Edited excerpts from a chat:

How are you viewing the Indian equity market at current valuations, and where do you see the next leg of earnings growth coming from?
At an index level, large caps are trading below their long-term average valuations, while mid- and small-cap stocks are trading above them. This divergence reflects stronger recent earnings delivery and higher liquidity in the broader markets, but it also suggests greater valuation comfort and a stronger margin of safety in large caps. In the near term, earnings growth is expected to be driven by the rally in commodities, benefiting metals & mining and select energy companies. As West Asia tensions ease and supply chains normalize, earnings growth should broaden and be led by the financial, consumer, industrial, and healthcare sectors.
Financials continue to remain a key pillar of the Indian market. What is your outlook on banks and financial services over the next 12-18 months?

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India is currently in the midst of a favourable credit cycle, which began post-COVID following a prolonged weak phase (FY14–FY20) marked by the NPA crisis. The clean-up of balance sheets over the past few years has laid a strong foundation for sustainable growth in the financial sector. For lending businesses, which constitute a significant portion of the financials universe, asset quality remains the most critical driver and continues to be robust across both banks and NBFCs.
Additionally, credit growth has accelerated, supported by improved systemic liquidity following RBI measures. The interest rate cycle appears to have bottomed out, with a moderate upward bias, which should support net interest margins (NIMs) for lenders. From a balance sheet perspective, both banks and NBFCs are well capitalized, positioning them to capture incremental credit demand and sustain growth.
Private sector banks are trading at attractive valuations, especially given their consistent book value compounding and superior return ratios. PSU banks, while trading above historical averages, still appear reasonable on an absolute basis, supported by improved profitability and healthier balance sheets, albeit with somewhat lower growth and compounding relative to private peers.
Importantly, the financials landscape has broadened beyond traditional lending businesses. Sub-sectors such as insurance and capital markets are experiencing structural growth tailwinds, adding new dimensions to the sector. These segments are benefiting from rising penetration and increasing financialization. Within banking, CASA ratios have structurally declined, reflecting a shift in household savings toward capital markets and higher-yielding instruments.

PSU stocks have delivered strong returns over the past two years. Do you believe the rerating story still has further room to play out?
Over the past two years, the PSU index has marginally underperformed the broader market following a strong post-COVID re-rating. Much of the structural re-rating in PSU stocks now appears to be largely priced in, with valuations settling closer to fair levels. Going forward, a stock-specific approach is essential, as broad-based multiple expansion is largely behind us. Within the PSU universe, we continue to see selective opportunities, particularly in segments benefiting from structural tailwinds such as defense, new energy, and maritime.

Technology stocks are navigating global uncertainty and AI-led disruption. How are you approaching the IT sector at this stage?
The IT services sector appears quite attractive, with companies currently offering compelling free cash flow (FCF) yields of around 4–5%. Revenue growth also seems to have bottomed out, as guidance from several companies for the upcoming year is broadly in line with last year’s performance. We expect revenue growth to accelerate as enterprise adoption of AI increases going forward.

Recent news flow around AI-led disruption appears somewhat exaggerated. IT services is a services-oriented sector rather than a product-centric one, making it less susceptible to obsolescence. In fact, these companies play a critical role in enabling their clients to adopt and invest in new technologies, rather than being disrupted by them.

The industry has successfully navigated multiple technology cycles in the past, and with each new wave of innovation, spending on related services has only increased. While global uncertainty can impact decision-making around technology investments in the near term, such investments are typically deferred rather than cancelled and should recover over time.

We remain overweight on the sector.

Largecaps have lagged broader markets in recent years. Do you expect leadership to shift back toward largecap stocks going ahead?
Large caps have lagged the broader market in recent years, creating an attractive valuation gap relative to both mid- and small-cap stocks and their own historical averages. This underperformance has been driven largely by financials and IT services, both of which now appear attractive from a valuation perspective.

We expect earnings acceleration in financials, driven by increasing credit growth and healthy book value compounding supported by a favourable credit cycle. On the other hand, an improvement in earnings in the IT services sector is still awaited, as a pickup in enterprise adoption of AI has yet to materialize. However, earnings in this sector appear to have bottomed out, and valuations remain attractive, supported by healthy free cash flow yields.

Both sectors appear well positioned to demonstrate improving earnings growth, thereby presenting a case for mean reversion from a valuation standpoint.

Overall, mid- and small-cap stocks appear expensive at the index level. However, within these segments, there are selective opportunities that offer a long runway for strong growth.

Do you think midcaps are in a bull cycle and best placed to navigate global uncertainties?
Like the broader market, the midcap index has delivered sub-optimal returns over the past two years, generating only ~6–7% CAGR. However, despite this modest price performance, valuations at the index level remain elevated relative to long-term historical averages.

Recent geopolitical tensions related to the Iran conflict have introduced an additional layer of uncertainty for corporate earnings in the near term, particularly through potential supply chain disruptions and input cost volatility.

In this environment, a stock-specific approach becomes critical. A significant portion of the midcap universe has already evolved into relatively large and well-established businesses, many of which offer a meaningful runway for growth. As valuations correct or become more reasonable, such companies could present attractive opportunities for investors

From a 5 year view, which sectors are you most bullish on and why?
Over the next five years, financials, consumer, and healthcare are expected to be key outperformers, supported by strong structural drivers. Within these sectors, select sub-segments offer high-growth opportunities.

Within the consumer space, themes such as e-commerce, quick commerce, organized retail, and aviation are well positioned. These are being driven by rising per capita income and the nuclearization of households, which are accelerating discretionary spending and increasing the preference for convenience.

In financials, the capital markets ecosystem appears particularly attractive, driven by increasing financialization of savings, rising retail participation, and improved market structures.

In healthcare, hospital services are expected to see strong growth, supported by rising income levels, increased health awareness, and higher insurance penetration, leading to a shift toward organized healthcare providers.

Beyond these, several emerging themes also stand out. Electronics manufacturing should benefit from geopolitical shifts and policy support for indigenous production. Industrial firms catering to strong pockets of private capex such as data centers, electrification, and battery-enabled storage systems are also likely to see robust growth, supported by rising demand for new technologies and energy.