India Inc's Resilience: Market Poised for Recovery

Indian businesses have demonstrated increased competitiveness over the past 18-24 months, bolstered by improvements in domestic demand, credit creation, and a more favorable rupee exchange rate against the Chinese yuan. Geopolitical conflicts may impact earnings in the short term, but underlying business competitiveness is seen as a key driver for long-term value.

The fund house is actively positioning its portfolio by increasing exposure to mid- and small-cap stocks, identifying opportunities where stronger businesses can benefit disproportionately from challenges like raw material availability. Sectors such as building materials, chemicals, and cement are showing promise. Despite high foreign selling impacting the banking sector, its overall competitiveness remains, leading to increased exposure alongside auto ancillaries.

While mid- and small-cap segments are heterogeneous, valuations are now considered more reasonable after an 18-month correction, offering growth prospects beyond the immediate quarters. Global investor sentiment, currently dominated by cyclical factors, is expected to shift back towards structural stories like India as trade dynamics evolve.

To further boost FPI participation, measures like reducing withholding taxes and accelerating capital inflow processes are suggested. Despite patchy earnings growth expected in the first half of FY27, a quick resolution to the West Asia conflict and improved raw material availability could lead to a sector shift towards organized players in the latter half of FY27, benefiting mid- and small-cap companies.

Potential for alpha generation lies in sectors with lower expectations like IT, consumer, and chemicals, as well as high-growth sectors such as auto ancillaries, aerospace, cement, and financials over the next 3-4 years.