Indian Markets Eye H2 Earnings Recovery Amid Easing Geopolitical Tensions

Indian equity markets have bounced back sharply, and with geopolitical tensions in West Asia easing, market strategist Mayuresh Joshi, Head-Equity Marketsmith India sees a cleaner earnings runway opening up for the second half of the year, even as the near-term remains bumpy.

"The earnings outlook which probably looked very hazy a few weeks back, there is now some element of hope in terms of a strong earnings recovery as we head into the second half," Joshi told ET Now, framing the current moment as one of cautious optimism rather than full-throttle conviction.

Q1 will be messy; here's why that's okay

Investors should brace for a weak first quarter. Joshi attributes this to a familiar trio of headwinds: persistent supply chain disruptions, input cost inflation, and softening demand across sectors. Consumer-facing businesses face an additional wildcard in El Niño, which could ripple through agricultural output and rural spending in Q2. That said, Joshi notes the monsoon is tracking close to long-period averages, which should limit the damage.

The message to investors: look through the noise of Q1 and position for what comes after.

Sectors Joshi is backing

Pharma, domestic engineering, and power and utilities are Joshi's preferred plays heading into the second half. FMCG and consumer discretionary, by contrast, are expected to consolidate rather than outperform.

Within pharma, Joshi's clearest conviction lies with the CDMO and CSM segment, companies that manufacture molecules for global pharmaceutical firms under contract. He flags Sai Life Sciences as a key holding, citing ongoing capacity additions and a structurally strong growth story. Aether Industries also earns a mention, with its customised specialty chemicals segment contributing a significant revenue share and EBITDA margins expected to hold firm as new product launches ramp up.

On the hospital side, Joshi continues to hold Max Healthcare and Apollo Hospitals, praising their asset-light expansion strategy into tier II and tier III cities. He points out that organised hospital chains are rapidly gaining share from the unorganised market, while keeping leverage off their balance sheets. The key risks to watch: potential government-mandated pricing caps on medical procedures and the pace of insurance penetration, which could compress out-of-pocket spending that currently supports premium billing.

Banking: PSUs largely played out, midcap private banks still interesting

Joshi has been trimming PSU bank positions after hitting targets, a clean exit after a strong run. His focus now shifts to the mid-sized private banking space, where he sees more selective opportunity.

He is watching large private sector banks closely but with caution. Deposit accretion, net interest margin compression, and the trajectory of risk-weighted assets are the three metrics he's tracking before re-entering.

With the RBI unlikely to hike rates meaningfully, especially as global central banks turn more cautious, advances growth may still face headwinds in the near term.

Where Joshi does see alpha is in midcap private banks. Karur Vysya Bank stands out as a top pick, lauded for consistently strong numbers, a diversified loan book, solid deposit franchise, and tight risk management, a combination that has translated into healthy NIMs, ROAs, and ROEs. Karnataka Bank and City Union Bank are on his watchlist.

For CSB Bank, despite reports of Fairfax potentially exiting its stake, Joshi says the structural story remains intact, though a change in ownership could temporarily weigh on the stock price.

The bigger picture

With West Asian risks fading and domestic macro holding, Joshi's base case is a market that gradually improves, led by quality businesses in pharma, healthcare, engineering, and select financial names. The pain of Q1 may just be the setup investors needed.