Expert view: Prolonged US-Iran conflict risks earnings estimate cuts, says Dhiraj Relli of HDFC Securities

Expert view: Dhiraj Relli, MD and CEO of HDFC Securities, believes a prolonged US-Iran conflict may lead to cuts in earnings growth estimates, but FY27 earnings growth may be better than FY26. He also expects the second half of calendar year 2026 to be better, with improved sentiment, prolonged consolidation, and reasonable valuation multiples. In an interview with Mint, Relli shares his views on the sectors he is overweight and underweight in, as well as his insights on how investors should pursue global investing. Edited excerpts:

Over the past 24 months, the Indian stock market has experienced a phase of heightened volatility, prolonged consolidation, and time-wise correction, driven by uncertainties related to the US trade tariff, evolving domestic policy dynamics, energy price shocks, and supply disruptions stemming from the West Asia conflict.

Despite an improving macroeconomic backdrop, the market remains fundamentally bottom-up, with growth-oriented themes and companies scaling up expected to be the key beneficiaries.

Even amongst the sectors, there are stock-specific opportunities. By and large, valuations have corrected over the last 12 months by 20-30% for most pockets. We reckon that strong earnings growth will remain key, along with stability in geopolitical situations.

A prolonged conflict may lead to cuts in earnings growth estimates, but we do expect FY27 earnings growth to be better than FY26. We expect the second half of calendar year 2026 (H2CY26) to be better on improving sentiments, prolonged consolidation and reasonable valuation multiples.

The quarter began with heightened volatility amid the West Asia conflict, marked by elevated energy prices, weakening macro indicators, and significant foreign capital outflows that pressured the currency and forex reserves.

However, conditions improved following the de-escalation of the US/Israel and Iran war, with crude prices and inflationary pressures easing, the currency stabilising, and FII selling moderating, resulting in a more stable macro environment.

Equity markets also recovered from their lows as sentiment improved. However, again, the Iran-US conflict started, and that could impact overall global markets. Given a lot of uncertainties, there could be a delay in earnings recovery (street expectation of nearly 15% CAGR growth in FY27 and FY28).

West Asia conflict and delayed monsoon could impact earnings in the first half of the financial year 2026-27 (H1FY27). The actual end of this war/issue would ensure global certainty, along with better earnings and improving Indian macros, to augur well for Indian markets.

We remain overweight on diversified financials and private banks, manufacturing and industrials, defence, pharmaceuticals, cement and consumer discretionary sectors. We are underweight on consumer staples.

For the US piece, FY27 will be muted, with companies like Dr Reddy’s, Zydus Lifesciences, Natco and Cipla likely to be impacted from gRevlimid genericization, but the base business is dependent on company-specific launches; given lower shortages, US price erosion is not expected to come down further.

We note that almost all the companies have very strong B/S with huge cash reserves, and therefore, M&A opportunities also exist (Sun Pharma - gigantic acquisition of Organon).

Domestic piece of business continues to grow at a healthy pace for large players. Indian pharma companies have been investing heavily in R&D, and that should drive US business growth on the back of niche launches.

Over the last 10-15 years, Indian pharma players built their global reputation on a simple but powerful proposition of producing and exporting high-quality generic medicines at unmatched scale and cost efficiency.

After a prolonged phase of uneven demand, the Indian consumer sector is showing clearer signs of normalisation, but the recovery remains patchy across segments and channels.