Morgan Stanley projects earnings recovery for Indian markets

Morgan Stanley forecasts an earnings recovery for its India coverage, projecting 3% revenue and 8% net profit growth year-over-year, with margins expanding to a two-year high, albeit limited to five sectors. Communication Services, Industrials, and Healthcare are expected to drive revenue, while Communication Services, Materials, and Energy lead earnings. This outlook, which includes a 3 percentage point higher FY26 EPS estimate than the recently lowered 12% consensus for Sensex, leads the firm to recommend lenders, select consumer, and industrial stocks.

Analysis

Morgan Stanley projects a modest earnings recovery for its India coverage universe, forecasting an 8% year-over-year net profit growth driven primarily by margin expansion, as revenue growth is expected to be a tepid 3%. While aggregate margins are anticipated to reach a two-year high, this improvement is not broad-based, with only five of ten sectors likely to see expansion. The recovery is highly divergent across sectors; Communication Services, Industrials, and Healthcare are poised to lead revenue growth, whereas Energy is projected to decline. For earnings, leadership is expected from Communication Services, Materials, and Energy, while Consumer Discretionary, Utilities, and Consumer Staples are forecasted to report declines. Notably, Morgan Stanley's fiscal 2026 Sensex EPS estimate stands 3 percentage points above the market consensus, which has recently been revised down by 3% to 12% growth, indicating a more constructive long-term view than the broader market. The report flags Reliance and Bharti as key positive earnings contributors, while identifying SBI and Tata Motors as likely poor performers.

Key Decisions for Investors

• Investors should consider a selective, not broad-based, approach to the Indian market, focusing on sectors with strong projected growth like Communication Services and Industrials, while remaining cautious on Consumer Discretionary and Staples due to expected earnings declines.
• Given the forecast for narrow margin expansion, positions in the Materials and Energy sectors could be evaluated for potential upside, while a significant margin contraction in Consumer Discretionary warrants a review of exposure in that area.
• Considering Morgan Stanley's above-consensus FY26 earnings estimates, it may be prudent to monitor for opportunities in their recommended areas—lenders, select consumer, and industrial stocks—while being mindful of the specific underperformance risk highlighted for names like SBI and Tata Motors.