Spark Capital’s CIO Deepan Kapadia views the July-September quarter as a transitional period before a potential rebound. The firm expects a stronger second half for the fiscal year, supported by government spending and domestic manufacturing. Investors are advised to favor companies with strong cash flows and margin stability over those showing only revenue growth.
Deepan Kapadia, Chief Investment Officer at Spark Capital PWM, expects the second quarter of the 2027 fiscal year to act as a bridge to a more robust second half. While the first quarter showed mixed results, the firm believes the current period is laying the groundwork for a stronger finish, supported by domestic credit growth, government capital spending, and consumer demand.
Focus on Industrials and Manufacturing
Kapadia points to the industrial and manufacturing sectors as key areas for growth. These segments are benefiting from India’s ongoing push for infrastructure development, including projects like power grid modernization and the construction of data centers. The firm notes that the capital goods segment continues to see strong order visibility, which helps in predicting future revenue. Additionally, Electronic Manufacturing Services and specialty pharmaceuticals remain areas of interest due to stable pricing and strong demand.
Earnings and Margin Trends
Reflecting on the recent first-quarter earnings, the firm observed that while companies generally saw revenue growth, profit margins in many cases came under pressure. This difference between top-line growth and bottom-line profit was often due to higher operating expenses and intense price competition. Spark Capital suggests that moving forward, the market will likely reward companies that can prove they have high-quality earnings, strong cash generation, and the ability to expand profit margins, rather than just growing their total sales.
Banking and Financial Sector Outlook
Despite the expectation of a moderate decline in interest margins—the gap between interest earned and interest paid—the banking sector is viewed as having solid fundamentals. Factors like healthy capital levels and steady credit growth are expected to support banks. For Non-Banking Financial Companies (NBFCs), the firm recommends a selective approach. It favors lenders that show disciplined underwriting, manageable credit costs, and sustainable returns, while remaining cautious of models that rely heavily on excessive borrowing or regulatory advantages.
Market Risks and Governance
While the outlook for the second half is positive, the firm highlights several risks that could affect the market. High valuations, changes in global growth, crude oil price fluctuations, and geopolitical uncertainty remain potential pressure points. On the corporate governance front, Kapadia noted that while small-cap companies are improving their standards, careful vetting is still necessary. The top tier of small-cap firms now shows governance practices similar to large-cap companies, but the lower tier continues to pose risks related to how capital is allocated and the quality of disclosures.
Investors may track whether private capital spending and domestic consumption recover in line with expectations, as these remain critical for driving broad-based earnings growth. The ability of companies to manage costs and protect their profit margins will likely be a key monitorable in the coming months.