'GST cuts could boost demand and earnings over 6-24 months'

Summary: GST cuts may have lifted sentiment, but for this fund manager, the real winners will be nimble businesses with pricing power and deep distribution. In this wide-ranging conversation, he decodes the true impact of the policy shift, explains where value still lies in small and mid caps, and shares the core principles guiding his Business Cycle, Pioneer and Small Cap strategies.

The recent GST slab cuts have added fresh energy to India’s consumption story, with near-term tailwinds expected for staples, durables and autos. But for Harish Bihani, Senior Fund Manager at Kotak Mutual Fund, the real winners will be businesses with the right products, nimble execution and strong distribution muscle.

With over 16 years in equity research and fund management, Bihani oversees three funds with assets worth around Rs 23,700 crore. His investing lens is clear: focus on scalable models, hungry management teams and disciplined monitoring. In this conversation, he unpacks the likely impact of GST changes, where value still lies in small and mid caps, and the common thread tying his Small-cap, Business Cycle and Pioneer strategies together.

The recent changes in GST slabs have been a big policy move. Do you expect this to change market sentiment and earnings growth materially, or do you see the impact being fairly limited?

The recent changes in GST slabs mark a meaningful policy shift. The impact, however, will not be uniform across sectors. We expect it to be felt more strongly in mass consumption and autos. The cut in GST rates should lift near-term sentiment and provide tangible tailwinds for demand and earnings over the next six to 24 months. If companies pass on the full benefit, household wallets could see an annualised relief of about Rs 1.8 trillion, or around 0.6 per cent of GDP, at a manageable fiscal cost of roughly Rs 480 billion.

In practice, this could play out in several ways. First, consumer staples, durables and certain discretionary categories should see higher volumes. Second, the auto sector is likely to benefit from a 2–9 per cent reduction in prices across most segments. Third, we expect a marginal easing of concerns around bond yields. Taken together, these dynamics create a supportive backdrop for recovery in the coming quarters.

That said, not every consumer or auto stock will be a winner. The real beneficiaries will be companies with nimble business models, the right products, strong pricing power and robust distribution networks, those best positioned to sustain leadership under this policy tailwind.

After the announcement, the market went up that morning, but later it corrected. Do you see any negative factors that investors might be missing?

So, typically, events like these were well anticipated, given that there was already a clear indication this move was coming. There was clearly pre-positioning in place. And pre-positioning could be done not only by mutual funds with a longer-term outlook, but also by certain market participants who operate with much shorter time frames, for example, certain HNI (high-net-worth individuals) categories or hedge funds. I’m sure many of them would have taken money off the table, given the rally in a lot of stocks that benefited from the GST cut.

That said, there’s still a lot of potential for many companies in the consumer space, autos and even some cement names. Several sectors could benefit incrementally, and as we start seeing delivery in numbers, beginning from the third and fourth quarters and through next year, the markets should start reacting to that. So, today’s move was more about near-term participants taking money off the table rather than a reflection of any deeper negative view.

Small and mid caps have run up sharply over the past 2–3 years, and valuations look stretched. Do you think they’re overpriced now, or is there still value left in this space?

After the strong rally in small and mid caps, valuations at the index level are clearly on the richer side. However, opportunities still exist where structural tailwinds align with strong management execution. These include sectors like hospitals, diagnostics, domestic pharma, niche manufacturing benefiting from PLI and supply chain realignment, select capital goods, auto ancillaries and certain market share gainers in discretionary consumption. Many of these are small-cap names that are leaders in their respective spaces.

The market, in our view, has shifted from a phase of “own the entire basket” to “own the best”. This simply means investors must be far more selective about what they buy or hold in their portfolios today. In the small-cap space, especially, the hurdle rate for any new position has to be meaningfully higher. Broad-based exposure looks less attractive, but bottom-up alpha opportunities remain. They are compelling, but capturing them requires us to work harder, be far more disciplined, and much more selective.

How would you describe your own investment style and philosophy? What really guides your decisions across the different funds you manage?

Our investment policy across funds is straightforward. We aim to identify scalable business models that have the potential to outperform the market, address a significant customer need and are led by strong promoters and management teams. We seek companies with strong financial strength and improving earnings, as evidenced by double-digit earnings growth, ROA expansion and enhanced cash flows over the next 24 to 48 months, supported by concrete company-specific triggers.

We also focus on maintaining discipline through continuous monitoring. If fundamentals deviate from our original thesis and conviction is lost, we will exit decisively and redeploy money into high-conviction opportunities.

So, in essence, our approach combines quality, growth and discipline, ensuring that only businesses with sustainable drivers of long-term compounding remain in the portfolio.

Do you use any specific filters when selecting stocks from sectoral calls?

In terms of stock picking, it is very simple. First, when you look at a particular sector, it needs to have clear tailwinds in place for the next 24 to 48 months; the longer the tailwinds, the better. The opportunity should also be meaningful in size, large enough to accommodate many players in a market like India, where competition is inevitable.

Second, within those sectors, you need to identify businesses that are clearly solving an important customer problem. These businesses should be run by entrepreneurs and management teams that are genuinely hungry for growth. And how do we judge that? One of the key indicators is market share gains. Market share data is available quarterly for most companies, providing a good sense of whether things are moving in the right direction.

Once we have these elements in place: the right sector with strong tailwinds, the right business solving an important problem and a capable management team, we don’t overly worry if near-term performance is not working out. What matters is whether things are improving at the margin, even if the market is neglecting it in the short term. As those improvements become evident, the business is eventually rewarded with stronger earnings growth and better share price performance.

You are running three very different mandates, Small Cap, Business Cycle and Pioneer. What is the common thread in your approach that ties them together?

The common thread across all three mandates rests on a single backbone, identifying superior management teams with a hunger for growth, companies with durable earnings and strong cash flows, and always protecting the downside.

The Small Cap Fund follows a structured bucket framework that we apply rigorously. The Business Cycle Fund expresses this through sector tailwinds and dynamic allocation. The Pioneer Fund emphasises companies that consistently gain market share. While the execution differs across these strategies, the objective is the same: invest in quality management teams, durable earnings and high cash flows, with the aim of compounding ahead of the market while avoiding irrecoverable losses.

Thematic funds often divide opinion—should they sit at the core of a portfolio or just play a satellite role? Where do you think funds like Business Cycle or Pioneer genuinely fit in an investor’s portfolio?

The Kotak Business Cycle Fund can act as a blend of core and satellite allocation. It can serve as a strong core holding because it has flexi-cap attributes and can dynamically shift across large-, mid- and small-cap stocks while moving between sectors based on opportunities. At the same time, since it usually focuses on five to six sectors, which together form 80–90 per cent of the portfolio at any point, it’s best used in a measured way rather than as the only core holding.

The Kotak Pioneer Fund is better suited as a core growth and innovation allocation. It invests in companies steadily gaining market share through innovation and strong execution. To achieve the best results, however, it should ideally be paired with other funds that follow a more balanced investment style. This combination helps smooth out performance when innovation- or growth-driven strategies go through weaker phases, ensuring that the overall asset allocation remains more resilient for investors.

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