Edited excerpts from a chat:
Now that we have been seeing time corrections for over a year, do you think the market would have found a clear direction by the end of the 2025 calendar year?
Indian equities posted a strong run in FY20-24, with Nifty gains reaching ~20% and the index outperforming global peers. However, since the end of FY24, the story has shifted to time correction. Nifty’s earnings rose only ~5% in FY25, and FY26 is expected to remain in the mid-single digits with Nifty’s EPS of ~₹1,096. From FY27 onwards, we see a sharp recovery, with Nifty’s EPS estimated at ~₹1,274, translating into ~16% growth, led by financial, auto, capital goods and consumption.
The valuations have also been normalized. Nifty’s one-year price-to-earnings ratio now stands at ~20.6x, almost in line with its long-term average of 20.7x. On a rolling basis, the price-to-earnings ratio has cooled to ~23.2x, compared to ~27x a year ago, allowing earnings to catch up with prices. With FY26 earnings bottoming out and a recovery in FY27 in sight, coupled with normalized valuations, we believe the consolidation phase is paving the way for the next leg of the rally. By the end of CY25, markets should have found a clearer direction, supported by earnings acceleration, supportive macros and policy continuity.
How are you adjusting your portfolios ahead of Q3 earnings season? Which sectors do you think could surprise positively and which are likely to disappoint?
At the end of Q2 2026, earnings are expected to remain modest, with MOFSL Universe PAT expected to grow ~9% YoY, while Nifty Q3 2026 earnings are expected to grow ~6% YoY. The key drivers are Oil & Gas (+25% YoY), NBFC Lending (+21%), Telecom (on track to gains), Metals (+10%), Cement (+62%), Capital Goods (+14%) and Healthcare (+10%). These sectors are likely responsible for the majority of marginal gains.
On the weaker side, banks – both private and PSUs – are expected to decline by around 7% year-on-year, extending the weakness from the first half of the year. Insurance sector growth is likely to remain subdued at around 6% annually, while automotive sector growth is expected to be only around 5%. Consumer and Chemicals are also likely to post moderate results. Portfolio positioning remains overweight in Auto, Industrial, Healthcare, BFSI and Consumer Discretionary, and underweight in Oil & Gas, Cement and Metals, balancing short-term volatility with long-term visibility.
FII flows are largely dependent on earnings and valuations. Once earnings growth starts to take hold, valuations will also start to look more reasonable. Given expectations of a recovery in earnings from the third quarter onwards, do you think 2026 would be the year of FII revival?
Capital flows have been weak over the past year as profits slowed, valuations remained elevated and global sentiment remained cautious. Since the market peak of September 24, FIIs have sold around USD 27 billion, of which USD 15.3 billion in CY25 YTD, while DIIs infused a record USD 67 billion in 9MCY25, protecting the markets. Historically, flows have followed earnings and valuations: in CY20-21, when Nifty earnings rose sharply, financial institutions invested $21-23 billion, while subdued earnings in later years kept inflows subdued.
With FY26 earnings likely to show average growth (~₹1,096 EPS), valuations have now normalized, with a one-year price-to-earnings ratio of ~20.6x, close to the long-term average. From Q3 2026 onwards, the earnings recovery should gain momentum, with FY27 EPS forecast at ~₹1,274 (~16% growth). Now that earnings have bottomed out and valuations become more reasonable, we expect FII flows are likely to revive.
The auto sector has been the best performing sector in recent months given the positive outlook around GST, rate cuts, etc. Are valuations still reasonable or would you be more cautious?
The auto sector has been one of the best performing segments in recent months, supported by VAT rate cuts, a 100 basis point interest rate cut and picking up rural demand. In Q2FY26, OEMs achieved ~13% YoY volume growth, especially two-wheelers, commercial vehicles and tractors, while passenger cars grew only ~3% due to higher discounts and supply constraints. This is expected to translate into earnings growth of around 11 to 14% for OEMs in the quarter, while suppliers only saw earnings growth of around 3%.
