“The index is inherently backward-looking and does not adequately capture many of the emerging sectors that are driving incremental growth,” Dharamshi told ET Markets in an interview. “The index tells you where the market has been. The opportunity lies in where the economy is going.”
His warning carries weight. ValueQuest has been quietly repositioning for months by moving capital away from consumption-oriented exposures and steering clear of IT services entirely, even before the geopolitical shock that roiled markets over the past two months.
The Structural Problem With the Two Pillars
Dharamshi argues that IT services is in the early stages of AI-led structural disruption — not a temporary demand lull, but a fundamental reshaping of the sector’s business model. Consumption, meanwhile, is suffering as a second-order casualty of the same transition: as IT employment and income growth slow, discretionary spending softens downstream.
“IT is dealing with AI-led disruption, while consumption is a second-order derivative of the same slowdown, as income growth and job creation adjust to this transition,” he said. “While headline valuations may appear reasonable, they don’t fully reflect the dispersion underneath.”
This creates a troubling optics problem for investors relying on index-level reads. Apparent reasonableness at the top level hides deteriorating fundamentals in the components that have historically driven Nifty’s returns.
War, Crude Oil, and a 3–4% Earnings Downgrade
The geopolitical crisis has added a second layer of pressure. Dharamshi estimates the ongoing conflict could shave 3–4 percentage points off FY27 earnings growth, bringing expectations down from 16–17% to approximately 12–13%. The Union Budget had implicitly assumed crude at around $70 as oil has since moved closer to $90 for the full year.
“Apart from higher crude and commodity prices, we are also seeing supply chain disruptions, elevated logistics costs, and pressure on government finances,” he said. “Importantly, this shock comes at a time when India was on the cusp of a cyclical recovery, which makes the timing unfortunate.”
If crude sustains near $100, Dharamshi flags risks that go well beyond headline inflation. The real stress, he cautions, is in sectors like chemicals, pharmaceuticals, fertilisers, and agrochemicals that are heavily dependent on crude derivatives for their input costs. Gas availability has emerged as a parallel constraint.
“Crude is not just an inflation variable — it is a supply chain variable. And that’s where the second-order impact becomes far more disruptive,” he said.
Where ValueQuest Has Been Moving Money
Against this backdrop, Dharamshi’s firm has been decisively reallocating into energy transition, defence and aerospace, AI infrastructure enablers, and grid capex plays. The thesis is that a fragmented, security-conscious world will structurally reward countries and companies that build hard assets and self-reliant capacity.
“This is not a short-term trade; it is a structural reallocation of capital globally, and India is a key beneficiary,” he said.
On manufacturing and electronics manufacturing services, a space that has seen sharp corrections after earlier enthusiasm, Dharamshi remains constructive but selective. He believes the cycle is shifting from assembly-led growth, which drove narratives but also valuation excesses, toward deeper component manufacturing and value-chain integration.
“Assembly builds volumes. Components build profits. And that cycle is just getting started,” he said.
On data centres, Dharamshi sees one of India’s most significant investment opportunities of the decade. From a current base of roughly 1.5 GW, announced projects could take capacity to 8–10 GW in the near term, scaling to around 15 GW by 2032–33 — representing approximately $150 billion in cumulative capex. His preferred play is through the enablers: power equipment, grid infrastructure, and electrical components.
“The real money in a gold rush is rarely made by the miners — it’s made by those selling the tools,” he said.
The FII Question
On the question of foreign institutional investor returns, Dharamshi says peace would likely trigger tactical inflows and short-covering as India is meaningfully under-owned but sustained capital flows require more than geopolitical calm.
He flags a structural disadvantage: FPI flows into India are taxed, unlike in most other major markets, creating a persistent competitiveness gap. Without coordinated policy action to attract foreign capital across equities, bonds, FDI, and NRI deposits, the loop of FPI outflows, rupee depreciation, inflation, and widening deficits risks becoming self-reinforcing.
“Flows don’t chase peace alone — they chase growth, stability, and ease of capital movement. Fix those, and flows will follow,” he said.
The Medium-Term View: Earnings Dispersion, Not Index Returns
Beneath the caution, Dharamshi’s structural outlook for India remains intact. Corporate balance sheets are deleveraged. A private sector capex cycle is still ahead. RoE expansion, he argues, is a multi-year story — one that markets will look through near-term macro disruption to price in.
“In the short term, macros will dominate headlines; in the medium term, earnings dispersion will dominate returns,” he said.
For investors still anchored to the Nifty, that earnings dispersion is the core risk. The pillars that built the index may no longer be the pillars that drive its next chapter.
“If this cycle is about building real assets,” Dharamshi said, “we want to be owning the pipes, not the paint.”
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