Indian markets benefit from long-term growth tailwinds but with short-term valuation risks: Equirus Securities
Leading institutional equities brokerage Equirus Securities has released its annual India Equity Strategy report where its bullish on large caps and eight sectors while its sanguine on five others sectors.As per the note, the Indian equity markets are benefiting from long-term growth tailwindsbut are witnessing short-term valuation risks.
“Indian equity markets are entering FY26 with cyclical headwinds but strong structural drivers.We are Overweight on auto, Capital market, Cement, FMCG, Infra, Internet platforms, NBFC, Oil & Gas sectors while we are underweighton Building materials, Industrials & Defense, Real estate, Textile, Logistics sectors,” says Maulik Patel Head of research Equirus Securities in the report.
The brokerage which counts leading insurers, mutual funds and FIIs as its clients has a neutral stance on Banks, Chemicals, Consumer Durables, EMS, IT Services, Metals and Mining, Healthcare and retail sectors.
Small-cap valuation premium at historical high
Equirus paints a note of caution on small caps pointing out that small-cap forward P/E ratio stands at 1.25x vs the long term average of 0.88x (just below the 1.3x peak), with Nifty 50 trading above its 10-year average. Mid-caps remain elevated but offer stronger earnings visibility than small caps, where multiple expansion dominates
“In an environment where CY25 EPS forecasts have fallen -13.8%, the steepest cut since the pandemic,” investing wisely backed by adequate research is key to outperformance says Patel.
“Large caps provide the best margin of safety, mid-caps should be approached selectively in structural growth areas, and small caps warrant caution until earnings catch up,” adds Patel in the report.
Large cap to outperform, prefer domestic sectors
Near term, leadership is likely to shift toward large caps and quality mid-caps as valuations and earnings expectations re-align.
Overweight sectors expected to benefit from rural income revival include Auto, Cement, NBFC, and FMCG, while sectors with stretched valuations and slowing earnings – building materials, Industrial, and Defense – remain underweight.
Domestic demand momentum shifting to rural
Recent trends indicate a clear turnaround in rural consumption. Rural wages, after years of stagnation or contraction, have been rising steadily since late 2024 — with Feb–May 2025 showing the strongest Y-o-Y gains since 2018 (overall rural wages +3.5% in May 2025). This wage growth directly boosts rural disposable income
Sentiment data reinforces this: both the Equirus Rural Index and CMIE’s Index of consumer sentiments have been climbing through 2024–25, pointing to improved purchasing power and optimism. On top of that, monsoon performance has been better than normal, with cumulative rainfall consistently exceeding the seasonal average since mid-June — a strong signal for robust kharif output and farm incomes
Together, higher rural wages + stronger monsoon + improving sentiment create a supportive backdrop for rural demand across FMCG, agri-inputs, twowheelers, tractors, and rural-focused financial services. Listed companies with large rural sales exposure are likely to see stronger volume growth and margin tailwinds in the coming quarters.
Supporting monetary policy to drive returns
CPI inflation has fallen below 4%, liquidity has moved into surplus, and the RBI has begun a gradual rate-cut cycle. Historically, such easing delivers muted short-term returns but stronger 12-month gains when macro conditions are supportive, favoring a barbell approach between cyclicals (financials, industrials) and defensives (consumer staples, healthcare).
Capex cycle taking pause
Public capex remains above pre-COVID levels, led by power and production linked investment scheme investments, with growth mainly from states & PSUs, while the private sector is steady but not exuberant.
Govt. infra spending is at record highs, and subsidies have returned to pre pandemic norms, channelling fiscal space into productive assets. FY26 is set to see a pause amid tariff wars and global trade uncertainty, though the multi-year capex story stays intact, aided by states/PSUs, supply-chain shifts, PLI schemes, and stronger corporate balance sheets.
Domestic investors in driver’s seat
Domestic institutional investors (DIIs) now surpass FIIs in equity ownership, supported by strong SIP inflows (+27% CAGR FY17-FY25), creating a stable domestic demand base. Higher domestic participation absorbs FII selling and reduces market sensitivity to global risk-off events, a secular positive for valuation resilience.
Top picks
Equirus Securities has identified 8 large cap picks offering a potential upside of between 12-31% and 20 mid and small picks with an upside between 13-76% (see table below).
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