Earnings resilient, but energy prices cap rerating prospects: Bharath S

S Bharath says elevated oil prices could pressure inflation, corporate margins, but resilient earnings and private capex support the long-term case for broader market outperformance

The structural case for broader market outperformance remains intact, though the pace may moderate until the current macroeconomic (macro) challenges ease, says Bharath S, head of equities at Sundaram Asset Management Company (AMC). In an email interaction with Abhishek Kumar, he discusses the risks posed by elevated oil prices, the outlook for corporate earnings, and opportunities in the mid and smallcap space. Edited excerpts:

 

With West Asia tensions showing no signs of easing and oil prices remaining elevated, have Indian equities fully priced in these risks, or is there scope for further correction? 

India’s economy has so far remained resilient, with the government absorbing the initial impact of higher energy prices. However, a prolonged period of elevated energy prices could have cascading effects on inflation, demand, and interest rates, partly offsetting the benefits of indirect tax cuts implemented last year. The challenge is to balance growth with the need for monetary tightening, an issue the central bank has begun addressing through recent measures. A couple of rate hikes are gradually being priced in.

 

From an equity market perspective, the correction so far has been valuation-led rather than driven by earnings performance. At an aggregate level, ex-energy earnings expectations remain intact in the near term. Any deeper correction would warrant near-term earnings disappointment, for which we see no supporting evidence. The scope for a valuation rerating remains limited against the prevailing macro backdrop, potentially leading to wide dispersion in stock returns.

 

As in the past, every challenging macro phase leads to a reset of policy priorities and creates bottom-up opportunities. Markets do not necessarily wait for an unambiguous turn in the macro environment.

 

What are the key triggers to watch for that could add to the pressure on Indian equities or change the market’s course from here? 

Key triggers include a de-escalation of the West Asia conflict, a decisive cooling of energy prices, and stable global bond yields. While domestic growth is still expected to remain above trend, the potential 0.5-1 percentage point drag on gross domestic product from elevated oil prices is not factored into the base case for 2027-28 earnings expectations. A timely de-escalation of the conflict remains key to keeping markets on course.

 

How are you positioning your portfolio amid these macro headwinds? Which sectors offer relative comfort, and which ones are you cautious about? 

Our portfolio approach is more bottom-up, with a focus on themes offering durable growth opportunities, companies with strong management teams and well-capitalised balance sheets, and businesses generating steady internal cash flows.

 

At a broad level, we remain constructive on select manufacturing themes linked to the domestic private capital expenditure (capex) cycle and on financial services, while remaining cautious about global cyclicals such as commodities and chemicals.

 

Long-term growth trends driven by greater policy support for power sector investments and energy security, emerging investments in domestic data centres, accelerating electric vehicle adoption, and resilient premiumisation in select consumption segments remain intact. These trends could offer interesting opportunities during the current corrective phase.

 

Mid and smallcap stocks have outperformed largecaps despite the uncertain environment. Is the trend sustainable? 

Return dispersion across market capitalisation segments has largely been driven by differences in earnings growth, with new-age businesses and segments benefiting from policy tailwinds emerging as bright spots. Mid and smallcap companies now account for nearly a third of aggregate market earnings, with profits growing faster despite macro uncertainties. A study of the past decade’s winners shows that more than 90 per cent of wealth creators emerged from outside the top 100 stocks.

 

Despite external headwinds, services exports, global capability centres, and localisation efforts have provided some support. We expect the structural case for broader market outperformance to remain intact, though the pace may moderate until the current macro challenges ease. Underleveraged corporate balance sheets, a pickup in private capex, and relatively attractive valuations following the recent correction strengthen the long-term investment case for mid and smallcaps.

 

The second-quarter (July-September/Q2) earnings season is underway. What is your assessment of the results announced so far, and has the West Asia conflict started to weigh on corporate performance? 

The earnings season so far, covering financial services, software, and select manufacturing companies, has been broadly in line with expectations. There have been pockets of positive surprises across industrials, non-lending financial services, and several smallcap companies, while some consumer-facing companies have reported weaker-than-expected results.

 

The West Asia conflict is likely to necessitate further price hikes, with the impact on corporate margins potentially becoming more visible in the second half of this financial year (2026-27). Several sectors have already undergone consolidation over the past decade. In our view, further price increases could weigh more heavily on volumes as companies pass on the additional costs to consumers.