The India Briefing
India’s next profit cycle: why earnings matter again
The month, we take a deeper look at the improving earnings trend and fundamental investment backdrop in India.
Please find below our latest thoughts on India:
- A key feature of India over the years has been its structural growth story. Favourable demographics, rising household incomes, digital transformation, and an expanding role in global supply chains have underpinned a powerful investment case for many years.
- However, after several consecutive years of strong market performance, questions inevitably emerged around whether enthusiasm had pushed equity valuations to overly demanding levels.
- That debate appears more balanced today. Indian equities trade at a roughly 25% discount to the broader emerging markets index. Relative valuations look considerably less stretched than they once appeared.1
- This pullback in equity market performance reflects a period of slower corporate profit growth.
- Over the last two years, companies faced a combination of higher interest rates, uneven consumer demand, tariffs, and broader global macroeconomic uncertainty. Earnings expectations were steadily revised lower.
Figure 1: MSCI India Index vs Consensus Earnings per Share (EPS) Estimates
Source: Macquarie Research, as of 21 August 2026.
- However, conditions have started to improve. The latest earnings season delivered a welcome series of positive surprises, with both revenues and profits exceeding expectations. Strength was broad-based across sectors.2
- This encouraging breadth is a reminder that, unlike many other markets that are dependent on a single growth engine like technology exports or commodities, India’s economy benefits from a combination of domestic consumption, services exports, manufacturing expansion, and financial deepening.
- One of the most important indicators we are monitoring at the moment is the trend in credit growth. Historically, periods of accelerating bank lending have been closely associated with stronger corporate earnings, as increased access to credit supports investment, employment, consumption, and ultimately profitability.
- Following efforts by policymakers to manage liquidity and moderate excessive lending early last year, Indian credit growth is returning to a healthier pace, hitting 18.6% in June vs 9.9% 12 months ago.3
- Consumption remains another key pillar of the outlook. Along with deeper credit penetration, rising incomes and increasing urbanisation continue to reshape household spending patterns. Consumers are allocating more towards discretionary categories such as travel, premium products, financial services, and healthcare. (The India Briefing - Jul2026 | Allianz Global Investors)
- Against this backdrop, companies benefiting from premiumisation trends appear particularly well positioned. We continue to find opportunities among businesses that are strengthening their brands, expanding distribution networks, and gaining market share as consumers move up the value chain.
- Financials should also play a central role in the earnings recovery. Banks serve as both enablers of lending and beneficiaries of growth. Insurance uptake also remains at a low base, with penetration in India sitting at 3.7% compared with a global average of around 7%.4
- At the same time, retail participation in investment portfolios and wealth products continues to rise, driven by greater financial awareness and innovative distribution models, predominantly digital.
- One threat to growth relates to the impact of AI. India has not been a major beneficiary of the global "AI trade" because it lacks many of the hardware and infrastructure components that sit at the centre of the ecosystem.
- This has led to concerns that AI could eventually challenge one of India's key competitive advantages: its large and highly educated workforce. While a valid long-term consideration, current evidence suggests that disruption has been limited.
- Net hiring across major IT services companies remains positive, while second-order indicators such as housing activity, banking trends, and consumer spending continue to indicate healthy underlying demand (IT professionals tend to have higher salaries, on average, and comprise a bigger proportion of this activity).
- Importantly, India ranks among the world's leading adopters of AI technologies, but the impact of AI-led productivity gains has, in our view, not yet been fully recognised by markets.
- In fact, investors are increasingly seeing India as providing valuable diversification away from other markets (both developed and emerging) that are more highly correlated to AI, and specifically US hyperscaler capex.
- Ultimately, companies that consistently compound earnings create long-term shareholder value. Today, we see many Indian companies with improving underlying fundamentals being met with attractive valuations.
- In our view, this sets the stage for the market to once again reward earnings delivery over sentiment, with fundamentals re-emerging as the key driver of returns.
1 Allianz Global Investors, Bloomberg, as of 28 August 2026.
2 Citi India, “Equity Strategy: Decent outlook ahead,” as of 18 August 2026.
3 Reuters, “Jefferies sees brighter India outlook as credit, capital flows ramp up; removes HDFC Bank in portfolio revamp,” as of 7 August 2026.
4 The Economic Times, “Economic Survey 2025: Insurance market on upward trajectory, penetration highlights gap,” as of 31 January 2025.