Speaking to ET Now, Giri said the pace of earnings downgrades has steadily reduced over the past few quarters, setting the stage for a potential turnaround.
Downgrades slowing, Q4 could mark a turn
Data from the National Stock Exchange of India (NSE 500 universe) shows a clear moderation in downgrades:
- Four to five quarters ago, downgrades were 4.5 times upgrades.
- That ratio gradually fell to 3.5, then 2.5.
- In Q2, it narrowed to 1.2 times.
- In Q3, downgrades were about 1.3–1.4 times upgrades.
“We are not at neutrality yet, but monetary easing, rate cuts and reform measures should help Q4 earnings improve,” Giri said.
An encouraging sign emerged from smallcaps, where earnings growth accelerated to 24% year-on-year in Q3, up from 18% in Q2 — indicating improving momentum at the broader market level.
IT sector: More pain ahead?
Despite some valuation correction in IT stocks, Giri believes operational challenges remain unresolved.
The key concern: artificial intelligence (AI) is rapidly changing how software is built and deployed. Traditional models — where global software firms build platforms and Indian IT companies implement them — may face structural disruption.
Key risks include:
- AI-generated, goal-oriented software reducing repetitive implementation work.
- Potential 20–30% reduction in manpower needs over 3–4 years.
- Prolonged revenue weakness if employee headcount shrinks.
Adding to pressure, global IT majors such as Accenture and Cognizant trade at lower valuations than Indian peers, narrowing the premium justification.
“There could be further derating and earnings downgrades in large-cap IT,” Giri cautioned.
Midcap IT may outperform large caps
While large IT firms face margin defence challenges, midcap IT companies could be better positioned in the near term.
Giri highlighted that midcaps:
- Operate at lower margins (17–18% vs 26–27% for large caps), making margin defence less challenging.
- Are more product-oriented in some cases.
- May benefit from AI enabling them to take on larger projects.
Companies like Persistent Systems and Coforge could see less disruption over the next one to two years compared to larger peers.
Banks, pharma, metals preferred over IT
Giri said his firm has stayed underweight IT while favouring banks, metals, and Indian pharmaceuticals. These sectors have delivered stronger performance relative to IT in recent months.
Metals entering a strong bull phase
The metals sector, particularly steel, is entering what Giri described as a “very good bull run,” driven by supportive global and domestic macro factors.
Key drivers include:
- Stimulus momentum in the US, Japan and Europe.
- Fiscal easing in Germany.
- China curbing steel exports.
- Early signs of domestic capex revival in India.
Bank credit growth has improved from 10.5% to 14.5%, signalling potential capex acceleration in FY27.
Top metal picks
Giri’s preferred names in the sector include: Jindal Steel and Power (top pick), Tata Steel and JSW Steel.
Among non-ferrous players, Hindalco Industries remains attractive, though Giri prefers steel over aluminium.
Market outlook: Stock pickers’ phase
With IT under pressure but metals, PSU banks and pharma showing resilience, Giri believes the broader index may remain range-bound while sectoral opportunities continue to emerge.
“Earnings upgrades could begin in Q4, but sector selection will be critical,” he said.
For investors, the message is clear: stay selective, watch earnings revisions closely, and focus on sectors aligned with macro tailwinds rather than structural headwinds.