Defence stocks, India-US trade deal: What Krishna Appala of Capitalmind PMS says

The domestic stock market is likely to cheer any clarity or progress on a phased trade deal with the US, even if it is narrow in scope, said Krishna Appala, Fund Manager at Capitalmind PMS. In an interview with Amit Mudgill of BTMarkets, Appala said the defence stocks are rallying, underpinned by structural shifts and not just narratives. Edited excerpts: 
 
In the recent earnings season, the growth for India Inc was not as weak as anticipated earlier. How do you see FY26 earnings? 

A) FY25 earnings were better than initially expected, with Nifty50 companies delivering 6.6% median revenue and 10.3% median PAT growth, and NSE 500 doing even better at 9.9% and 14.2% respectively. This earnings season showed that India Inc is holding up well despite macro uncertainties. As we enter FY26, margin tailwinds from lower input costs and improving operating leverage could continue, particularly in domestic-facing sectors. The base for exports and global-facing businesses remains low (manufacturing & IT), so even a modest revival could aid earnings upgrades. Overall, we see FY26 earnings starting on better footing than consensus had feared earlier.

The current pause on the Trump tariffs is set to expire on July 9. Do you see the market cheering if there is a limited phased-deal with the US before that? What if no deal could be achieved -- how will the market react then? 

A) Markets are likely to cheer any clarity or progress on a phased trade deal with the US, even if it's narrow in scope. The return of uncertainty on trade has been a persistent overhang, and a limited agreement could improve global risk appetite. However, if no deal materialises, the market may price in near-term volatility, particularly in export-sensitive sectors. That said, a large part of the risk is already in the price — unless tariffs are sharply escalated again.

IT is one pocket that has taken a big hit on cautious client demand outlook. How were the recent management commentaries? Do you see value in this pocket?   

A) Management commentaries during earnings were cautious, especially among tier-1 firms, citing slower decision cycles and budget constraints at client firms. That said, the sector is entering FY26 with relatively low expectations. Valuations, particularly in mid-cap IT, have corrected meaningfully and some of the companies have created a niche in its own space. We find selective value in verticals like ER&D and digital transformation, which have longer-term tailwinds. However, broad-based recovery will likely hinge on the second half of the fiscal year.

Defence is one segment that has seen a lot of interest of late following the India-Pakistan tensions. But is it just narrative buying? Are valuations reasonable? 

A) The recent surge in defence sector interest isn’t just driven by sentiment — it’s underpinned by structural shifts that are still playing out. India’s push for indigenisation, a steadily expanding order book, and rising defense exports are reshaping the sector’s fundamentals. While valuations have moved up meaningfully in parts of the private sector, the long-term story remains intact. What matters now is selectivity — companies with proven execution across areas like aerospace, shipbuilding, and radar systems are better placed to benefit over the cycle. Policy momentum continues to support the theme. 

Defence spending grew at over 10% in FY23, but the July 2024 budget disappointed with a sub-5% hike, which led to a temporary cooling-off in the trade. That changed with the February 2025 budget, which delivered a 9.8% increase in capital allocations — a move that caught the market by surprise and reignited interest. Recent geopolitical tensions have only added to the renewed focus.That said, given the sharp rally in recent months, a pullback wouldn’t be surprising. But we view this not as a one-quarter trade, but as a multi-year opportunity aligned with India’s broader manufacturing and strategic ambitions.

MFI players have been under pressure since past few quarters. Do you see some recovery there? Name a few sectors that one can keep an eye on.
A) MFI players have faced persistent stress from regulatory interventions and localised asset quality issues. There are early signs of stabilization, but we remain watchful. As far as sectoral positioning goes, we find promise in domestic manufacturing, capital goods, and segments benefiting from government-led infrastructure and PLI initiatives.

Suppose a trade deal with the US is sealed. Which sectors are likely to be key beneficiaries?

A) A trade agreement could support export-heavy sectors like textiles, pharma, auto ancillaries, and chemicals — especially where tariff clarity and long-term procurement contracts are key. It may also open up better access for Indian service exports in the IT/ITES and professional services space.

Other than trade war and domestic earnings, do you see any other factor that investors need to pay heed to?

A) Beyond earnings and trade headlines, investors should monitor global liquidity, oil prices, and fiscal discipline in an election-sensitive environment. Additionally, central bank policy pivots — especially from the US Fed — could influence capital flows and sectoral leadership.

What is your mantra for stock investments in this volatile market?
A) Focus on cash flows & earnings visibility, balance sheet strength, and pricing power. In volatile markets, it’s important to separate story from substance. We prefer businesses that align with long-term structural trends but are also supported by current fundamentals — not just valuation optics or headline narratives.