Kunal Tayal, Senior Analyst for India IT, Cement, and Real Estate at BofA Securities, outlines his views across key sectors amid evolving market dynamics.In this conversation, Tayal explains why uncertainty around global trade and politics continues to weigh on IT spending, how pricing could be the key driver for cement stocks in the fiscal year 2025-26 (FY26), and why he sees the real estate upcycle as still intact – albeit with some emerging risks.Below are the edited excerpts of the interview.
Q: Tell us, how are you feeling about the tech sector? There is plenty of uncertainty with US President Donald Trump. There are pullbacks or delays of deals as well. For the sector as a whole, how are you feeling? What’s your preference between midcap and largecap as of now?A: It’s been a couple of tough years for the tech sector, and some of our work was indicating that things were starting to change at the start of the year. A lot has changed since then. Our recent work is telling us a couple of things about how it has moved since April.Number one, on the positive side, it doesn’t seem like all this uncertainty has pulled down spending to the extent it was feared. So what we are getting is that there is some pressure on discretionary spends, but then there are several other areas of the technology spend pie where customers are still continuing with their journeys. So that’s on the positive side.The dip that has transpired from March onwards has not been as intense as was being expected on the Street. That’s good.Conversely, there was also some hope building up that with the movement in the tariff situation, a 90-day pause, talks of a deal with the UK and China, there could be an end to the uncertainty. We are not picking that up. A lot of our findings suggest that the 90-day pause may serve to be a phase of uncertainty for this entire duration, and if a deal were to be concluded at the end of that, is when certainty could return.So in our view, what you are looking at is a slow taper-off in IT spending, but the uncertainty is continuing for a couple more quarters.Q: Just want to take forward a couple of those points, then. In this sort of an uncertain environment, what would the preference be—some of those large-cap names? If I look at the cash flows as a percentage of market cap, they look fairly well-placed. The problem is that there is a lot of uncertainty. However, there will be midcap names that will grow at a faster clip. So largecaps are growing at an anaemic pace, while midcaps are growing at a faster clip, though that comes at expensive valuations. What is the preference?A: In our view, the largecap to midcap trade-off has already played out. It’s been the case for a while that midcaps have been the faster-growing companies, and the markets have priced them according to that.Likewise, it’s true for the largecaps, where, as you described, the growth rate is on the lower end of the curve. Therefore, on a go-forward basis, as we are looking at investment returns, our style is more absolute, and we are looking at very specific criteria across largecaps and midcaps, rather than preferring any one bucket over the other.In terms of what it is that we are looking at, three or four things.Number one, we think that there are certain areas which could be called secular winners. So companies that have exposure to data and analytics are one area where we think that companies with the right exposure will benefit from that.Second, there are companies with a well-defined right to win. So in the largecaps, you have some companies which are very strong in cost-takeout deals that can help them perform better than the peer set.On the midcaps, we have seen a couple of strategies play out—either you are very strong in sales and marketing, or there are niche areas where, again, you have particularly strong credentials.Also Read | BofA Securities sees value in mid-sized private banks, remains positive on PSU lendersAnd the final one is margins. Margins are often a less-focused thing in the IT sector. But again, what we find is that there is a set of companies where, even in the current uncertain times, they might have scope to expand margins from the current levels, which may not apply to other companies across the sector.
And this is our pecking order. This is our screening criteria for looking at what we favour.Q: Do you want to give us your top picks, which have already been published from the tech pack itself?A: I would stay with the screen that we are using, I wouldn’t be getting into the individual names.Q: From tech to cement—more domestic-facing. Cement has had a horrific FY25, to say the least. Volumes didn’t pick up, pricing was under pressure, and profitability took a hit as well. Now there’s hope that FY26 will be far better. How are you all placed on the cement pack? And what would you prefer out there—the largercap names who are dominating the industry, the likes of the Adani Group, Ultratech Cement as well? Or do you think the smaller ones could relatively do better, because the delta could be higher out there?A: Cement has been a very interesting sector. Like you pointed out, the volume story wasn’t exactly great in FY25. Yet, if you look at the stock performances for most of the companies in the sector, I am sure you would agree that they held up pretty well.So, in terms of what we think will be the incremental factor in the sector, we think that last year, when the stocks didn’t fall as much, that was because the Street was looking ahead to volume recovery once the new government settled in.For us, the incremental factor is pricing. Because all through last year, pricing was weak. There was not too much confidence in pricing power returning.I wouldn’t say it is an established trend, but at least Q4 has started afresh – that after a tough two to three years on the pricing front, this parameter can recover for the sector.To your question, therefore, as to what the names are that will do well, if this is the criterion, at least in our observation, pricing is a bigger leverage for the midcap companies on their EBITDA per tonne outlook versus the largecaps.Q: Let us touch a little bit on where cement is used—in the real estate space. We had the management of DLF, Tyagi, last week, and he was going all guns blazing, saying the best is yet to come. What is your take on the real estate basket? Normally, we have this 10-year cycle. The real estate developers say we are in the first couple of years. Analysts say they are in the middle years. And some of the bears say that we are towards the end of it. Where do you think we are?A: I would put it as year five of the upcycle. That said, CY24 wasn’t without its share of challenges. We heard that there were at least a couple of soft spots last year. Industry supply was an issue, as approvals in pockets were slow to come by, and pricing was starting to rise at a very fast pace. That is not ideal for the sector, especially if you have to make the case for a 10-15-year cycle.The good part is that both of these aspects have started to show signs of settling down. Pricing is sort of back to rising at an inflationary level, plus or minus. And in terms of supply, you often hear that Bengaluru was the worst hit, and the Bengaluru-based companies are starting to tell you that it is starting to resolve itself.Also Read | Nifty near peak for now, returns to stay limited: BofA’s Amish ShahTherefore, our expectation for the real estate sector is that, on a go-forward basis, these companies should still be able to compound bookings at about 10 to 15%. Given the price increases that have already happened in the sector, we think that the EBITDA growth for the companies can be faster. And therefore, overall, we are still positive on the real estate sector.Q: What about the Delhi-NCR market or the Mumbai market? What is the preference, or do you like the mix of both?A: A little bit similar to the midcap versus largecap in IT—the market perceptions are pretty well established. For Delhi, it’s been viewed with an element of caution—that investment demand might be taking over. The other markets are considered stronger.Therefore, our picks are more contingent on the availability of the land bank that developers already have at their disposal. I was indicating that supply has been an issue.So, in our criteria or screens, developers that have good visibility on land parcels – and therefore visibility on launching new projects over the next two to three years – stand to benefit the most.Watch the accompanying video for more.
