weakness, emerging markets discount to all country index and India premium to MSCI EM is shrinking, these factors could act as tailwinds and support valuations in the near- medium term.
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