ETMarkets Smart Talk | India enters earnings-led phase; Anil Rego favours financials, autos, industrials

India’s equity market appears to be transitioning from a valuation-driven phase to an earnings-led one, with the recent correction improving the risk-reward for long-term investors.

Anil Rego, Managing Director & Chief Investment Officer at Right Horizons PMS, believes the worst of the valuation-led correction may be behind us, while a broadening earnings recovery could provide the catalyst for the next leg of the market.

He remains constructive on financials, manufacturing and industrials, autos, power and renewable energy, and consumer discretionary, while advocating a bottom-up approach to identify businesses where earnings growth is yet to be fully reflected in valuations.


In this edition of ETMarkets Smart Talk, Rego explains why he sees the current consolidation as a potential base-building phase, what could bring FIIs back decisively to Indian equities, and why investors should focus on earnings growth, valuation and balance-sheet quality rather than simply chasing market-cap categories. Edited Excerpts –

Q) After falling in 1H2026, the Indian market is showing signs of stability. How are you reading the market?

A) We see the current phase more as a period of consolidation and base-building than a breakdown in the India story. The correction has already taken out a meaningful part of the valuation excess, while the earnings outlook remains relatively resilient. We believe the risk-reward has improved considerably after the correction. Importantly, we are not seeing the kind of fundamental deterioration that would justify a prolonged bear phase.

• Our view is that the worst of the valuation-led correction is behind us, and the next leg of the market can be driven by improving earnings rather than simply expanding multiples.

• We expect volatility to remain, but deeper drawdowns would require a much larger macro shock, such as a sustained energy disruption or a material deterioration in domestic growth.

• For long-term investors, we see this as a phased accumulation opportunity rather than a time to step away from equities. We would use volatility to add to businesses where the fundamentals have remained intact but prices have corrected.

Q) Household debt has risen to around 48% of GDP from about 35% a decade ago. Should investors be concerned that consumption has become increasingly credit-dependent?

A) We would look at the quality of the borrowing rather than just the headline household-debt number. Rising financialisation and greater access to formal credit are also natural features of a developing economy.

• The key positive is that India's banking system today is far healthier than it was in previous credit cycles, with stronger capitalisation and much better asset quality. We therefore do not see the current situation as a systemic balance-sheet risk.

• There are certainly pockets of excess, particularly where unsecured credit has grown faster than underlying income. But that is an opportunity for better stock selection within financials, rather than a reason to turn negative on the entire consumption or lending story.

• We continue to favour lenders with strong underwriting, diversified books and sustainable credit growth. The winners will be those that can compound through the cycle rather than simply maximise loan growth.

• More importantly, India's consumption opportunity is still structurally underpenetrated. As incomes rise and financialisation deepens, formal credit can remain a growth enabler, provided underwriting remains disciplined.

Q) With valuations having moderated but still not looking outright cheap, should investors expect the next phase of returns to come more from earnings growth than from valuation re-rating?

A) Absolutely. We see this as an earnings-led phase of the market. The correction has already delivered a meaningful valuation reset; from here, the scope for indiscriminate multiple expansion is much lower.

• That is not necessarily negative. In fact, it creates a healthier market because companies now have to earn their re-rating through actual earnings delivery.

• We see Nifty earnings growing at around 12% CAGR through FY26-FY28E, which provides a reasonable fundamental foundation for the market.

• Our focus is therefore shifting towards businesses where earnings estimates can move ahead of consensus, rather than businesses that simply look optically attractive because their multiples have fallen.

• This is where our contrarian approach becomes relevant: we want to identify quality businesses before the earnings improvement becomes fully visible in the price, rather than buy after the market has already re-rated them.

Q) How are you assessing the earnings outlook for India post Q1 numbers? Are we finally at a point where earnings upgrades can become a meaningful market catalyst?

A) We believe we are at the early stages of a broader earnings recovery, rather than at the end of the cycle.

• The June quarter was affected by elevated commodity prices, currency depreciation and geopolitical disruptions. Some of these pressures are now easing, creating a better operating environment for the September quarter.

• Still earnings ex-OMC’s have beaten expectation with SMIDs earnings growing YoY in late teens.

• Financials, industrials/capital goods, autos and consumer discretionary are among the areas where we see stronger earnings momentum. Healthy credit growth, order books, capex and improving demand are providing tangible operating support.

• If earnings upgrades broaden sequentially, that itself can become the catalyst for the next leg of the market.

• We therefore see the current consolidation as potentially creating the setup for an earnings-led re-rating once the improvement becomes more visible.

Read more: ETMarkets NRI Talk | Why private credit, REITs and PMS are entering the NRI investment conversation, explains Sumegh Bhatia

Q) FIIs are slowly turning around. What would it take for FIIs to return decisively to Indian equities?

