Financials in a Sweet Spot, Defence Remains a Structural Bet: Dharmesh Kant

Market expert Dharmesh Kant of Cholamandalam Securities suggests that financial stocks are poised to lead India's next market rally, driven by robust credit growth and improving margins. While a short-term relief rally is expected through June and July, long-term structural plays in defence and healthcare offer significant upside potential for investors.

Financials: The Engine of the Next Rally

According to Kant, the banking and financial services sector is currently in a "sweet spot." Unlike previous cycles, financial institutions are entering this phase with strengthening Net Interest Margins (NIMs) and healthy credit growth. He noted that even the possibility of interest rate hikes could act as a catalyst for the sector rather than a deterrent.

Furthermore, the microfinance lending segment is showing signs of recovery. Kant highlighted that lower funding costs and sustained loan demand are strengthening the overall outlook. He expressed confidence that government support mechanisms will act as a buffer, preventing any significant deterioration in asset quality even if the broader economic landscape softens.

Defence and Healthcare: Safe Havens Amid Monsoon Uncertainty

While the market may see a breather in the coming months, Kant warned that investor sentiment in the latter half of the year will depend heavily on the monsoon progress, which currently appears "scary." To mitigate this risk, he recommends pivoting toward sectors that are insulated from weather-related volatility.

Defence remains his primary structural recommendation. Kant believes the sector still has a 40% to 50% upside potential over the next two to three years, fueled by massive order inflows and the push for indigenisation. Specific companies to watch include:

In addition to defence, the healthcare sector—encompassing hospital chains, diagnostics, and pharmacies—is viewed as a resilient play regardless of economic fluctuations.

Sectors to Avoid: Oil, Metals, and Overvalued Paints

Kant advised caution regarding several sectors, specifically recommending that investors stay away from Oil Marketing Companies (OMCs) and oil producers. He categorized the fossil fuel industry as a "sunset sector," noting that long-term demand is weakening and a potential surplus in global supply could further depress crude prices.

While falling crude oil prices generally benefit certain industries, Kant suggests a preference for tyre manufacturers over paint companies. He noted that while paint stocks remain richly valued, tyre companies stand to benefit more directly from stabilising rubber prices and strong automobile demand. Conversely, he remains cautious on consumption-oriented businesses and metals due to lack of visibility.

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