NEW DELHI: While India’s equity valuations have cooled from their post-Covid peaks, small-cap and mid-cap stocks remain significantly more expensive than large caps, making them vulnerable to any earnings disappointment, according to a new India Equity Strategy note by Equirus Securities.
The brokerage said the recent market correction has helped narrow India’s valuation gap with emerging markets and global peers. The Nifty is expected to trade in the 18x-22x price-earnings (PE) range, similar to the post-Covid period. However, the broader market remains priced well above historical averages.
“Risk-reward now favours large caps and quality compounders where valuations are closer to long-term norms,” the report noted, while cautioning that mid/small caps continue to carry elevated risks.
Small-cap froth persists
Small-cap valuation premiums over large caps have widened materially, with the small/large forward PE at around 1.25x — far above the historical average of 0.9x. Small-caps are also trading near multi-year extremes based on standard deviation measures, suggesting recent gains have been driven more by multiple expansion than earnings delivery.
Mid-caps, though still expensive, are supported by a stronger earnings outlook and healthier balance sheets.
While large-cap valuations have moderated, they remain above pre-Covid and earlier cycle averages. Equirus believes future market returns will depend more on earnings growth than further multiple rerating, particularly with consensus earnings for CY25 already cut by 13 percent.
Earnings growth is expected to accelerate from H2FY26 onward, aided by monetary support, domestic demand resilience, and lower crude prices.
Sector positioning
Equirus has an Overweight stance on Auto, Banks, Capital Markets, FMCG, Internet Platforms and Oil & Gas. It remains Underweight on Building Materials, Industrials & Defence, Real Estate, Textiles and Logistics. Cement, Chemicals, Durables, EMS, Infra, IT Services, Metals, Mining, NBFCs, Healthcare and Retail are rated Equal Weight.
According to the brokerage firm, domestic inflows continue to provide market support despite foreign selling. DII ownership has risen to 18.6 percent, while FII ownership has slipped to 16.9%. Strong SIP inflows — growing at a 27 percent CAGR — are structurally cushioning global risk-off phases.
India’s export-heavy sectors, especially textiles, face challenges from a sharp drop in US shipments following tariff actions. A valuation correction could deepen if earnings upgrades don’t materialise or if domestic liquidity softens.