In terms of valuations, the sector is now trading near or slightly below its ten-year average, unlike several sectors that are still above long-term levels. Current multiples look reasonable given the earnings recovery and holiday momentum. Autos are expected to continue to lead earnings growth in FY27 in the medium term. That said, selectivity is key: constructive for OEMs, cautious for passenger cars and more moderate for accessories where supplies are lagging.
With more and more IPOs hitting the streets, what is your view on valuations and sustainability of post-listing performance?
The primary market has remained active through 2025, with nearly 50 IPOs raising approximately $11.4 billion to date. This reflects abundant domestic liquidity and robust retail participation. Sector-wise, electronics and energy dominate the announced pipeline, alongside a number of major consumer and manufacturing names.
However, post-listing performance has been uneven. Companies with strong fundamentals, earnings visibility and scalable models have managed to maintain profits, while companies that are aggressively priced relative to publicly traded peers or with weaker financials have underperformed. Many IPOs continue to be launched at a discount to secondary market valuations, underscoring the importance of selectivity.
Looking ahead, the pipeline remains healthy and major problems are expected in the financial, consumer and industrial sectors. While fundraising momentum should continue, the sustainability of post-listing returns will depend on fundamentals and earnings metrics rather than initial demand.
Given the way Motilal Oswal is gradually expanding its coverage base to cover a wider range of mid and small caps, what is your view on the size of the opportunity in the broader market in the current ensemble? What parts of the broader market are you most excited about?
Investor interest is gradually returning to the broader market, supported by better earnings visibility and strong domestic flows. In Q1 2026, the Nifty Midcap-150 delivered 17% earnings growth compared to 8% for largecaps, underscoring the relative strength of midcaps. While mid- and small-cap valuations remain above historical averages, certain themes stand out.
Within this space, EMS continues to benefit from rising demand for electronics manufacturing and policy support. Healthcare offers stable compounding potential through hospitals and niche pharmaceuticals. On the consumption side, discretionary midcaps in sectors such as travel, leisure, alcoholic beverages and value retail are benefiting from premiumization and the shift from unorganized to organized players.
We like the Capital Market theme, such as depository participants, registrars and asset managers, because they are well positioned and benefit from strong private participation and the structural deepening of the equity markets.
The broader market opportunity is significant, but sustainability will depend on disciplined selection and earnings development, making these structural mid- and small-cap themes the most attractive.
Which themes within the Indian consumption story do you think are currently undervalued by the market?
The recovery in Indian consumption is accelerating, helped by interest rate cuts with GST 2.0, declining inflation and improving rural sentiment. Consumer durables are likely to outperform consumer staples. We like the consumer discretionary space as higher income levels and the ambition to consume would lead to higher growth for the sector.
Themes such as travel and hospitality benefit from robust domestic tourism and sustainable occupancy rates, but the sustainability of this cycle is not yet fully priced in. Mass market retailing in second and third tier cities is also expanding as consumers shift from unorganized to organized players.
Other sectors, including alcoholic beverages and premium apparel, are supported by rising disposable incomes and premiumization trends. While the recovery in staples is more visible, the market continues to underestimate the long-term sustainability of these consumer durables segments, which could become a major driver of the Indian consumption story in the future.
Which sectors or themes do you think will drive the alpha generation in the next twelve to eighteen months?
The alpha generation over the next twelve to eighteen months will likely come from domestic cyclical factors and structural growth themes. Our portfolio positioning remains overweight in autos, industrials, healthcare, BFSI and consumer discretionary, while we are underweight in oil and gas, cement and metals.
Cars are being supported by VAT cuts, lower interest rates and a recovery in rural demand, making them one of the strongest profit drivers. The industrial sector and EMS are benefiting from robust order books, policy-driven capital investments and incentives for the manufacturing sector, keeping growth momentum intact. Healthcare offers steady growth, with strong demand in pharmaceuticals, diagnostics and hospitals.
On the consumption side, discretionary themes such as travel, leisure and high-speed commerce continue to expand, supported by premiumization and formalization. Global cyclical sectors such as IT services and Metals, on the other hand, are facing external headwinds. Selectivity remains key, but domestically driven sectors are best positioned to deliver superior alpha in this cycle.
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