The Indian stock market has undergone prolonged phase of consolidation, marked by both time and price correction, after touching an all-time high in September 2024.
The fall has led to a sharp correction in the valuation, improving risk-reward for Indian equities, according to Motilal Oswal Financial Services.
The benchmark Nifty 50 has declined over 12% from its 2024 peak, weighed down by persistent global, geopolitical and macroeconomic headwinds, which have heightened volatility across global and domestic markets.
However, mid-caps and small-caps have remained nearly flat during the same period. The Nifty Midcap 150 index has been flat and the Nifty Smallcap 250 index has dropped 1%.
The brokerage firm noted that a sharp sectoral rotation toward segments with a higher representation of mid- and small-caps helped SMIDs outperform, cushioning the impact of a sharper drawdown in large-caps, which limited the broader weakness in Indian indices.
“Several emerging sectors, particularly in the SMID universe, delivered a strong outperformance, while an ongoing rotation away from established large-caps led to a significant underperformance across several traditional sectors and stocks,” Motilal Oswal said in a strategy report.
Sectors - Winners And Losers
Over the past two years, defence stocks have rallied 19%, followed by metals with 14% gains and PSU Banks with 10% rise, emerging as the key outperformers.
On the contrary, the key laggards included technology stocks with a decline of 18%, followed by Consumer (-17%), Media (-15%) and Real Estate (-12%).
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Valuations Below 2024 Peak
The valuations in the Indian stock market have cooled down from the highs seen in 2024 on the back of the ongoing market consolidation, alongside continued earnings recovery from FY25 lows.
“Notably, large- and mid-caps saw the steepest valuation corrections of 29% and 27% from their highs, respectively, whereas small-caps corrected 4% from the peak on a 12-month forward P/E basis,” said Motilal Oswal.
The Nifty 50 is now trading 16% below its LPA, while mid- and small-caps are trading 4% and 27% above their respective LPA. They were trading +20%, +50% and +47% above their respective average in September 2024.
Most sectors are now trading significantly below their September 2024 peak valuations.
“With valuations now significantly below their peaks, earnings growth remaining healthy, and macro environment staying strong, we believe risk-reward has enhanced further for Indian equities.
Meanwhile, the past two years have witnessed record FII outflows and DII inflows. While FII outflows over the past 24 months stood around $56 billion, DIIs pumped in a record $177 billion in Indian equities.
Earnings Growth Expected to Accelerate
Motilal Oswal expects Nifty 50 to report a PAT CAGR of 16% over FY26–28. It expects Nifty Midcap 150 to record 17% PAT CAGR and Nifty Smallcap 250 to report 27% CAGR in PAT during the same period.
“Given the relatively higher earnings growth in the mid- and small-cap segments, market performance is likely to remain firmly bottom-up,” said the brokerage firm.
Top Stock Picks
Motilal Oswal's top picks in the Nifty 50 index include Bharti Airtel, ICICI Bank, SBI, Titan Company, Adani Enterprises, M&M, Bharat Electronics, Eternal, Hindalco Industries, Shriram Finance, InterGlobe Aviation, and Apollo Hospitals.
Among non-Nifty-50 stocks, the top picks include TVS Motor Company, BSE, SBI Funds Management, GE Vernova T&D, Lenskart Solutions, Indian Hotels, Meesho, Dixon Technologies, Coforge, Radico Khaitan, Kirloskar Oil Engines, RBL Bank, Physicswallah and Inventurus Knowledge Solutions.
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