Kotak Mutual Fund does not expect more downgrades going forward as "the tax rate cut has helped at profitability level".

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“We do not expect more downgrades from hereon... expect more of a gradual improvement in earnings rather than V-shaped recovery,” said Harsha Upadhyaya, CIO-Equity, Kotak MF, in an interview with CNBC-TV18.

Upadhyaya said the house is hopeful of a turnaround in the mid and smallcap stock performance.

“If you look at midcap index, it is 20 percent lower than the previous high and small-cap index is about 40 percent lower than the previous peak... if they weather through this tough period then over the next 3-5 years, this basket can provide better returns than the largecaps,” he said.

In the recent past sentiment and liquidity has improved based on which the largecaps have done well but from here on they may pause or consolidate around current levels, said Upadhyaya.

Sector-specific, he said the house still remains cautious on auto stocks although the retail sales have been better than wholesale sales, which has helped the sector clean up some inventory.

"However, one should not expect demand to recover the post-festive season. Demand is expected to be weaker for passenger vehicles as well as commercial vehicles. Two-wheelers may be a bit more resilient to the economic downturn, where one would see some growth continue," he added.