Daily Voice: Cement, chemicals, consumer discretionary sectors poised for recovery, says Kotak AMC’s Nilesh Shah

How do you interpret the consistent decline in retail inflation over the past several months? Do you expect this trend to continue for the remaining of FY26?

CPI inflation decelerated further to 2.1% in June, with continued moderation in food prices. Core inflation on the other hand has been inching up. Going ahead, the headline CPI inflation trajectory looks fairly benign and we continue to expect the FY26 inflation trajectory to remain favourable, driven largely by moderating food prices—supported by better than average monsoons and a healthy crop output, as well as benign commodity prices.

Do you think earnings and a revival in consumption will be the key triggers for Indian markets, rather than Trump-era tariffs? Q: Do you think trade tariffs will continue to create uncertainty for global markets during the remainder of 2025?

India has been an oasis in the dessert, but there is a sandstorm blowing globally. Hence, global risks cannot be ignored. Any further flare up in geo-political tensions and tariff related uncertainties could have a bearing on global growth and sentiment. We would also watch out for policy changes in the US, fiscal and monetary. A clearer picture of the impact of tariffs may emerge only after trade deals by the US with major economies are concluded.

On the domestic front, one of the key factors to watch out for would be the delivery of corporate earnings in FY26 after a muted FY25. The expectation is of improvement in earnings, with the Nifty estimated to deliver double-digit earnings growth in FY26E. The monsoon progress and its distribution will be the other monitorable in the short term along with any policy or regulatory changes.

India’s macro-economic variables as evidenced by high frequency economic indicators continue to hold up well. Inflation is at a six-year low, creating a favourable environment for consumer spending and interest rate cuts are expected to ease borrowing costs and stimulate demand over a period of time. However, in the near term, one may have to anchor equity returns expectations to a more moderate levels given current market valuations.

Do you believe the second half of FY26 will be significantly better than the first half in terms of earnings, driven by the lag effects of interest rate cuts and tax reductions announced in the Budget?

Q1FY26 earnings are likely to remain modest with the Nifty 50 companies expected to post mid-single digit earnings growth (ex of one-off gains in specific cases). Select sectors like Energy, healthcare services (hospitals), Telecom, chemicals and Cement are likely to lead earnings growth while Autos, consumption and Utilities and are likely to drag.

Overall for FY26, the expectation is low double-digit earnings, which is an improvement from the levels reported in FY25. Hence, it is likely that earnings in H2FY26 are better than H1FY26 as the impact of lower policy rates, tax cuts and better monsoons starts getting factored in.

Is it the right time to include cement, chemicals, and consumer discretionary stocks in one's portfolio? Do you believe cement and rural consumption are likely to deliver positive earnings surprises in FY26?

We are positive on the cement, chemicals and consumer discretionary sectors from a medium term perspective.

In the case of cement, we expect improvement in volume growth on the back of both government and real estate activity. Pricing trends have been rational for the sector which bodes well. Moreover, industry has undergone consolidation, with larger companies gaining market share as smaller capacities exit. This consolidation is expected to drive price improvements. Strong pricing and soft input cost are likely to drive improvement in profitability and earnings for the industry.

Apart from cement, we are positive on the consumer discretionary segments. Several macroeconomic catalysts appear to be aligning to support a recovery in discretionary consumption:
•) Inflation is at a six-year low, creating a favourable environment for consumer spending.
•) Interest rate cuts are expected to ease borrowing costs and stimulate demand.
•) The FY26 income tax cuts should significantly boost disposable income, further fuelling consumption.

Together, these factors should help revive growth in discretionary categories driving improvement in consumption trends going forward.

We are also positive on the chemical sector. The domestic agrochemicals market is poised for a recovery, thanks to the favourable monsoon trends. On a global market context, the agrochemicals market is moving towards an upcycle after a few weak years. Additionally, the fluorochemicals segment is experiencing tailwinds driven by an uptick in refrigerant pricing.

Most the companies are expanding into adjacencies such as Pharma, Advanced Materials, Energy Chemicals etc which should increase revenues at a faster clip. Price realisation fall due to dumping from China is abating. All these factors should lead to improved margins, buoyed by higher volume throughput. However, tariffs remain a key risk along with geopolitics disrupting the supply chains.

Do you think earnings are most at risk in the IT and two-wheeler segments?

In the near-term, there is some degree of uncertainty over discretionary tech spends globally given the geo-political scenario and trade tensions. This is likely to result in muted trends on growth and earnings for the sector in the near term. However, revenue growth and earnings expectations in the IT sector are already modest for the near-term and we don’t see major headroom for further cuts. However, a lot depends on US entering into trade deals with its key trading partners and a consequent easing of tariff related tensions.

Over the medium term, we expect the IT sector to be a key beneficiary of structural tailwinds like AI, cloud and data adoption. As AI adoption evolves from Gen AI to agentic AI, we believe IT services companies to be the key proxy plays in areas like data centre refresh and app transformation.

For two wheelers, while the volume growth for the industry at large has been muted and we believe that we are close to the bottom. The consumption boost in form of income tax exemption provided in the Union Budget, lower interest rates and normal monsoon should provide tailwind to volume growth. Rural income has been showing signs of improvement and real rural wage growth has turned positive with benign food inflation. With commodity prices under control, margins too are unlikely to see any major headwind for the sector.

Are you strongly constructive on quick commerce, cloud kitchens, and digital-first consumption segments?

The quick commerce sector in India presents a compelling long-term investment opportunity, driven by rapid urbanization, rising digital adoption, and evolving consumer preferences for convenience. The TAM (target addressable market) for the segment is large. The sector’s penetration in India’s retail market is still nascent, offering significant headroom for growth, especially in Tier II/III cities. The top few players are expanding aggressively, with the market expected to grow at a strong CAGR through 2030.

While competition remains intense, recent moderation in discounting and platform fee hikes suggest improving unit economics. Hence, despite near-term profitability challenges due to high capital intensity—such as investments in dark stores, logistics, and customer acquisition—we expect that there is a visible glide path to EBITDA breakeven over the next few years, supported by operating leverage, improved take-rates, and rationalized marketing spends.

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