Financials in Sweet Spot While Defence Remains a Structural Bet

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

Financials: The Engine of the Next Market Rally

According to Kant, the financial sector is currently in a "sweet spot," making it the primary candidate to spearhead the next phase of market growth. This optimism is rooted in strengthening earnings dynamics, specifically through improving Net Interest Margins (NIMs) and healthy loan demand.

Notably, Kant pointed out that even potential interest rate hikes could act as a tailwind for financials rather than a headwind. The sector is also seeing a recovery in microfinance lending and benefiting from lower funding costs. Furthermore, government support mechanisms are expected to safeguard asset quality, providing a cushion even if broader economic conditions soften.

Defence and Healthcare: Insulated Structural Plays

While much of the Indian market is sensitive to the monsoon season—which Kant warns currently looks "scary"—certain sectors remain insulated from such climate-related volatility. He identifies defence and healthcare as primary safe havens.

The defence sector, in particular, is viewed as a "structural growth story" fueled by massive order inflows and the push for indigenisation. Kant remains highly bullish on this space, suggesting a potential upside of 40% to 50% over a two-to-three-year horizon. Specific high-conviction names include:

In the healthcare space, Kant expects steady performance across hospital chains, diagnostics, and pharmacy segments.

Sectors to Avoid: Oil, Metals, and Expensive Consumption

Kant advises caution regarding several sectors, particularly those tied to consumption and commodities. He remains wary of metals and consumption-oriented businesses due to lack of visibility.

Interestingly, despite falling crude oil prices, he maintains a negative stance on Oil Marketing Companies (OMCs) and oil producers, labeling them a "sunset sector." He expects further downward pressure on crude prices if Iranian oil exports increase, potentially creating a global supply surplus.

Regarding indirect beneficiaries of lower oil prices, Kant prefers tyre manufacturers over paint companies. While paint stocks are currently viewed as richly valued, tyre companies stand to benefit from stabilising rubber prices and healthy automobile demand.

Key Takeaways