Jefferies' Mahesh Nandurkar: Resolution of India-US trade impasse could be a near-term market catalyst

The Indian equity market could see a near-term boost if the India-US trade impasse is resolved, according to Mahesh Nandurkar, Head of India Research & India Equities Strategist at Jefferies India.

Equity market returns have been muted, with India underperforming regional peers like Korea, Taiwan, and China over the past year. Speaking exclusively to CNBC-TV18, Nandurkar said, “67% of emerging market funds are underweight on India. India has already underperformed, and most of the conversations that we are having with the investor base are about whether it is time to buy India. My sense is that a potential improvement in India-US trade relations can be that one big trigger. If that were to happen, we should see a decent spike in the market.”

Corporate earnings in India have been subdued, with single-digit growth, but government measures like GST cuts and income tax reductions are expected to improve the earnings outlook in the second half of FY26. “On the earnings growth story, we definitely believe that the government has played its part in terms of the income tax cuts or the GST cuts that we’ve seen,” Nandurkar said.

Certain sectors are likely to benefit from these measures. Passenger cars, two-wheelers, consumer durables, and cement are expected to see strong double-digit volume growth during the festive season, supporting overall corporate performance.

Credit growth is another key factor that could bolster earnings. Measures from the Reserve Bank of India—such as interest rate cuts, CRR reductions, and lower risk weights on consumer loans—are expected to take effect, helping corporate EPS growth in the second half. For FY26, full-year EPS is projected to remain in high single digits, while FY27 could see 12–13% growth, largely driven by a recovery in the banking sector.

Despite an underweight stance on large-cap IT services, opportunities remain in mid-cap and small-cap IT firms as well as sectors benefiting from GST rationalisation. NBFCs could also gain from improved credit growth, offering selective investment opportunities for investors, Nandurkar noted.

Below is the excerpt of the interview.

Q: We were just listening in to Chris Woods a while back, and he was giving us a big picture view on India, and what's happening with this trade deal, and what happens to the market if it gets done or not done. But now we want to get a little more micro with you, Mahesh. And I think at the crux of it all is this earnings story in India, which has been sputtering along, with single-digit earnings. We can't handle what happens with the trade deal, but from the RBI side, from the government side, GST, income tax, all that stimulus has come through the system. Will it translate into better earnings growth this year?

Nandurkar: On the earnings growth story, we definitely believe that the government has played its part in terms of the income tax cuts or the GST cuts that we've seen. And I think it is going to be really very crucial to watch the bottom-up data over the next month or so, especially on the auto side and the segments which have seen the GST cuts, but especially autos and air conditioners. I expect that we should therefore see a very strong pickup in the volume growth in these categories over the next one month, particularly, but even beyond. But if that does not happen for whatever reason, then I think it will be a very big negative, in my view. But that's not our base case. Our base case is that we have a very strong festive season, which should reflect in strong double-digit volume growth for passenger cars, two-wheelers, and other consumer durables. So, we are clearly watching out for that data over the next one month or so.

By and large, the earnings story is dependent not just on the GST side, but also on the credit growth side improvement as well. Over the last six months, the Reserve Bank of India has taken a variety of measures, such as cutting the interest rates, cutting the CRR, reducing the risk weights on consumer loans, etc. And I think we should see now, over the next six months, the impact of all those measures result in higher credit growth as well. So, over the next six months, we are looking forward to one, the impact of the GST cuts, and secondly, the impact of credit growth improvement driving corporate EPS growth to be better in the second half.

Q: So, headline EPS growth should be in double digits, Mahesh, at least for the second half of the year? And for the full year, what are you expecting now for FY26?

Nandurkar: Yeah, double-digit EPS growth in the second half. On a full-year basis, I think it would probably still be in high single digits. And I think next year, FY27, should be a much better year, looking at 12–13% EPS growth. The primary reason for the full-year EPS in FY27 to be three to four percentage points higher than FY26 is once again going to be driven by banks in my view. This year, FY26, we have seen the banking sector getting negatively impacted because of the rate cuts and the negative impact that it has on the net interest margins. I think those should reverse next year, driving higher EPS growth from the banking sector. That would be the primary reason for next year. But this year, I think we should still be in high single digits for FY26.

