GST cut a partial cushion against trade headwinds, says Mahesh Nandurkar

GST rate cuts are definitely positive for consumption, especially with the festival season approaching, says Nandurkar

Markets cheered the cut in goods and services tax (GST) rates last week. Mahesh Nandurkar, managing director at Jefferies, tells Puneet Wadhwa in an email interview that for foreign institutional investor (FII) money to return to India, either valuations must moderate or growth expectations need to improve. Edited excerpts: 

Is the GST rate cut enough to cushion the impact of US tariffs? 

GST rate cuts are definitely positive for consumption, especially with the festival season approaching. The advantage is that these cuts are being implemented with limited fiscal impact, thanks to the conversion of GST cess into GST. They are also supportive of the inflation outlook, increasing the probability of rate cuts. While India’s exports to the US are affected by tariffs of about $50 billion, the GST benefit is estimated at $15–20 billion, providing a partial, though not full, cushion against trade headwinds. 

Are policy initiatives enough to bring FII money back to Indian markets? 

Given that the Consumer Price Index inflation outlook over the next 12 months is around 4 per cent — and with the recent GST cuts improving the outlook — there is room for the Reserve Bank of India to cut rates by 25–50 basis points. For FII money to return, either valuations need to moderate or growth expectations must improve. 

Is a bubble building up across equity markets? 

I don’t think so, though certain pockets of the Indian equity market are trading at elevated valuations. Growth is slowing, with corporate earnings per share (EPS) expected to rise 8–9 per cent this year and 12–13 per cent next year. In that context, the one-year forward price-to-earnings (P/E) ratio of 21.5x appears rich. Meanwhile, equity supply pressure may keep market returns in the low single digits over the next 12 months. If trailing returns remain lacklustre, domestic flows could slow — a risk worth keeping in mind.

 

Which sectors are in a spot of bother?

 

On a 12–24-month horizon, we remain cautious about consumer staples and information technology (IT) services. Consumer staples trade at 40–50x P/E despite single-digit EPS growth, driven more by historical institutional memory. Similarly, IT services growth is stuck in single digits, yet stocks trade at around 25x P/E. Both sectors may underperform over one to three years, though short-term rallies are possible given light institutional positioning.

 

What’s Jefferies’ stance on Indian markets now, in the context of emerging markets (EMs)? 

The Indian market has underperformed the EM benchmark by over 20 per cent in the past 12 months. This is the steepest underperformance India has seen in any 12 months over the past 15–20 years. As a result, relative valuations have moderated.

 

The challenge for India is the absence of a compelling artificial intelligence (AI) narrative, unlike North Asian markets such as China, Taiwan, and South Korea. If the AI frenzy among global investors fades, India could benefit in relative terms. That said, if the Indian market rallies sharply, we would look to trim into that rally.

 

Earnings outlook for 2025-26 (FY26) and 2026-27 (FY27)?

 

India will continue to trade at a premium to other EMs thanks to stronger EPS growth and higher corporate return on equity. Many large EMs, such as China and Brazil, have benchmarks weighted towards low P/E commodities or state-owned enterprises. In contrast, India’s index is driven by more efficient private sector companies.

 

EPS growth for FY26 is modest at 8–9 per cent, but we expect improvement in FY27. Earnings in the first quarter of FY26 were weak but largely in line with expectations, with cuts most pronounced in lenders and consumer staples.

 

Which sectors are you overweight and underweight on, from a 12-month perspective?

 

We are overweight on lending financials, given reasonable valuations and the expectation of gradual improvement in credit growth. Telecommunications, automotive, and select rural plays are our preferred ways to capture the consumption story. Cement also stands out, with both earnings upgrades and sector tailwinds, including GST cuts.

 

We are underweight on consumer staples, which do not fit well in the growth-versus-valuation matrix, and on industrials, where we take a cautious view on government capital expenditure. We are also underweight on energy and capital market plays. 

Market pulse: India unplugged

      *  Cash on sidelines: Flows need cheaper valuations or stronger growth; RBI may cut 25-50 bps

 

        *  Bubble check: Select pockets pricey; EPS growth slowing, forward P/E 21.5x

 

        *  Staples trap: 40-50x P/E, low growth, medium-term risk

 

        *  Tech on teeter: Around 25x P/E, single-digit growth, short-term rallies possible

 

        *  Pick your battles: Markets stable but selective — track valuations and sector risks