September 2026 / Q2 FY27

01Two Engines of Growth

Indian manufacturers are being pulled by two engines at the same time. The first is the home market. The IMF expects India to grow about 7.4% in 2026, faster than China, the US or Europe.[2] A new Indian plant can fill its first lines at home, and that scale is what lets it compete on cost abroad.

The second engine is the rest of the world, which no longer buys on price alone. For three decades the cheapest supplier won. Since COVID and the wars that followed, buyers have paid for reliability and a second source. China’s share of US goods imports has fallen from 21.6% in 2017 to 7.5% in January–August 2026, while US imports from India have more than doubled.[3]

The two engines reinforce each other. Scale at home makes an Indian plant cost-competitive, and orders from abroad fill it. The pull from abroad is strongest where buyers depend most on China, so we start there.

02China+1

Where China makes more than half the world’s supply, a buyer has no fallback. These are the segments where customers are now paying to build one, and where Indian companies are showing up.

The table is ordered by how far India has got. Being needed as a second source is not the same as being qualified as one. Our holdings sit mainly in castings, where Indian suppliers are already approved and shipping, with one, Shakti Pumps, building into solar cells (Section 06). Some of these buyers are European, and Europe has pressures of its own.

03Europe+1

China+1 is about buyers. Europe+1 is about sellers. Europe still owns the technology, the certifications and the customers. Parts of its industry are short of people to run the factories and of affordable energy to power them. We first wrote about this in our September 2022 letter.

Russia’s share of EU gas imports fell from about 45% in 2021 to about 13% in 2025, and costlier US LNG filled the gap. European gas averaged about US$25/MMBtu in September 2026, against about US$3 in the US (4.8x on average over January–September). A gap that size weighs on where energy-intensive plants such as foundries, forges and chemical units are built next: about 40% of German industrial firms, and 60% of large ones, are weighing or making cuts at home or moves abroad. These are intentions, not relocations, and they become an opportunity only when an Indian company wins the work.[5]

Owners without successors, plants squeezed by gas costs and customers who still want the product are pushing European manufacturing towards outsourcing, joint ventures and sales, and India is the partner with scale, engineers and a fast-growing home market.

Indian Companies, European Partners

Indian companies are already doing these deals. By late October 2025, Indian acquisitions in Europe had reached US$5.7bn, more than in any full year since 2020.[6] The deals take three forms: contracts, joint ventures and acquisitions.

Aerospace features often because an engine or airframe part can take years to qualify. A contract, joint venture or small acquisition hands an Indian company approved-supplier status, certifications and customers in one step. A contract gives visibility, but only if the company can deliver it at a profit, and that is what we check.

04What India Still Imports

Localisation also matters at home. India imported US$775bn of goods in FY26, and six categories made up more than half of it.[7] The table sets out those six and what each means for us.

The table splits the bill in two. Crude, gold and potash are gaps no factory can close quickly. Electronics, chemicals and auto parts are gaps capable Indian manufacturers are already closing, though imports of electronics and auto parts are still rising. That is where we look.

The Cost of Dependence

Crude is the largest item on the bill, and 2026 showed what that dependence costs. The chart tracks India’s crude basket month by month.

India produces only about a tenth of the crude it uses. After Hormuz was disrupted in late February, the basket nearly doubled in three months, eased to US$82 in July and was back at US$116 in September. About 60% of India’s LPG is imported, which is why our March 2026 letter called it the weakest energy link; by June a cylinder cost above ₹1,600 to supply, while Delhi households paid ₹942. Petrol and diesel rose about 8% in May. The rest was borne by oil companies (losses of ~₹530 cr a day by September, per ICRA), excise and the fertiliser budget. Most of the cost of dependence showed up on balance sheets rather than at the pump.[7]

The statement is being followed by capacity. India added 7.6 million tonnes of urea capacity from six plants between FY15 and FY24, a coal-to-urea plant at Talcher is targeted for end-2027, and a new urea policy proposes about nine more gas-based plants. Private companies are localising the DAP chain too, among them Shree Pushkar, one of our holdings, which is investing ₹350 cr in DAP and NPK capacity (Section 06).[8]

05Trade Deals, and Keeping China Out

Policy is now working on both fronts. By our count India has signed or concluded seven trade agreements since 2022, more than in the whole of the previous decade. Each opens a richer market to Indian factories, and each comes with rules of origin that reward real manufacturing in India rather than re-labelling.

Two matter most to our companies. The UK agreement, in force since 15 July, gives zero duty on about 99% of UK tariff lines, and S.P. Apparels already ships under it. The EU agreement, concluded in January, offers preferential access on 97% of tariff lines once it is signed and ratified, and Europe is where most of the Section 03 partners sit. The US, our largest export market, is still unsettled: after the US Supreme Court struck down the reciprocal tariffs, a 10% duty applies for now.[9]

When China Is Shut Out

Tariffs make Chinese goods more expensive; exclusion rules make them unavailable. Where a Chinese supplier is barred outright, price stops deciding the winner. These are the cleanest openings for Indian makers, and each comes with a catch.

Protection can win an Indian supplier the order while it still relies on imported parts or one dominant buyer. That is why we look for businesses protected by approvals and qualification, not by a rule that can change.

