Q2FY27 Seen as Transition Phase for Indian Markets, Stronger H2 Expected on Domestic Growth: Spark Capital PWM CIO

Q2FY27 Seen as Transition Phase for Indian Markets, Stronger H2 Expected on Domestic Growth: Spark Capital PWM CIO

India’s equity market could be heading into a period of improving earnings breadth, with the September quarter likely to serve as a bridge toward stronger growth in the second half of FY27, according to Deepan Kapadia, Executive Director and Chief Investment Officer – PMS at Spark Capital PWM.

Kapadia expects the July-September quarter, or Q2FY27, to remain a transition phase rather than a period of broad-based acceleration. He believes the outlook for the second half is more encouraging, supported by domestic consumption, government expenditure, credit expansion and relatively easier financial conditions.

Earnings recovery gradually becoming broader

Kapadia's assessment of the June quarter is cautious but constructive. He said the performance was mixed, although the quality of earnings was stronger than what headline growth numbers alone suggested.

Several companies have started benefiting from better operating leverage and relatively healthy balance sheets. More importantly, the earnings recovery appears to be spreading beyond a limited group of companies.

However, the improvement has not been uniform. While revenue growth across several important sectors remained reasonably resilient, profitability faced pressure in some areas because of compressed margins, higher operating expenses and competition over pricing.

This divergence between revenue and profit performance is expected to remain important for investors as the earnings season progresses.

Why the September quarter could be a transition period

According to Kapadia, the September quarter is likely to lay the groundwork for a stronger second half of FY27.

Four factors are central to this view: domestic demand, government spending, credit growth and easier financial conditions. If these factors continue to strengthen, they could provide companies with a more supportive operating environment in the months ahead.

For the equity market, however, stronger economic activity alone may not be sufficient. Kapadia expects investors to increasingly differentiate between companies based on profitability, cash generation and the ability to deliver earnings upgrades.

This could result in greater divergence between individual stocks, making stock selection more important than simply relying on broader market or sector trends.

Earnings upgrades could be the key market catalyst

Kapadia identified a broad-based earnings upgrade cycle as the most important factor that could support a sustained move toward new market highs.

In his view, the next major leg of the market would require private-sector capital expenditure to accelerate alongside a meaningful recovery in mass consumption. A stronger capex cycle that eventually translates into employment and wage growth could make the improvement in corporate earnings more durable.

Such a combination could potentially support broader market participation instead of gains being concentrated in a small number of stocks.

At the same time, investors face several risks. Domestic liquidity, foreign flows, resilient economic growth and improving corporate earnings are positive factors, while elevated valuations, geopolitical developments, crude oil prices and global economic conditions remain potential headwinds.

Industrials and manufacturing remain in focus

Among sectors, industrials and manufacturing have emerged as areas of interest following the June-quarter results.

Companies exposed to India's domestic capital expenditure and manufacturing expansion could benefit from continued investment activity. Within capital goods, order visibility is being supported by several structural themes, including power-grid modernisation, rising electricity requirements from data centres, energy-transition investments and public-private capital expenditure.

Kapadia also highlighted specialty pharmaceuticals, where export conditions are improving while domestic formulation pricing remains steady.

Electronics manufacturing services, or EMS, is another segment he sees continuing to benefit from a high-growth trajectory, supported by government backing and company execution.

Selective approach to financials and NBFCs

The banking sector continues to have relatively strong fundamentals, with healthy capital levels, manageable asset quality and robust credit growth.

However, margins are likely to become a key variable as lower interest rates put pressure on net interest margins. Credit expansion, operating efficiencies and contained credit costs could partly offset that pressure.

Kapadia remains positive on large private-sector banks and efficient public-sector banks, expecting them to maintain relatively steady earnings compounding as loan growth remains supportive.

His stance toward NBFCs is more selective. Stronger capitalisation, improved risk management and reduced regulatory arbitrage could be positive over the long term. However, preference is for lenders with diversified funding, disciplined underwriting, controlled credit costs and sustainable returns rather than businesses dependent heavily on leverage or regulatory advantages.

Global investors becoming more selective

India continues to be viewed as an important structural growth market by global investors, but the manner in which foreign capital is being deployed is changing.

Rather than making broad allocations purely on India's growth narrative, investors are increasingly focusing on individual companies and their ability to deliver earnings.

That shift means companies may need to demonstrate actual earnings performance to attract sustained foreign interest. For domestic investors, it also reinforces the importance of evaluating business fundamentals instead of depending solely on market-wide sentiment.

Overall, Kapadia's outlook suggests that Q2FY27 could be a period of consolidation and transition, with the bigger opportunity potentially emerging in the second half if domestic demand, government spending, credit growth and corporate earnings continue to improve.