A) We don't see FII selling as a verdict on India's fundamentals. A significant part of the recent selling has been driven by global allocation, the AI trade and opportunity cost, rather than a deterioration in India's domestic growth story.

• India is already relatively under-owned after a prolonged period of foreign de-risking. As global headwinds ease and the crowded AI trade normalises, India can become an important destination for the marginal global dollar again.

• We would look for three things to come together: improving earnings visibility, more reasonable valuations and currency stability.

• Importantly, we don't think FIIs necessarily need to wait for earnings growth to reach the mid-teens. If the direction of earnings estimates turns positive, foreign investors can begin positioning ahead of the full recovery, which we are seeing playing out in current earnings season.

• We are already seeing a more interesting change in FII behaviour: their participation is broadening beyond traditional index heavyweights into a wider universe of mid- and small-cap companies. That is a more constructive signal than simply looking at monthly net flows.

Q) India continues to command a premium over several emerging markets. How much of that premium is justified, and where is the market still pricing in too much optimism?

A) We believe India deserves a structural premium, because the growth runway is fundamentally different from many emerging markets. Domestic consumption, capex, manufacturing, financialisation and improving corporate balance sheets provide multiple engines of growth.

• The mistake would be to assume that every Indian company deserves that premium.

• We are seeing much better opportunities where the market has temporarily become sceptical about a company's earnings trajectory, while the underlying structural story remains intact.

• At the same time, there are pockets particularly some re-rated capital goods and smaller companies where valuations have run significantly ahead of near-term earnings delivery. We would be selective there rather than broadly bearish.

• Our approach is therefore to earn the premium through stock selection: buy businesses where growth, balance-sheet quality and cash-flow visibility justify the valuation, and look for contrarian opportunities where the market is underestimating the earnings runway.

Q) Which sectors do you believe can deliver earnings growth above the broader market over the next 2–3 years?

A) Financials: We remain structurally positive. Private banks and selected NBFCs have healthy balance sheets, stable asset quality and strong credit-growth opportunities. Financialisation of household savings adds another long-term growth driver.

• Manufacturing & industrials: Make in India, PLI, localisation and China+1 are creating a multi-year investment cycle. We see this as a structural shift rather than merely a capex upcycle.

• Auto & auto ancillaries: We continue to see strong volume, operating leverage and earnings momentum, with EV adoption adding another structural layer. Auto has been one of our stronger sector calls.

• Power & renewable energy: Rising electricity demand, manufacturing, data centres and EVs are creating a structural need for generation, transmission and storage investment.

• Consumer discretionary: We expect improving domestic demand and the festive cycle to support earnings as the consumption recovery broadens.

• Semiconductors, electronics and digital infrastructure: These are longer-duration structural themes where India's manufacturing ecosystem is still at an early stage. We would focus on companies that can translate the industry opportunity into sustained earnings compounding.

Q) Do you see a rotation from expensive growth stocks towards more reasonably valued large caps as the dominant market theme?

A) We would not call it simply a rotation from growth to large caps. The larger shift is from expensive, momentum-driven growth towards reasonably valued businesses with visible earnings growth.

• That naturally creates opportunities in large caps, particularly where a period of underperformance has brought valuations back to more attractive levels.

• But we would not automatically sell a mid- or small-cap simply because it has already performed well. If earnings growth continues to compound ahead of the market, growth can justify the valuation.

• Conversely, a large-cap at a lower multiple is not automatically attractive if earnings remain stagnant.

• Our framework remains: earnings growth + valuation + balance-sheet quality. We want to own the businesses where the market is underestimating the combination, irrespective of market-cap category.

• This is where we see the current market becoming more interesting: the opportunity is shifting from broad beta to differentiated alpha through bottom-up selection.

Q) Mid- and small-caps have delivered strong returns over the longer term. How concerned are you about pockets of excess valuation and liquidity risk?

A) We are constructive on the segment, but not indiscriminate. The recent correction has actually made the opportunity more interesting because it has separated businesses with genuine earnings compounding from those driven primarily by liquidity and momentum.

• We continue to see a long runway in areas such as manufacturing, electronics, financial services and emerging consumer businesses, many of which naturally sit outside the traditional large-cap universe.

• The contrarian opportunity is particularly interesting where good businesses have corrected along with the broader segment despite their underlying earnings trajectory remaining intact.

• At the same time, we acknowledge that some pockets remain expensive. In such cases, the scope for multiple expansion is limited and returns will have to come almost entirely from earnings.

• Liquidity is a risk, but we believe it is best managed through position sizing, quality filters and staggered accumulation, rather than by avoiding the entire segment.

• Our preference remains very clear: we would rather own a high-quality small-cap with a long earnings runway at a reasonable growth-adjusted valuation than a large-cap simply because it appears safer or cheaper.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)