Gupta believes investors should focus on value rather than chase momentum. While sectors such as defence, capital goods and power continue to have strong long-term growth prospects, he says much of that optimism is already reflected in stock prices. Instead, he sees better opportunities in sectors linked to India’s economic recovery, where valuations are more reasonable.
“We are back to looking at some of the most cyclical economic recovery plays, which have been sort of underperforming and where valuations are a little bit more reasonable,” Gupta said in an interview with CNBC-TV18.
He said Kotak Institutional Equities is constructive on private banks despite their weak performance over the last few years. Foreign selling, slower loan growth and pressure on margins have weighed on the sector, but valuations now offer a better risk-reward balance.
“If you have a one-year-plus time frame, there are actually, from a valuation perspective, these stocks have come down to very reasonable levels,” he said, adding that banks remain among the biggest beneficiaries of India’s economic recovery.
Gupta also cautioned against getting carried away by the sharp rally in small-cap stocks. He believes liquidity has fuelled rapid gains, making many companies expensive once again.
“Valuations do tend to get out of hand pretty quickly, which is the case in our view right now,” he said.
He added that investors should be especially careful at a time when global risks are rising. Higher oil prices, geopolitical tensions in West Asia, uncertainty around trade tariffs, monsoon-related risks and the impact of artificial intelligence
(AI) on businesses all warrant a more cautious approach. Given these uncertainties, Gupta said he would prefer large-cap stocks over small caps at current valuations.
On the pharmaceutical sector, Gupta said the proposed 100% tariff on drug imports by US President Donald Trump appears more like a negotiating tactic than an immediate policy threat. Since such a high tariff would be difficult to implement, he expects discussions to continue rather than result in an abrupt change. While the announcement could hurt investor sentiment in the near term, he does not expect markets to take it too seriously.
Within the sector, Kotak continues to favour domestic pharmaceutical companies over exporters of generic drugs. Gupta said the domestic market offers a longer and more sustainable growth runway, while US-focused generic companies continue to face intense competition and pressure on margins.
Gupta also addressed the outlook for India’s IT sector, where Kotak remains underweight despite being optimistic over the long term. He expects Indian IT companies to eventually benefit from enterprise adoption of artificial intelligence, but says the industry is still going through a difficult transition.
Watch the full conversation here
Companies are investing in reskilling employees, adapting to new technologies and dealing with pricing pressure from clients. As a result, Gupta expects earnings growth to remain subdued in the near term before the benefits of AI become more visible.
On foreign investor flows, Gupta said overseas investors are gradually expanding their investment universe in India beyond traditional large-cap sectors. However, expensive valuations and limited trading liquidity continue to keep many mid- and small-cap companies out of favour with large institutional investors, despite growing interest in select initial public offerings (IPOs) and larger mid-cap names.
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