India Earnings Recovery Underpriced: Kotak Life’s Kanawala

India’s robust earnings recovery, now broadening across multiple sectors, has yet to be fully reflected in market prices, according to Hemant Kanawala, Senior Executive Vice President and Head of Equity at Kotak Life Insurance.

He highlights that large-cap stocks are currently trading at approximately 19.7 times estimated FY27 earnings. This follows two challenging years, bringing relative valuations near multi-year lows and presenting a more attractive risk-reward profile.

Nifty Growth and Market Dynamics

The Nifty’s profits are projected to grow by 17-18% in FY27. This outlook is supported by Q1 earnings, which already surpassed expectations with an 18% increase year-on-year.

Kanawala notes a significant divergence in valuations across the market. While the aggregate market appears reasonable, certain consumption and investment-related sectors show high valuations.

In contrast, sectors like banks and IT services have experienced a de-rating, now offering better value. The Q1FY27 earnings cycle proved broad-based and strong, with Nifty 50 PAT growing 18% year-on-year, marking a 10-quarter high.

Positive surprises emerged from metals, financials (BFSI), select auto companies, and power utilities. Small-caps notably led growth with an impressive 31% surge during this period.

Strategic Portfolio Positioning

Kotak Life maintains a balanced portfolio allocation, finding valuation comfort in large-caps, particularly within the banking and IT sectors. Mid-caps and small-caps, despite trading at premiums, are considered valuable for alpha generation due to their exposure to higher-growth themes.

Kanawala favors financials, holding quality compounders across various market capitalizations. He selectively invests in mid and small-caps to achieve an additional alpha boost.

A sustained shift in market leadership, he emphasizes, requires consistent earnings growth to truly take hold.

Sectoral Outlook: Favored and Vulnerable

Financials, including banks and insurers, offer a compelling combination of earnings visibility, valuation comfort, and balance sheet strength. These sectors benefit from reasonable valuations, improving margins, strong credit growth, and low credit costs.

Telecom is also favored due to its clear earnings visibility, primarily driven by recent tariff hikes.

Conversely, several sectors are deemed vulnerable to earnings downgrades. Staples face margin pressure, while IT services contend with weak discretionary demand and the impact of AI.

Residential real estate grapples with affordability issues. Energy sectors experience volatile earnings influenced by crude prices and marketing margins.

Long-Term Investment Philosophy

As a long-term equity investor, Kanawala’s strategy involves staying invested through market volatility. This approach acknowledges India’s inherent structural growth drivers.

The fund does not make cash calls, instead expressing discipline through strategic asset allocation. It focuses on reasonably valued compounders and reduces exposure to overvalued segments.

Exposure is maintained in high-growth areas. A significant reduction in equity exposure would only be considered in the event of a prolonged conflict pushing crude prices significantly higher.