Indian stock market to rebound in 2nd half of FY26, says this smallcase manager; lists key investment ideas for 2025

Even though markets have recovered in March after five months of losses, a definitive market turnaround is expected only by the second half of financial year 2026 (H2FY26), Caprize Investment, a smallcase manager, anticipates. The brokerage noted that the ongoing market correction and consolidation are likely to persist as capital outflows continue over the next two quarters in the absence of new policy reforms. However, high-growth sectors with strong earnings visibility are expected to stabilise.

As market estimates transition to financial year 2027 (FY27) post-Q1 FY26 earnings, Caprize Investment believes high-growth stocks will start appearing attractively valued, setting the stage for the next earnings re-rating cycle.

Liquidity and Valuation Trends

Caprize Investment highlighted that a significant liquidity event will be crucial for market recovery. While liquidity has been ample in recent years, the next two quarters may pose challenges in this regard. Despite this, several high-growth stocks—showing 25 percent or more year-on-year growth—are currently trading at 15-20 times their one-year forward earnings multiples. During the consolidation phase, these valuations are likely to become more attractive based on FY27 projections.

Key Investment Themes for 2025

Caprize Investment outlined key investment themes and stock picks that could perform well in 2025. The brokerage identified discretionary consumption, power, manufacturing, renewables, and water treatment as strong themes poised for growth. The stocks highlighted include:

Discretionary Consumption (Value Retail, Jewelry Manufacturers, Mid/Premium Hotels): V2 Retail, Style Bazaar, Sky Gold, Samhi, and Kamat.

Power (Transformers, Transmission EPC): Transformers & Rectifiers India, Shilchar, and Rajesh Power.

Manufacturing/Make in India: Garware Hitech and Vishnu.

Renewables: Insolation Energy, KP Energy, and Shakti Pumps.

Water Treatment: Ceinsystech.

The brokerage emphasised that discretionary consumption, particularly in value retail, jewellery, and mid-to-premium hotels, remains a core focus area. Additionally, the power sector, with emphasis on transformers and transmission EPC projects, continues to offer promising investment opportunities. Manufacturing, driven by Make-in-India initiatives, is expected to benefit from government policies and domestic consumption trends.

It further pointed out that renewables, supported by a robust backward integration theme, are expected to see selective growth, while data centres are likely to expand due to increasing digital infrastructure demands. Meanwhile, water treatment is gaining traction as sustainable water management solutions become increasingly vital.

Sectoral Performance: Bullish and Bearish Trends

Caprize Investment noted that while some sectors are poised for growth, others may face headwinds due to macroeconomic and sector-specific challenges. Sectors such as oil & gas, BFSI, auto, defense, railways, chemicals, consumer non-discretionary, and IT are expected to lag due to various industry-related concerns. Conversely, discretionary consumption, power, manufacturing, renewables, data centers, and water treatment are likely to maintain growth momentum and offer large-scale investment opportunities.

Strategic Investment Approach Amid Volatility

Piyush Mehta, smallcase Manager and Chief Investment Officer (CIO) at Caprize Investment, stated, “The changing market environment in 2025 presents both challenges and opportunities. Short-term volatility may persist due to liquidity pressures and earnings normalization, but sectors such as discretionary consumption, renewables, and niche manufacturing offer strong long-term potential. Strategic investors who prioritize earnings clarity and valuation discipline will be well-positioned to navigate this evolving landscape.”

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.