Financials in a sweet spot, defence remains a structural bet: Dharmesh Kant

New Delhi: Financial stocks are poised to lead the next phase of the market rally, according to market expert Dharmesh Kant from Cholamandalam Securities, who believes banks and financial institutions are currently best positioned to benefit from improving earnings dynamics, healthy credit growth, and supportive policy conditions.

Speaking to ET Now, Kant said the market could witness a relief rally through June and July, with financials likely to remain at the forefront. However, he cautioned that investor sentiment later in the year could hinge on the progress of the monsoon season, which remains a key variable for the broader economy.

"Financials are the ones who are in the sweet spot. This time around, with net interest income growth coming into play, NIMs improving, and credit growth already being very good, even if an interest rate hike happens, that is again beneficial for financials."


Kant noted that microfinance lending has started recovering, while lower funding costs and healthy loan demand continue to strengthen the sector's outlook. He also highlighted that government support mechanisms are likely to prevent any significant deterioration in asset quality, even if economic conditions soften.

Relief Rally Expected, But Monsoon Remains a Concern
While remaining constructive on equities in the near term, Kant acknowledged that uncertainty surrounding rainfall could become the market's next major challenge.

"As a house, what we are expecting is a couple of months, maybe June and July, of a breather rally playing into the market. Then much depends on how the monsoon pans out. Going by the trend, it is looking scarier right now."

Despite concerns over rainfall, he believes financial companies are better insulated than in previous cycles, thanks to government intervention and targeted support measures.

Defence and Healthcare Seen as Safe Havens
Among sectoral preferences, Kant remains positive on defence and healthcare, viewing both as relatively insulated from monsoon-related risks and broader economic volatility.

"The insulated sectors like defence will continue to do well. Healthcare, the entire space—be it hospital chains, diagnostics, or pharmacy—will continue to do well."

On the other hand, he remains cautious on consumption-oriented businesses and metals, preferring to stay on the sidelines until visibility improves.

Defence Sector Still Has Significant Upside
Kant reiterated his long-term bullishness on defence stocks, describing the sector as a structural growth story supported by strong order inflows, rising indigenisation, and expanding opportunities in aerospace and naval defence.

"Defence, we are constructive on, being a structural play in the making. Order flows have been very robust for all the defence companies."

He highlighted growing opportunities for aerospace manufacturer Hindustan Aeronautics Limited, particularly as defence cooperation between India and France progresses.

"If you look from a two-year or three-year perspective, at least 40% to 50% kind of upside is still due."

Kant's preferred names in the sector include Hindustan Aeronautics Limited, Bharat Electronics Limited, and Mazagon Dock Shipbuilders.

He believes the proposed Project-75 submarine programme could significantly enhance Mazagon Dock's growth trajectory.

"The P75 submarine deal, likely in a month or so if it happens, is itself a one lakh crore kind of an opportunity."

Avoiding Oil Producers Despite Falling Crude Prices
Despite expectations of lower crude oil prices, Kant remains firmly negative on oil producers and refiners, arguing that the long-term demand outlook for fossil fuels is weakening.

"As far as OMCs, be it downstream or upstream companies, are concerned, we never touch them. The reason is because it is a sunset kind of a sector going into play."

He expects additional downside in crude prices if Iranian oil exports return more freely to global markets, creating a supply surplus.

Tyres Preferred Over Paints
Among sectors that benefit indirectly from lower oil prices, Kant favours tyre manufacturers over paint companies.

While he believes paint stocks remain richly valued despite potential gains, he sees stronger fundamentals in tyre companies, supported by healthy automobile demand and stabilising raw material costs.

"Tyres, yes. Auto has been doing fairly well and tyre demand has been quite on a swing. Even rubber prices have stabilised, so those companies can still benefit from falling crude oil prices."

Outlook
Kant's investment strategy remains centred on financials, defence and healthcare, while maintaining caution toward consumption-linked sectors, metals, oil companies and expensive paint stocks. With markets likely to enjoy a short-term relief rally, the evolution of the monsoon and government policy responses could determine whether the current optimism extends into the second half of the year.