Daily Voice: Platform stocks risky; hospitals more promising, says this fund manager

Do you think the Q1 earnings announced so far are in line with your expectations?

The Q1 FY26 earnings season has been largely in line with expectations, but sectoral performance has been varied. While large-cap stocks such as ICICI Bank, HDFC, and UltraTech Cement posted impressive results, some mid-sized players, including Axis Bank and RBL Bank, reported mixed earnings. ICICI Bank saw a 16% YoY growth in profit, driven by strong loan growth and non-interest income, while UltraTech Cement posted a robust 49% increase in net profit.

On the other hand, RBL Bank's profit fell by 46% YoY. Similarly, Paytm surprised markets by posting a profit of Rs 122 crore in Q1 FY26, compared to a Rs 840 crore loss in the same period last year. However, the mixed performance of mid-tier banks and some non-financial sectors indicates a patchy recovery in earnings. While large-cap stocks remain solid, mid-tier stocks face headwinds due to inflationary pressures and high provisions.

Based on the earnings reported so far, do you rule out any signs of a recovery in the June quarter? Do you believe the earnings recovery will only begin from the September quarter onward?

Based on the earnings reported so far, a broad recovery seems to be taking shape, though it is still tentative. The banking and cement sectors are showing robust growth, with ICICI Bank and UltraTech Cement leading the charge, but other sectors such as retail and hospitality are still grappling with demand recovery. While some optimism surrounds a recovery post-monsoon, analysts believe the true momentum in earnings will only be visible from the September quarter.

Brokerage firms project stronger earnings growth in H2 FY26, driven by stable macroeconomic conditions and the end of base effects. Despite a few bright spots, most companies, particularly in the retail, infrastructure, and services sectors, are expected to see slower earnings recovery. The outlook for Q2 and Q3 will likely depend on how effectively companies can manage raw material costs and whether consumer demand picks up meaningfully in the second half.

Are platform companies currently trading at high valuations? Is it still worthwhile to hold them in the portfolio?

Platform-based companies, particularly in fintech, e-commerce, and SaaS, have experienced sharp valuation increases in recent years. Stocks like Paytm, which reported a surprising profit in Q1 FY26, and Zomato, which saw a 7% rise after consecutive gains, reflect investor optimism about their long-term growth potential. However, these valuations now appear stretched, particularly considering the untested profitability paths of many of these firms.

Paytm's valuation has been primarily driven by user growth and diversification into financial services. While this growth is encouraging, the company still faces significant challenges, especially in terms of margin expansion and monetization.

As for Zomato, while it is trading at high multiples, the sustainability of its growth in a competitive market remains a concern. Investors should consider the long-term viability of these business models. If platforms fail to show consistent profitability, their lofty valuations may come under pressure. Therefore, while holding on to platform companies might make sense for long-term investors with high conviction, new investments in this space require caution.

Have banking sector earnings been mixed this quarter?

The banking sector's performance in Q1 FY26 has been mixed, with larger banks outperforming their mid-tier counterparts. ICICI Bank, HDFC Bank, and Yes Bank reported solid results, posting double-digit profit growth driven by strong asset quality and expanding net interest margins. Yes Bank in particular saw a 59% YoY increase in profit, while ICICI Bank and HDFC both benefited from higher non-interest income and controlled provisions.

However, mid-sized players such as Axis Bank and RBL Bank faced challenges. Axis Bank’s profit dipped by 3% QoQ due to higher provisioning, and RBL Bank saw its profit drop by 46% YoY.

The divergence in earnings performance points to a potential decoupling of large and mid-tier banks, with the latter struggling under higher provisions, loan growth concerns, and competitive pressures. This trend could continue unless mid-tier banks recalibrate their risk models and focus more on increasing fee-based income to offset rising credit costs.

Are you bullish on the hospital sector and do you prefer it over the pharmaceutical sector?

The healthcare sector is witnessing an interesting shift, with hospitals now seeing stronger momentum compared to the pharmaceutical sector. Hospitals, particularly in the private healthcare space, are benefiting from rising healthcare demand, insurance penetration, and better healthcare affordability. India’s hospital sector, which is expected to grow at a CAGR of 16-18% in the coming years, is increasingly attracting private equity investments.

In contrast, pharmaceutical companies are facing margin pressures from regulatory challenges, rising input costs, and stiff competition in the generics market. Dr Reddy’s and Cipla, for instance, are grappling with slow growth in their US generics business, which is a key revenue driver. On the other hand, hospitals like Apollo Hospitals and Fortis are seeing stable patient inflows and revenue growth, making the hospital sector more attractive for long-term investors. While pharma remains a stable defensive sector, the hospital sector’s growth potential and profitability are more compelling in the current environment.

Do you expect strong growth in cement companies during the second half of FY26?

The cement sector looks well-positioned for strong growth in the second half of FY26. UltraTech Cement, one of the largest players in the space, has reported a 49% YoY increase in Q1 FY26 profits, driven by higher realisations and a strong volume growth of 9.7%. The government’s focus on infrastructure development, with major projects underway under the National Infrastructure Pipeline (NIP), has further bolstered demand for cement.

Analysts expect cement companies to benefit from the increased demand for housing, roads, and other infrastructure projects. Furthermore, rising input costs, including that of coal, have been absorbed into the pricing structure, which bodes well for margin stability. Cement companies are likely to see strong earnings growth in H2 FY26, driven by a stable volume trajectory and infrastructure growth. While the monsoon season may slightly slow construction activity, the underlying demand for cement remains strong, which should keep growth on track through the second half.

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