Speaking to ET Now, Shreyash Devalkar, Head-Equity, Axis MF said the June-quarter earnings season has so far been more resilient than initially feared, with listed companies reporting only limited impact from geopolitical tensions and inflationary pressures.

Earnings resilience despite macro concerns
Devalkar believes the focus has shifted back to corporate earnings after the results season. While smaller companies have faced some challenges, the broader listed universe has remained relatively insulated.”We looked at the internals of the market. They are always driven by earnings growth, and that is what, at the end of the day, the market has come back to after the results season. Earlier, it was expected that the June quarter would see a significant impact from the war and inflation. While it definitely affected smaller companies, the commentary from listed companies has largely suggested that the impact has been benign,” he said.

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He added that higher nominal GDP growth and inflation could actually support revenue growth across several sectors.
“Higher nominal GDP growth and inflation would actually help revenue growth this quarter in many segments. There have been price increases, which are reflected in improving credit growth. We are looking at companies where higher pricing and higher revenue growth will come with minimal impact on margins. In some segments, the price increase may more than compensate for higher raw material costs, allowing margins to remain broadly intact,” he added.
Largecaps may finally catch up
Midcap companies have consistently delivered stronger earnings growth than largecaps over the past several quarters. However, Devalkar believes improving nominal GDP growth could help narrow that gap.

“That has been the case for many quarters now. Midcaps have consistently delivered stronger growth, while largecap growth has remained subdued. In my judgment, largecap companies generally cannot grow too far away from nominal GDP growth. With nominal GDP growth improving because of inflation, there is a case for largecaps to see an uptick in headline revenue growth,” he said.

IT still lacks growth triggers
Despite attractive valuations, Devalkar believes the IT sector needs stronger revenue growth before becoming compelling again.

“When the growth for any sector is below 5%, it becomes difficult to generate meaningful equity returns. Even after combining low dollar revenue growth with rupee depreciation, free cash flow yields, dividends and buybacks, the overall return is only reasonable, not exciting. Unless dollar revenue growth improves beyond 5%, it becomes difficult to build a strong investment case,” he said.

He also pointed out that some global IT peers benefiting from the AI wave are trading at lower valuation multiples.

“One should not only look at valuation. Since growth is below 5% so far, returns need to be evaluated more holistically,” he said.

Auto ancillaries preferred over OEMs
Within automobiles, Devalkar said his preference remains firmly tilted towards auto ancillary companies rather than vehicle manufacturers.

“Broadly, we are more positive on auto ancillaries than auto OEMs. Traditionally, auto ancillary companies depended heavily on the domestic auto cycle. Today, many of them have diversified into non-auto businesses and exports, making them an attractive play on India’s manufacturing story. That is why we continue to have meaningful exposure to this space,” he said.

Pharma and healthcare remain portfolio favourites
Devalkar said the investment case for pharmaceuticals has evolved, with domestic businesses driving consistent growth while international operations have stabilised.

“There are two parts to pharma—domestic and international. The international business is broadly getting into a base and is reasonably priced. On the domestic front, growth remains strong and is comparable to, or even better than, many FMCG companies. That is why pharma continues to fit well within our portfolio,” he said.

He added that the firm’s healthcare exposure extends beyond pharmaceuticals.

“Our exposure is not only to pharma but also to healthcare, including hospitals and diagnostics. We remain positive on the entire healthcare space,” he said.

Defence remains a structural story, but valuations need caution
While maintaining a positive long-term view on defence, Devalkar advised investors to be selective as valuations have become richer.

“Defence is a long-term structural story, and there is no doubt about that. However, unlike three years ago, these structural themes are no longer in the early stages. Whether it is power or defence, these sectors have now been discovered. Investors need to be cautious because of valuations,” he said.

Crude oil remains the biggest risk
On market risks, Devalkar believes recent developments have largely been supportive for equities, though crude oil prices continue to warrant close monitoring.

“There have been more incremental positives than negatives. Cooling crude prices and the measures taken by the government and the central bank have been supportive. The biggest risk continues to be crude oil because it remains highly unpredictable. The monsoon is also a risk, but it is broadly known and largely priced in,” he said.