Earnings Recovery Could Renew Investor Confidence in Indian Equities

Indian equities could be set for a re‑rating as second‑half earnings accelerate and domestic institutional capital returns, a report said on Friday.

The report from Omniscience Capital said that the consolidation phase should be treated as an accumulation window rather than as an opportunity to chase recent performance.

The firm said that opportunities lie in businesses benefiting from structural capital expenditure, energy transition and infrastructure development.

The report cautioned that pockets of the mid‑ and small‑cap segments remain richly valued and urged selective deployment into high‑quality growth businesses available at discounted valuations.

Opportunities are concentrated in businesses exposed to sustained growth and operating leverage but available at favourable valuations, the report noted.

Key areas include banking and financial services, infrastructure and power, and business services, supported by resilient credit growth, rising electricity demand and a recovery in corporate capex.

The moderation in Indian equity valuations has led to renewed institutional interest, with foreign investors turning net buyers on multiple occasions after a two-year moderation in valuations.

Domestic fundamentals remain supportive, with FY27 real GDP growth estimated at around 7 per cent even though crude oil prices call for caution.

With direct, retaliatory military actions between the US and Iran, the hope for a diplomatic resolution through a longer-term peace deal has taken a severe blow, the report forecasted.

“Multi-year forward earnings execution is fully priced in, leaving prospective returns barely near the discount rate while exposing investors to severe de-rating risk,” said Ashwin K. Shami, President & Chief Portfolio Manager, OmniScience Capital.

The firm saw a valuation disconnect across market capitalisations, with Nifty Smallcap 250 and Midcap 150 trading at trailing P/E multiples of around 34-fold and 30-fold, respectively, compared with around 20-fold for Nifty 100.

Global equity markets continue to contend with elevated risk-free rates, with US 10-year Treasury yields near one-year highs of 4.6 per cent-4.7 per cent, while geopolitical tensions have added volatility to crude oil and commodities. The US Federal Reserve’s policy decision on September 16 remains a near-term factor for Treasury yields and global risk appetite.