Largecap Indian stocks look attractive after correction, says Kotak Institutional Equities

Largecap Indian stocks have turned attractive after the recent correction, but a sustained market recovery will depend on easing crude oil prices, softer global bond yields and stronger corporate earnings, according to Pratik Gupta, CEO and Co-Head of Kotak Institutional Equities.

Gupta said the current correction has improved valuations, particularly in largecap stocks, even as foreign investors remain cautious on India. He expects earnings growth to improve, while lower oil prices and bond yields could provide the trigger for renewed foreign inflows.

"We're not exactly out of the woods," Gupta said, pointing to crude oil prices above $100 a barrel and elevated global bond yields as the key headwinds for emerging markets. "We need a lot more oxygen, with oil and bond yields cooling off before we see a sustained rally," he added.

Gupta said global investors continue to remain underweight on India despite better valuations. According to him, India is still not cheap enough and the growth prospects are not strong enough at these valuations when compared with competing emerging markets.

On the debate around capital gains taxation for foreign portfolio investors (FPIs), Gupta said tax reforms alone would not bring foreign money back into India, but they remain an important part of improving the investment environment. "It's like an essential part of the plumbing. You need to first fix the leak before you turn on the tap," he said.

He explained that while a reduction in capital gains tax would improve India's competitiveness, foreign investors also need lower oil prices, easing global bond yields, stronger earnings growth and further economic reforms before increasing allocations to India.

Despite near-term challenges, Gupta said the correction has created opportunities in several largecap sectors. He prefers private sector banks with strong deposit franchises, large non-banking financial companies (NBFCs), telecom, hotels, domestic pharmaceutical companies and select automobile stocks, particularly commercial vehicles and tractors.

Gupta also remained constructive on India's telecom sector, citing improving industry structure, tariff-led average revenue per user (ARPU) growth and rising free cash flow. He expects telecom companies to benefit as most of the 5G capital expenditure cycle is complete, allowing debt reduction and higher shareholder payouts over the next few years.

While global investor interest in India remains low, Gupta believes that itself could become a positive indicator. "Positioning can't get any worse," he said, suggesting that any improvement in macroeconomic conditions could lead to a reversal in foreign investor sentiment.

For the full interview, watch the accompanying video



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