Portfolio Review – 2Q FY26

The second quarter of FY26 has continued characteristics of earnings as we had discussed in our previous commentaries. We had spoken about FY25 being a relatively muted year of revenue growth, due to the higher base. Around this, we wanted to ensure that our portfolio construct had characteristics of strong operating leverage (companies, which can translate the low base growth into stronger earnings and cash flows, which invariably comes from companies with strong pricing power and margin profile).

The quarter went by (September 25 – Q2FY26) saw strong annual growth in revenue and profitability across our portfolio. Growth on a YoY basis, our profitability margins grew along with robust revenue growth. There were a few interesting trends in our portfolio companies which we highlight in further detail below:

P.S: We are segregating the earnings ex-Bharti due to a one-off provision by the company in the prior year, that depressed the earnings and hence inflated the YoY growth (365% for Bharti) this year.

Note: For year-on-year (YoY) comparisons, we have used a rolling four-quarter format – Q3FY25 to Q2FY26 compared with Q3FY24 to Q2FY25. This approach allows us to better assess the portfolio’s growth by minimizing the impact of quarterly seasonality. Our portfolio companies continue to show steady growth and maintain healthy profitability.

Exhibit 1: Gross Margins for Itus Portfolio over the last 8Q

We measure the health of the portfolio to give us a summary of the earnings capability of our holdings. Our Portfolio has largely maintained healthy gross margins over time – which in turn has helped our businesses accrete margins with efficiencies of scale. Keep in mind, seasonality and portfolio changes may affect Gross Margins on a quarterly basis.

Exhibit 2: Top 10 sectors for Itus by weight against benchmarks

As we have mentioned in prior quarterly letters, our portfolio is overweight in Mining and Consumer segments, while we have strategically trimmed exposure across Pharma. We continue to see tailwinds for growth and monitor the trends on the ground for additional channel-checks to re-validate our thesis and translate this into our positioning.

Below we highlight a few key updates and themes worth monitoring:

GST Impact on Automotives:

The revised GST rates came into effect on 22^nd September (towards the end of the quarter). In our Q1FY26 Portfolio Review, we touched upon the GST reform and highlighted the sectors that would be likely beneficiaries. As a follow-up, we look at the automobile sector and the impact of the reform on this industry.

At Itus, we have exposure to the automobile sector through 2Ws. Below are the revenue and volume growth (Q2FY26 versus Q2FY25) metrics for 2W OEMs. All OEMs, with exception of Ola Electric, have seen volume growth of at least high single-digits; and mid-teens and above topline growth.

Exhibit 3: 2W OEMs volume and topline growth

In the case of 4W segment, the data has not been as impressive as 2W. Maruti, the market leader, saw 2% volume and 13% revenue growth, while M&M recorded volume growth of 7% and revenue growth of 21% for the same period.

Considering the GST impact for the quarter was for one week starting 22^nd September – to get a sense if the reform has led to benefits to the industry, it is imperative to measure volumes in subsequent months by OEMs.

Exhibit 4: Volume growth by OEM in October 2025

We do observe strong double-digit growth in M&M, Tata Motors and Ather, other companies with exception of Hyundai and Ola Electric, have shown higher single-digit to mid-teen growth. Another key data point to track is the retail/wholesale ratio, below is the data for the month of October 2025 for domestic sales.

Exhibit 5: Retail to Wholesale Ratio for OEMs in Oct 2025

Retail/wholesale ratio is above 1, for all companies with exception of M&M – implying higher sales at dealer outlets to the end customers versus the dispatches from OEMs to dealers. This is a positive sign as dealers have liquidated more stock than what they have bought from OEMs and gives them the ability to stock up if the demand were to be strong going forward.

October volumes for OEMs have started off on a positive note, subsequent monthly sales need to be monitored to see if the reform has resulted in continued demand. We have been positioned in Auto through the year but will be incrementally mindful of valuations from here to build any further exposure.

Ather and OLA do not disclose wholesale numbers.

Macro Outlook:

At a time when global macro continues to be uncertain on continued geo-political tension, India is seeing headline CPI print moderating (to 0.25% in October 2025) and manufacturing activity showing signs of improvement (IIP Manufacturing index). This creates potential for a rate-cut in the coming quarters. Lower inflation also reduces the real policy rate, which has remained high, allowing for a less restrictive stance without undermining stability.

Exhibit 6: CPI Inflation has trended lower over last 3Y period (RBI)

Exhibit 7: Manufacturing activity has improved over a 2Y period (MOSPI)

Interest rates is one of the key indicators influencing investment and spending decisions. Historical evidence suggests lower interest rate environments (supported by benign inflation) to stimulate borrowing and investments, ultimately aiding mid-term growth. Lower inflation also reduces the real policy rate, which has remained high, allowing for a less restrictive stance without undermining stability. CPI inflation for FY26 is expected to remain below RBI limit of 4%, signaling continued lower interest rate environment. In view of this, and government consumption focused reforms (welfare schemes, GST cut), we expect consumption driven earnings growth to resume over mid-term.

Exhibit 8: India Capacity Utilization highest since Q3FY19

Furthermore, we are also keeping an eye on incremental capex/investment activity. Basis RBI recent survey, we note that manufacturing capacity utilization is trending at ~76%. This is close to the upper end of its historical range and typically coincides with the beginning of new investment activity.

Exhibit 9 : Real policy rates continue to be restrictive today

Source: CEIC, Morgan Stanley Research

A combination of strong capacity utilization, potential to trim rates further and a non-leveraged balance sheet for corporate India bodes well for future growth.

Our stock selection and sector positioning reflects this dynamic. To summarise, the below table gives an overview of the health of our portfolio as of Q2FY26 (with the snapshot as of October 2025).

Note: The sum of above weights would not total up to 100%; remaining would be our cash holdings.

Team Itus

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