Market: S Krishnakumar on 3 sectors to bet on in the next 6 months

“Having said that, if you look at valuations, we have started discounting FY26 and FY27, so that basically means that we are probably heading into a phase of time correction, consolidation, probably some value correction, which we should be prepared for,” says S Krishnakumar of Lion Hill Capital.
Which camp do you belong to – the cautious, happy camp that has made a lot of money in the last three or four years and is now saving money, or the camp that is still in the loop, is only looking for good ideas and is not too cautious in the market?
S. Krishnakumar: I think I am in the first camp and I was cautious but I invested so we have probably made good profits over the last three to four years. Of course, with all the news flow around us, India is in a good place in terms of foreign interest and also domestic flows that are coming in.
The Indian equity asset class looks like it will do really well. Having said that, if you look at valuations, we have started discounting FY26 and FY27, so that basically means that we are probably heading into a phase of time correction, consolidation, probably some value correction, which we should be prepared for.

So gradually we will be very vigilant. There are several factors that may alleviate some of the problems in the markets. Of course, the earnings season has started and there is some disappointment on the growth and profitability front in some sectors.

The budget is due next week. Of course, there are some tax breaks for individuals, but there is also talk of an increase in capital gains tax, etc., and there may also be a wealth tax issue, which could have a negative impact on the market. That could be a factor in a correction that could come after the budget is announced.
Of course, there was a bigger event on the US front, with Republicans seemingly starting to back down and Donald Trump vocalizing his plans for what could trigger a global shift in financial liquidity.

There’s reason to be a little bit cautious, but have you significantly reduced your position or are you fully invested, just a little bit shuffled because, however, valuations in some pockets may have gotten frothy, but there are also enough high-quality companies where good earnings growth and good management do a lot of things. So are you looking at those companies or is the level of caution so high that you’ve raised significant cash?
S. Krishnakumar: You see, I have some cash, let’s say around 20-25%, waiting for a bigger correction in the market. But of course, as you rightly said, there are opportunities and from a long-term perspective we have to invest in the market, being prepared for periods of correction, periods of consolidation. So, definitely, if you look at some sectors like automotive, automotive ancillary services, look at pharmaceuticals, consumer durables, for example, which did not do so well and came back.

So there are a number of sectors where you could be surprised by a positive earnings growth trend, and that may be where you should try to gradually position yourself to get through the next six months and year.
If we look at the pharmaceutical sector, for example, it has been lagging for a long time, but looking at the return metrics and the cash flows that these companies are generating, healthcare seems to be a good space to probably add to. And also some of the other sectors, smaller sectors like real estate, retail, fashion, cotton, textiles, etc., could also come back and we should probably look at them in a more meaningful way to get some value in that market.

What exactly would you look for? Whether you were looking for a company like Gokaldas Exports, which is primarily an exporter, or you were looking for a domestic fashion retailer, but that space hasn’t done well in the last few quarters, what kind of textile play would you consider?
S. Krishnakumar: Firstly, on the spinning side and the cotton value chain, etc., there has definitely been a lot of selling. Demand has picked up and globally, textile demand is improving and therefore cotton spreads, spinning spreads are getting better.

Many companies have invested in and have the capacity to increase production, thanks to which we can enjoy growth in demand and expansion of margins on the trading side.

The second part is the domestic retail market, where again due to weak consumption patterns over the past few years, companies have come under pressure.

Now, with rising revenues and better proposals in the Budget, the retail sector is expected to benefit from an increase in domestic consumption.

You’re already seeing that in consumer durables and so forth in Q1 and Q4, there are signs of that, so I think apparel, fashion demand is probably a quarter off again. So that should be a good place to basically position yourself.

Coming back to the point where the correction after the budget could be triggered from abroad, what could be the extent of the correction? Do you think valuations are in a bubble zone or 10-20% or more of the kind of correction that we are prone to or do you think a shallow correction because liquidity remains strong but nevertheless it could actually happen?
S. Krishnakumar: Given the foreign interest in India as well as the inflow of domestic capital, a correction in the core indicator of 5% to 10% can be expected.

Any significant changes in domestic taxation of equity markets, whether mutual funds or otherwise, could potentially reset the market if there were major changes in the structure of capital gains etc. or something on the dividend side etc. So these are changes that could come immediately to the tax proposals as they are introduced, so we should be watching them.

And when the main index corrects by 5-7%, small and mid-caps could correct by as much as 20%, so that’s the range we can expect, coupled with some global news that might come out in terms of the position of the US dollar, etc., monetary policy and what Trump is going to do when he comes to power.

At the same time, if there is indeed a rate cut in September (some also say early July), as well as Trump’s return, could this lead to a further weakening of the dollar and an increase in bond yields, which would trigger an inflow of capital from emerging markets, and we could also be beneficiaries? Is such a hypothesis also possible?
S. Krishnakumar: Yes, definitely, in a broader sense, liquidity and falling interest rates will help. At the same time, discussions with foreign investors etc. and various roadshows by many Indian strategists indicate that people are very bullish on India, but again, in hindsight, people want to wait and buy at the right valuation.

So this compromise keeps the markets in a range bond phase where you see a correction of 3%-5% and then you see a pullback again. That is the positioning that we are seeing now, whereas big money flows would come in with bigger corrections in the Indian markets.

Over the next six months, the textile sector and one or two other sectors should be on the lookout?
S. Krishnakumar: The investment cycle is doing quite well, so I would be very, very positive on industrials, provided there is a good correction because the order books are swelling and valuations have gone up tremendously, so you have a big correction there, I think that’s a big space that you want to get involved in. Again, the consumer durables retail space is something that would be very interesting. Durables and consumer on the premium side is something that we should be looking at from a good delta growth perspective.

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