Fund Manager Talk | Kotak MF’s Mandar Pawar: Consumption, autos and cement to lead next market rally

Kotak Mutual Fund’s equity fund manager Mandar Pawar believes the next leg of market growth will be driven by domestic themes like consumption, autos, and cement. With rural demand improving, festive season tailwinds, stable margins, and rising construction activity, he expects earnings momentum to strengthen in H2FY26, despite near-term global trade uncertainties.

Edited excerpts from a chat:

Sensex, Nifty have failed to beat bank FD in the last one year. Do you think that most of the time correction is behind us and that the growth trajectory should be back soon?
One year timeframe is too short to judge the equity market’s performance and one should be keeping a longer time horizon for investing in equities. Having said that, weak corporate earnings growth, deceleration in investment cycle around same time last year when valuations were also expensive and global trade related uncertainty have contributed to the underperformance for equities in this last one year.

A gradual recovery in growth is expected, led by certain segments of the economy such as domestic consumption. Govt’s measures to reduce direct tax burden and now indirect tax through expected GST rationalization, better rural income on back of favourable monsoon, low inflation and interest rates are some of the factors that should spur rural as well as urban consumption. The investment cycle needs further acceleration and one is hopeful of both, private and Govt. capex, picking up in the later half of this year and momentum continuing into the next financial year. Export dependent segments will see some pressure due to trade tariffs induced uncertainty. While we expect a mild recovery in growth, we are hoping for more fiscal measures from Govt. and de-escalation of tariffs which will be needed to further speed up.

FII selling has created pressure on Indian equities. We saw Q1 earnings season doing little to change investor opinion. When do you think we can expect broad-based double-digit earnings growth once again?
Q1FY26 earnings has been muted at 8% YoY growth but that was broadly inline with the expectations. This weak earnings trend may continue into Q2FY26. H2FY26 is likely to see pick-up in growth on the back of consumption revival, festive period tailwinds, benefit of low inflation and interest rates and pick up in construction activities. Also, lower base of last year helps. Touching double digit earnings growth in H2FY26 is not a certainty but chances are bright.

Which sectors do you believe will lead the next leg of market growth, and what’s driving your conviction in them?
Consumer discretionary and autos sectors are on strong footing, supported by the boost to consumption. Select consumer staples can exhibit volume growth. Margins look stable to improving with raw material prices off their peaks. Cement is the other sector which can lead growth with strong pricing environment with the sector consolidation happening and there is likely to be pick up in construction activity post monsoon. These factors are domestic economy dependent and has got very little to do global trade related uncertainty which gives confidence in sustenance of this theme. Heavyweight sector i.e. BFSI is seeing near term pressure on NIMs but we see that bottoming out soon and improving next year with credit growth also showcasing healthy growth.

With a series of measures like income tax and GST rate cuts, do you think consumption is becoming a no-brainer theme for next couple of years?
Consumption certainly an attractive theme for coming years with expected upswing in middle and lower middle class consumer spending. However, one needs to closely monitor competition within the sector as new D2C brands have been able to grab part of the market share from traditional players. This is visible in staples as well as discretionary categories. Valuations in staples are reasonable compared to their historical trading multiples but in case of discretionary valuations are pricing in mid to high teens growth in revenues and any miss on these expectations can cause de-rating.

Within the consumption basket, how would you go about picking winning stocks?
Low ticket discretionary category such as apparels and lifestyle, QSR, travel & hospitality would gain from increased disposable income and improving consumption spending. With 8th Pay Commission based salary revision will be a boost for two wheelers and entry level passengers vehicles. We would evaluate the companies on Price Earnings Growth ratio and our key bets will be where expected earnings growth in coming years justify the valuations.

If you had Rs 10 lakh to invest in the market right now, how would you spread it across gold/silver, equities and debt?
Asset allocation is a mantra which we advise all investors to follow whereby they should diversify their savings and investments across asset classes viz. equities, debt, bullion commodities, etc. to achieve long-term financial health, much like a balanced diet for physical health. However, the ratio of allocation will depend on individual investors’ profile including financial goals, investment time horizon, and risk tolerance. Hence, there is no one size fits all when it comes to asset allocation. At present, we would recommend investors to be neutral on equities within which bias is more towards large caps and select midcaps. Within commodities, Silver looks like a good investment bet.

Lastly, what’s the one contrarian idea you’d back for the next 12 months?
Chemicals sector has underperformed in the last one year. In speciality chemicals, overcapacity risk is likely to recede particularly from China and that should help improve the global pricing environment. Indian companies’ competitiveness is an advantage available to increase share in the global speciality chemicals market. We see investment cycle picking up in pockets like within the energy sector for transmission and distribution sub-segment and in renewables. Equipment producers and EPC companies operating in this space can be attractive bets.