If money continues to flow into the markets despite adverse macros it’s because there’s good momentum in the economy with private capex picking up, services exports doing well and consumption is holding up, says Sanjeev Prasad, Managing Director and co-Head, Kotak Institutional Equities. Prasad tells Shobhana Subramanian many of the mid-and-small cap stocks look very expensive. Excerpts:
How do you read valuations at this point?
Many of the large cap stocks are now more reasonably valued given the price and time correction. So stocks in financial services, healthcare, pharma and telecom are looking anywhere from inexpensive- to- attractively-valued. Large private and PSU banks, for instance, are attractively valued. There has been a decent correction in consumer names—and IT multiples too have come down due to structural issues. In mid-caps and small-caps, however, one needs to be more selective because there are stocks that are expensive based on narratives. In fact, some stocks are pretty pricey. Capital market plays are fairly valued and mid-cap capital goods, defence, CDMO valuations look high.
What is the earnings outlook like?
Nifty earnings should grow by 17-17.5% this year on the back of the low base of FY26, when net profits were up 8%. Almost 50% of the profits come from sectors that are not so India-dependent or regulated. Also, economic activity is picking up and so far investment and consumption trends have been decent across auto, staples and parts of the discretionary spaces. Again, commodity prices are very high. For our universe of 320 companies, we are looking at 15% growth; excluding OMCs and CIL, the rise could be as much as 27%.
Despite unfavourable macros, the markets have been resilient. To what do you attribute this?
There is good momentum in investment which is partly reflected in the strong credit growth to industry which is up sharply at 20% plus. We are seeing decent private sector capex in chemicals, metals, engineering and power. In chemicals, the China plus one story is playing out. There’s fresh steel capacity being added by all top players; capacity is also being created in aluminium with new players entering. There is also investment in transmission networks.
Also, while in the initial phase much of the PLI investments may have been largely assembling, we should see more value addition now in sectors like electronics. The upstream capex intensity in stage 2 and 3 should be much higher and more jobs should be created.
Consumption is holding up fairly well. There is also good momentum in exports of non-software services with the GCCs are doing well despite AI worries; exports in June quarter, 2026 were $25 billion versus $18bn in June 2025 quarter. Also, IT services exports are also holding up and interestingly, Q2FY27 saw a good net addition to the workforce.
Is some of this also because the impact of oil prices hasn’t been passed on to consumers?
Yes, so far the pump prices have not been raised. Also spending hasn’t come off because we are seeing decent salary increases. Also a rate hike will not push up EMIs by too much for 2 and 4 wheelers.
Despite this the FPIs are not investing in India…
It has to do with the relative attractiveness of India versus other markets. The earnings growth in other competing countries is significantly higher; in Korea it is forecast at 310%, in Taiwan at 80% and for the US, the growth is estimated at Nasdaq 34%. Our earnings growth pales in comparison. The S&P, which comprises top class companies, trades at a multiple of 21 times.
What are the risks to equities?
There are a couple of big risks, higher- for- longer oil prices and therefore, higher inflation and the second is the precarious fiscal condition of many developed economies. That’s why bonds are selling off and yields are rising. I believe another rate hike by the US Fed this year is a given. A higher cost of equity is a risk for all markets. Also, we need to see a quick resolution to the West Asia crisis else oil prices will shoot up. So far oil inventories have supported demand but supply needs to increase. There is also the potential impact of the 100% tariffs following the Graham Lindsay Bill because we do buy oil from Russia.
How would you explain the tremendous interest in mid-caps?
Many of these stocks have run up on the basis of narratives, which keep on changing and may not always play out as expected. And now retail money is chasing these stocks; 40% plus of retail money has gone into mid and small cap funds. And as we know, SIPs have not done well in the last three years. We have done an analysis which showed that returns from many of these companies have not been good.