India is closing security-sensitive products to China but opening the door to its capital. Since March 2026, investors from land-border countries can take non-controlling stakes of up to 10% through the automatic route, subject to conditions, and proposals in specified manufacturing activities are to get a decision within 60 days. Our view is that the likely winner in electronics is an Indian-controlled company with a Chinese technology partner.[9]

06Our Portfolio

We play the theme three ways: China+1 (exporters taking share from China), Europe+1 (partners to European technology and customers) and import substitution (making in India what India buys abroad). We look for companies where the theme can carry profits at about 20% a year for many years, bought at sensible valuations. For eight of our holdings, the table sets out why each fits and what has to happen next.

The holdings fall into three groups. Talbros and Shree Pushkar have qualified with customers and moved to repeat orders, and their profits have roughly doubled over FY23–26. S.P. Apparels, Steelcast and Stove Kraft are midway through expansions whose earnings are still to come. HBL and Shakti Pumps depend on the timing of large orders and government schemes, so their profits move in steps. Hindustan Oil Exploration sits apart, as our one domestic energy holding. We size each position to match how its earnings are likely to arrive.

Shakti Pumps: Margins, Not Demand

• We have owned Shakti Pumps for about eight years, and several of you have asked about it. Its profits have been weak for several quarters. In the June quarter revenue rose 38% to a record ₹859 cr and solar pump installations rose 58%, but the EBITDA margin fell to 9.6% from 23.1% and profit fell 47% to ₹52 cr.[10] The problem is margins, not demand.

• •Why margins fell. Input costs rose sharply, some orders being delivered were priced in older tenders, and while the market waits for the next phase of the KUSUM scheme, most installations have come from Maharashtra, where prices are lower.
• •Signs of a floor. Margins held steady from the March quarter, and profit rose about 35% quarter on quarter. When the first KUSUM scheme reset its benchmark prices to reflect costs, margins recovered; whether the next phase does the same is what we are watching. The current scheme has been extended to March 2027, so installations continue meanwhile.
• •Demand. Close to one crore farmers have applied for solar pumps, the order book is about ₹1,000 cr, and farmers choose the supplier, which favours a trusted brand. New lines in EV motors, rooftop solar and exports are adding to it.

• What we are watching: the launch and pricing of the next KUSUM phase, the start of module production, and receivables returning to normal.

07Risks

• The main risks to this view, and the first signs we would look for, are set out below.

• •Oil stays above US$100 into 2027. Inputs and freight cost more for our manufacturers. We would see it first in Q3 and Q4 FY27 margins.
• •China cuts prices to clear surplus capacity. Import substitutes lose margin. Watch landed prices and new anti-dumping cases.
• •US trade terms worsen. Fewer orders reach our customers’ customers. Watch the order books of US-facing clients.
• •Expansions run late. Earnings arrive later than we expect. Watch commissioning dates and utilisation.
• •The theme gets crowded. Multiples fall if growth disappoints. Watch valuations against their own history.
• •Flows reverse. Foreign selling and heavy IPO supply hit small companies hardest. Watch FPI flows and the IPO calendar.

08Outlook

After the recovery, earnings will matter most from here. Results for the September quarter are coming in now, the first to carry the full cost of expensive crude, a weaker rupee and higher rates. We will judge each company on three things: whether it passes on higher costs, whether new plants start on time, and whether orders turn into profitable revenue.

These are estimates, not an indication of returns. Crude remains the risk we watch most closely, and our base case is that the stress eases (Section 07).

A Broad Correction

If your portfolio is below its recent high, you are in wide company. Among Indian companies worth ₹1,000–5,000 cr, where most of our holdings sit, 83% have fallen at least 20% from their all-time high.[13] The fall has been broad, and it has come largely from price rather than from profits.

Markets move in cycles, and we have invested through several drawdowns like this one. Each time, the businesses that kept growing their earnings came through stronger. Periods like this are when the groundwork for the next phase of wealth creation is laid. Our job is to find businesses with strong models, long growth runways and ethical promoters, buy them at sensible prices, and stay invested through the cycle.

Emerging Opportunities II

Emerging Opportunities I is closed to new investment and continues to be managed as before. We have opened Equitree Emerging Opportunities II, a separate scheme that is now accepting investments. It follows the same philosophy, research process and risk framework, and is building a concentrated portfolio of 12 to 15 businesses, some new and some shared with the first scheme where we still have room to buy. New capital is invested in stages. If you would like to know more, talk to us.

Thank you for your trust through a volatile year.

Sources

1. 01

   Equitree Capital.

2. 02

   IMF, World Economic Outlook (Oct 2026); MoSPI, Q1 FY27 GDP estimates (Aug 2026).

3. 03

   US Census Bureau, US trade in goods by country (2017–Aug 2026).

4. 04

   IEA; China MIIT; Institute of Indian Foundrymen; MNRE (2026).

5. 05

   Eurostat; Destatis; KfW Research; World Bank Pink Sheet (Oct 2026); DIHK (Jul 2026).

6. 06

   Company filings and releases; Bloomberg (Oct 2025).

7. 07

   Ministry of Commerce (Jun 2026); RBI; PPAC; ACMA; MoPNG; ICRA (Sep 2026).

8. 08

   PIB; Parliament replies (2024–26); company filings.

9. 09

   Ministry of Commerce; PIB; MNRE; MeitY; DoT; DGFT; DPIIT; company filings; Reuters.

10. 10

    Company results, presentations and call transcripts (2023–26); ICRA.

11. 11

    Ministry of Commerce, foreign trade data (Oct 2026).

12. 12

    NSE Indices; US Federal Reserve; RBI; NSDL (Sep–Oct 2026).

13. 13

    Listed-company price data, as of early October 2026.