Q: Will this be a catalyst for market returns? Because so far, it's been very, very muted. Now, one year of no returns, and with double-digit earnings growth in the second half, 3-4% higher in FY27, do you see the headline index moving from a return point of view, or will that still be capped?

Nandurkar: See, the thing is, in fact, we spoke from the very same venue exactly one year ago. At that time, we did highlight our cautious view on the market. Thankfully, the market hasn’t really gone down. We are just about at the same level where we were about a year ago. But what has happened over the last 12 months is that the other regional markets, like Korea, Taiwan, even China, have done extremely well. So, while the Indian market did not go down in absolute terms, it has underperformed the regional or the emerging market benchmark by almost 30%. So, to that extent, the relative valuations have seen a correction, not the absolute but the relative valuations, because of much stronger performance by the other regional markets.

Even at this point in time, I believe that the value versus growth equation is not looking very conducive if I take the next 12-month view. The earnings growth improvement that we just talked about, I think it’s already expected, so it should not be a very big trigger. But what really makes us optimistic on the market from a near-term perspective is that the foreign investor positioning on India is at a very, very low level. 67% of the emerging market funds are underweight on India. India has already underperformed, and most of the conversations that we are having with the investor base are about whether it is time to close out that underweight, basically whether it is time to buy India and bring it to a neutral level. We need a trigger for that to actually unfold. My sense is that a potential improvement in India-US trade relations can be that one big trigger. If that were to happen, we should see a decent spike in the market.

Q: So, the resolution of the India-US trade impasse could be one trigger. What else? What are the other conversations around you at the conference? It's only day one. I think today, Mahesh, one piece is IT. I know that you guys are underweight on large-cap IT services. But the market is trying to seek out new themes, and some of them are very small companies, mid-cap or even small-cap companies. There's a bit of a digital play, or maybe a tiny hint of a platform play. We don't have too much of that here in India. Then you have the consumer tech companies, of course, whether it's platform or the Swiggys and Zomatos of the world. How are you looking at that missing link in the India equity story?

Nandurkar: That's a very fair question. In fact, that is one of the key reasons why the North Asian markets have done so well, and the Indian market hasn’t really done that well. For global investors, the key investment theme for the last 12 months, or maybe even the last 24 months, has been the rise of AI. And as you mentioned, in India, we don’t really have many large-cap names that are actually a play on the AI theme. Yes, there are some small-cap and mid-cap names, but no large caps as such, and that’s one of the key reasons.

So I feel that as long as AI remains the most dominant theme for global investors—which is the case right now—it is difficult for the Indian markets to outperform the other regional markets. In fact, in many ways, India is also seen as a country or economy where there could be a possible negative impact coming through the IT services sector, and that’s why we have an underweight on IT services.

Q: Since you’re underweight, you don’t expect anything spectacular from legacy IT services companies. But in the best case, will they remain neutral, or could they provide a downside drag if their earnings really taper off in the next couple of months? What’s your base case?

Nandurkar: I do believe that from a 12-month standpoint, it should be an underweight sector. In between, there can be some short-term trading rallies because of investor positioning and maybe some positive news coming here and there. But I sense that the best way to play the IT story is actually through some of the mid-cap and small-cap names, which are driving much higher growth. Many of the large-cap IT names are growing in that single-digit zone at this point in time, but some of the mid-caps and small caps, as I said, are growing in double digits. Although they are trading at higher multiples, investors and the market are right now willing to pay that higher P/E multiple for the visibility on growth that we are likely to see from some of these mid-cap ideas. So, I would continue to be underweight on the large-cap names and the sector as a whole, but some selective mid-cap ideas can be looked at.

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