The core reason Kumar favours midcaps is the liquidity cycle. When the Reserve Bank of India (RBI) tightened liquidity, mid and small caps bore the brunt of the correction. As liquidity eases, he expects the benefits to show up directly in their margins. This trend, he said, is already visible in the current quarter’s earnings.
Kumar explained that the market’s confusion stems from the sharp difference between the Nifty’s muted numbers and the broader market’s strength. While Nifty’s earnings per share (EPS) grew 6.8% in the July–September quarter of 2025 (Q2FY26), the 2025-26 (FY26) estimate is only 3%—a lag he attributed to the index’s heavy financials exposure. He said the financial sector is still adjusting to net interest margin resets, but expects the drag to ease next year once deposit and loan pricing stabilise.
Based on this outlook, Elara Capital’s positioning is clear. “Our preferred picks are midcaps first, large caps and then small caps,” Kumar stated. He advised investors looking for alpha next year to “start looking very aggressively on the midcap side.”
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He also pointed to two sectors that could energise next year’s earnings cycle. A “reset on IT earnings” may emerge from rupee depreciation and a potential demand rebound, while consumer discretionary names, especially autos, could benefit from the upcoming Pay Commission boost— “larger than the goods and services tax (GST) cuts or the regular tax cuts,” he said.
Alongside this, he highlighted the need for valuation discipline in new-age technology companies, despite their growth potential. Kumar argued that many newly listed tech firms may be strong businesses, but entered the market at valuations that do not justify their current profit levels. He stressed that entry price is crucial, explaining their value framework based on net worth, short-term earnings, and terminal value.Also Read: NBFC outlook brightens, but housing lenders risk losing share to banks: Elara Securities
Using examples, he compared a mature asset manager with a ₹1 lakh crore market cap and ₹2,500 crore PAT against a loss-making tech IPO at the same valuation, stating the latter “will take years” to justify the price. This is why he prefers to enter such companies at lower multiples. Still, he justified picks like Zomato (Eternal), whose acquisition of Blinkit expanded its true Total Addressable Market (TAM), and Delhivery, which has returned to profitability and is expected to compound steadily.
Kumar also said fintechs like Paytm (One 97 Communications) and PB Fintech remain long-term beneficiaries of AI, which can sharply reduce cost-to-income ratios for both fintechs and non-banking financial companies (NBFCs).
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In contrast to the caution around tech valuations, he is strongly bullish on real estate. He argued that as incomes rise, demand for second homes and luxury housing increases sharply—a trend visible in global markets too. Even after recent stock corrections, pre-sales and cash flows remain strong, creating a gap between intrinsic value and market prices. Stocks like Oberoi Realty and Godrej Properties, trading close to their net asset value (NAVs), were highlighted as opportunities that can compound at a strong rate.
For the entire interview, watch the accompanying video
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