IGI Logo

Strategy

Consolidation amid volatility; midcaps & smallcaps outperform largecaps

* Tested by volatility, the Nifty-50 consolidates in Aug’26: The Nifty ended its two-month winning streak in Aug’26, declining 1.2% MoM to close at 24,080. Notably, the index remained extremely volatile swinging ~781 points during the month before closing 303 points lower. The Nifty is down 7.8% in CY26YTD. The Nifty Smallcap 100 (+3.1% MoM) and Nifty Midcap 100 (+2.1% MoM) outperformed the Nifty-50 during the month. Over the last 12 months, largecaps have dipped 1%, underperforming midcaps (+15% YoY) and smallcaps (+16% YoY). Over the last five years, midcaps (CAGR: 17.7%) have notably outperformed largecaps (CAGR: 7%) by 85%, while smallcaps (CAGR: 14.2%) have markedly outperformed largecaps by 53%.

* FIIs record inflows for the second consecutive month; DII inflows remain strong: In Aug’26, FIIs recorded inflows for the second consecutive month, at USD2.4b. FII equity outflows stand at USD24.1b in CY26YTD. DII inflows remained strong in Aug’26 at USD6.1b, taking DII equity inflows to USD59.8b in CY26YTD.

* Breadth weak in Aug’26: Among sectors, Metals (+4%), Telecom (+3%), Capital Goods (+3%), PSU Banks (+3%), and Healthcare (+2%) were the top gainers MoM, while Consumer (-6%), Media (-4%), Power (-3%), Infrastructure (-2%), and Oil & Gas (-2%) were the key laggards. The market breadth remained weak in Aug’26, with 31 Nifty stocks closing lower. Grasim Industries (+9%), Eternal (+8%), Kotak Mahindra Bank (+7%), Bharat Electronics (+7%), and Shriram Finance (+6%) were the top gainers, while Tata Motors PV (-9%), ITC (-9%), Bharti Airtel (-8%), SBI Life (-8%), and Bajaj Finance (- 7%) were the key laggards.

* India ranks among the bottom-performing markets in Aug’26: Among the key global markets, Taiwan (+7%), Indonesia (+5%), China (+4%), Korea (+3%), MSCI EM (+3%), Japan (+3%), the US (+3%), and Germany (+2%) ended higher MoM. However, India (-1%), the UK (-0.4%), and Brazil (-0.3%) ended lower MoM in Aug’26. During the last 12 months, the MSCI India Index (-5%) has underperformed the MSCI EM Index (+37%) in USD terms. Over the last 10 years, the MSCI India has been marginally higher than the MSCI EM Index.

* Earnings review 1QFY27 - A picture-perfect quarter: The 1QFY27 corporate earnings season concluded on a strong note, demonstrating widespread outperformance across all key aggregates. The earnings growth and beat were led by Financials, Metals, Oil & Gas (ex-OMCs), and Automobiles as well as sectors such as Chemicals, Textiles, and Real Estate. OMCs expectedly dragged the overall aggregates. Read more

* Valuation - two-thirds of the sectors trade at a premium to their historical averages: The Nifty is trading at a 12-month forward P/E ratio of 18.4x, below its LPA of 20.9x (at a 12% discount). Further, its P/B of 2.7x represents a 6% discount to its historical average of 2.9x. The 12-month trailing P/E for the Nifty, at 21.2x, is below its LPA of 23.2x (at a 9% discount). At 3x, the 12-month trailing P/B ratio for the Nifty is near its historical average of 3.2x (at a 5% discount). Notably, two-thirds of the sectors trade at a premium to their historical averages. Healthcare, PSU Banks, Capital Goods, Utilities, Metals, Automobiles, and Consumer Durables trade at a premium to their long-period average (LPA) valuations, while Consumer, Private Banks, Technology, Retail, and Real Estate trade at a discount to their LPA.

* View: The Nifty-50 has largely remained flat over the past one year, weighed down by persistent geopolitical headwinds, relative valuation concerns, and sustained FII selling, particularly in index heavyweights. In contrast, select pockets of the SMID segment have continued to deliver strong earnings growth, driving the Midcap and Smallcap indices to new all-time highs. With the pace of earnings growth strengthening and the breadth of growth improving, we expect the risk-reward profile to become increasingly favorable, enhancing India’s attractiveness from an FII perspective.

* Top Nifty-50 Ideas: Bharti Airtel, ICICI Bank, SBI, Titan Company, Adani Enterprises, M&M, Bharat Electronics, Eternal, Hindalco, Shriram Finance, Interglobe Aviation, and Apollo Hospitals. Top non-Nifty-50 Ideas: TVS Motor, BSE, SBI Funds Management, GE Vernova T&D, Lenskart Solutions, Indian Hotels, Meesho, Dixon Tech, Coforge, Radico Khaitan, Kirloskar Oil Engines, RBL Bank, TBO Tek, and Arvind.

Key exhibits

FIIs clock inflows for the second consecutive month in Aug’26

MSCI India underperforms MSCI EM over the last 12 months

Healthcare: Multiple growth levers support premium valuation

Structural growth supports premium valuation: The healthcare sector currently trades at 37.0x P/E, ~33% above its 10-year average of 27.8x. While the premium is at an all-time high, the outlook remains compelling across the healthcare segment, supporting the potential to sustain premium valuations and drive further re-rating. Every sub-segment (Domestic formulations (DF), CDMO, exports, and hospitals are posting demand expansion and companies are gearing up in terms of capabilities/capacities to benefit from the upcoming business opportunities. Notably, after a dip in valuation that bottomed out in Mar’23, the overall valuation has been rising. Excess inventory build up post-COVID and select product-specific opportunities for certain companies led to stable valuations over Feb-25-Mar-26. With companies well positioned to cater to demand even amid global geopolitical turmoil, as reflected in their 1QFY27 performance, and favorable currency movements, valuations have further re-rated to 37x PE on a 12M forward earnings basis in Aug-26.

DF- acute recovery, chronic strength drive growth: The DF segment is witnessing a broadbased recovery, with IPM growth shifting from single-digit levels to double-digit YoY growth over the past few quarters. The growth rates stood at 13.5%/11.7%/11.9% in 1QFY27/4QFY26/ 3QFY26. The growth is broad-based across acute and chronic therapies, supported by new launches, higher field-force productivity, and greater doctor engagements. Mounting chronic disease burden and healthcare penetration, along with the asset-light, high-margin nature of DF, should support sustained growth and premium valuations.

CDMO - new-age capabilities drive the next leg of growth: The CDMO outlook remains constructive, aided by improving US biopharma funding, healthy RFP activity, and stronger customer engagement. “China+1” and friend-shoring should accelerate outsourcing to India, which could capture ~20–30% of flows migrating from China by 2030. India’s CRDMO market could grow from ~USD3b in 2024 to ~USD22–25b by 2035, with CDMO reaching ~USD10–12b. Increasing capabilities in biologics and ADCs, new customer wins and integrated global manufacturing networks should support growth.

Hospitals - healthy demand and expansion aid growth: The hospital sector continues to see healthy demand, improving occupancy, and better case mix. Mounting lifestyle-related disease is a structural tailwind, with ~59% of under-30s being overweight/obese and ~52% having abnormal cholesterol. Among the broader workforce, ~81% are overweight/obese and ~45% have prediabetes/diabetes. Expansion into Tier-2/3 cities and investments in advanced specialties and technologies should support higher-value procedures and ARPP, while maturing capacities and improving utilization should drive operating leverage

For More Research Reports : Click Here 

For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412