FY27 to be challenging for PSU banks, limited room for upside: Seshadri Sen

With limited RoA levers left and a risk of credit costs normalising, we see limited room for further upside in PSU bank stocks, said Seshadri Sen of Emkay Global.

After a stellar run in the PSU banks basket since Nifty's September 2024 peak, Seshadri Sen, head of research and strategist, Emkay Global Financial Services, has turned wary on the sector. In an email interaction with Saloni Goel, he suggested adopting a more cautious approach, with limited upside on cards from hereon. 

 

How would you assess the Q1 earnings season? Is the worst over for India Inc? 

We view the Q1 earnings season as strong, with a clear improvement in the underlying earnings trajectory. Topline growth recovered to 18.5 per cent, while Ebitda margins remained resilient at 18.2 per cent, supporting a 19.8 per cent PAT growth. The dual combination of healthy revenue growth and stable margins suggests that the earnings recovery is becoming more broad-based. We believe the worst of the earnings slowdown is largely behind us, with improving demand and operating leverage likely to provide further support to earnings in the coming quarters.

 

 

Which sectors stood out in the June quarter earnings, and where would you position ahead of the Q2 results? 

Materials led the pack, with PAT growth of 49.9 per cent, followed by telecom (30.9 per cent) and financials (22.7 per cent). Materials benefited from firmer pricing and margin normalisation, financials from higher credit growth and stable asset quality. Heading into Q2, we remain overweight on discretionary, real estate and industrials, where we expect stronger earnings momentum due to improving demand visibility.

 

Mid & smalls have emerged to be more resilient than Nifty 50 so far in 2026. Do you expect their outperformance to continue, or can large-caps catch up? 

Yes, we expect SMIDs to continue outperforming large-caps, as the top 100 Nifty companies are dominated by relatively lower-growth sectors such as banks, IT, FMCG and energy. The SMID universe has greater exposure to higher-growth segments, which offer stronger earnings momentum.

 

Nifty is set for its first annual fall in 2026 after a decade of positive calendar year returns. Do you expect this to reverse? 

It's too early to call the year, but our base case is that the decline reverses, barring any external shocks. The setup is turning favourable: a broad-based earnings recovery is underway, FPI selling is easing, and valuations have corrected to more reasonable levels. Three factors will decide the path from here — the durability of the earnings upturn, the trajectory of foreign flows, and the external backdrop (global rates, oil, and geopolitics). If earnings deliver and no fresh shock intervenes, the index should recover through the rest of the year and close the gap.

 

RBI in its latest policy move said that inflation for FY27 would be 5 per cent. For a market that has not moved in almost 2 years, how should someone look to create an inflation-proof portfolio? 

For a market that's been range-bound for nearly two years, in an inflationary environment the way through isn't to hide in low-growth safety—it's to own companies whose earnings can outrun inflation and re-rate as the cycle turns. We'd focus on high-growth companies that can compound earnings through the cycle—if elevated inflation forces monetary tightening, that growth cushions the blow by offsetting the valuation compression higher rates bring.

 

Nifty PSU Bank index has been the top performer since Nifty's peak in September 2024. What is your outlook? Is there more room for upside? 

We remain cautious on PSU banks and expect FY27 to be challenging. Treasury profits, which contributed 6–21 per cent of PBT in FY26, will fade and drag EPS growth to low single-digits, while RoEs are likely to decline. With limited RoA levers left and a risk of credit costs normalising, we see limited room for further upside despite the strong recent performance.

 

Amid a lack of pure AI plays in India, what sectors/companies would you recommend them to look at on Dalal Street? 

We'd point toward domestic growth stories. Our top overweight sectors are autos, discretionary consumption, capital goods, healthcare and real estate, supported by structural domestic demand, GST rationalization, rate cuts and the upcoming 8th Pay Commission. Autos and discretionary should benefit from the consumption recovery, capital goods from sustained government and private capex, healthcare from steady growth, and real estate from a housing upcycle that still has room to run. 

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