D-Street in gloomy mood, but Kotak sees 3 triggers for rebounds and adds 5 midcap stocks to portfolio

As Dalal Street investors await a strong comeback by the wounded bulls, Kotak Institutional Equities sees a favorable price-value gap in more stocks after the sharp correction in recent weeks, which it says will help dispel the ‘gloomy’ mood in the market.

The brokerage in its latest Strategy report highlighted that many market investors are taking cues from stock prices instead of their value, which has resulted in “euphoria and despair”. “We see value in more parts of the market, as valuations have come off sharply across sectors and stocks. Market multiples are reasonable, although we focus less on top-down index valuations,” it said.

Kotak noted that the stalemate in the Iran-US war, elevated crude oil prices and associated headwinds may have punctured the euphoria in the small and midcap segment of the market, and pushed investors to look at large caps more favorably, given the reasonable value in many large-cap stocks.


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3 triggers for Dalal Street to emerge from its 'funk'

While valuations have improved, the market continues to fall and spook investors. In this background, Kotak Institutional Equities listed three possible triggers for the Indian market to emerge from its current ‘funk’.

A durable end to the ongoing Iran-US war and related normalization in crude oil prices is what Kotak listed as the first such trigger. This can release the pressure on India’s macroeconomics, according to the brokerage.

A decent earnings print for the second quarter of the ongoing financial year 2027, which will provide more confidence about earnings outlook and valuations, can also boost the market. Lastly, Kotak sees the shift in the market’s focus to value and valuations from price and flows as another trigger for such recovery. A reduction in or removal of capital gains tax for equities would certainly shore up sentiment, although this looks unlikely, it added.

Oil prices to be high or low?

Kotak does not see any immediate relief for India’s challenged macroeconomics, given the complete stalemate in the Iran-US war with no progress on ‘peace’ talks, growing risks of further escalation with Iran and Israel-US potentially using military options to force concessions from each other in any future negotiations, as well as domestic headwinds from deficient monsoons

The brokerage noted that crude prices have a large bearing on India’s major macroeconomic parameters, given that India is the second largest importer of crude oil. The impact of high crude prices is disproportional beyond a certain band, it said.

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Q2 results season should address earnings fears

Kotak Institutional Equities hopes that a strong Q2 results season provides more confidence to investors about the earnings outlook of the market. “Earnings downgrades were a major reason for the market’s weak performance over FY25-26, and investors are justifiably nervous about downgrades given the challenged macroeconomic situation,” it said.

The brokerage draws comfort from limited downgrades to FY27-28 earnings estimates in the past few months and strong Q1 and Q2 results for FY27 so far. Q2 net profit for the Nifty 50 constituents overall are 1.7% higher than Kotak’s estimates and 19% higher than the same period last year.

What can help Dalal Street break the 'doom loop'

Kotak believes that a greater focus on the favorable price-value gap in more stocks after the sharp correction in recent weeks will help dispel the ‘gloomy’ mood in the market. It rejigged its model portfolio, replacing Bajaj Finserv with Bajaj Finance in the large-cap space as the latter is a direct play, although the former trades at a hefty discount.

It also moved Mankind Pharma from the mid-cap to large-cap space, and trimmed positions in HDFC Life, ICICI Bank and Infosys. It increased weight on Reliance Industries, while trimming positions in Axis Bank and State Bank of India (SBI) by 50 basis points each. “We like the favorable reward-risk balance in all the three names but have taken the opportunity to broad-base the portfolio given the diverse movement in stock prices over the past 9-12 months.”

In the mid-cap space, Kotak added Aster Dam, Dixon Tech, Emcure Pharma, Endurance Technologies and Indegene in its model portfolio.

Disclaimer: This article has been written by Debaroti Adhikary, who is not a SEBI-registered Research Analyst or an Investment Adviser. Debaroti Adhikary and his/her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here.