Kotak Equities expects Indian equities to outperform in 2026 based on three factors; adds Dixon, increases IndiGo weight

Indian stocks are expected to outperform in 2026 after a subdued year, supported by an earnings recovery, improving domestic consumption and a more stable macroeconomic environment, Kotak Institutional Equities said, as it added Dixon Technologies to its model portfolio and increased its weight in InterGlobe Aviation, the operator of IndiGo.The brokerage said the 2025 calendar year delivered “moderate” returns for investors despite strong domestic inflows, tax cuts and government support. Markets have been under pressure from high valuations, downward earnings expectations, weak earnings growth and limited interest from foreign portfolio investors, even as the Nifty-50 index has gained about 9% so far this year. Large-cap stocks outperformed mid-caps and small-caps, while performance varied widely by sector.

Kotak said it expects 2026 to mark an inflection point, supported by three key factors: stronger earnings prospects, a recovery in domestic consumption demand following GST and income tax cuts and lower interest rates, and a more supportive macro environment. The brokerage also pointed to the possibility of an improving external backdrop, including progress on an India-US trade deal and a stabilization of the rupee after a sharp deterioration in the trade balance.“We expect CY2026 to be a better year due to (1) better earnings prospects, (2) improved domestic consumer demand and (3) likely stable macro data,” Kotak Equities said.

Portfolio Rebalancing: Adds and Expands

Against this backdrop, Kotak has made several changes to its featured model portfolio. It added Dixon Technologies with a 150 basis point weighting, citing long-term growth drivers despite recent share price weakness.

“DIXON shares trade at 51x earnings per share in FY 2027 and 37x earnings per share in FY 2028 and are likely to deliver a CAGR of 37% per share over FY 2026-30,” Kotak Equities said, noting that joint ventures in camera and display modules and the benefits of the government’s production-linked incentive program should support future growth.

The brokerage also increased its weighting in IndiGo by 50 basis points to 180 basis points after the stock corrected around 15% in the past month on concerns over near-term earnings risks due to operational disruptions.

“We do not see any meaningful change in Indigo’s dominant position in the Indian aviation sector,” the broker said.

Additionally, Kotak has added Aadhar Housing Finance to the portfolio with an allocation of 150 basis points, indicating reasonable valuations and steady growth prospects.

“Aadhar shares are trading at 2.3x FY2027E BV and 2x FY2028E BV and will deliver a RoE of 16.7% for FY2027E and a RoE of 17.5% for FY2028E,” the report said, even as it acknowledged a modest deterioration in asset quality in recent quarters.

Trims and exits: Torrent, Airtel, Reliance

On the other hand, Kotak removed Torrent Pharmaceuticals from the portfolio, saying the stock has performed well over the past 12 to 36 months and that it sees “better opportunities elsewhere” at current valuations. The brokerage also cut weights on Bharti Airtel and Reliance Industries as part of a broader rebalancing, while increasing allocation to Mahindra & Mahindra.

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Looking ahead: selective positioning remains crucial

Kotak expects the Nifty-50’s net profit to grow 18% in FY2027E and 15% in FY2028E, with diversified financials, metals and mining, oil and gas, and telecommunication services contributing the bulk of incremental gains. Still, the report warned that several parts of the market remain expensive, underscoring the need for selective positioning even as the broader earnings cycle becomes more favorable.

(Disclaimer: Recommendations, suggestions, views and opinions expressed by the experts are their own. These do not represent the views of the Economic Times)