Indian stocks poised for better CY26; Nifty earnings growth seen at 12% CAGR over FY25-27: Motilal Oswal

Synopsis

Indian markets may stage a stronger show in CY26 after a steep CY25 underperformance, as Motilal Oswal sees improving earnings momentum and supportive macro conditions. With Nifty valuations near long-term averages and upgrades returning, the brokerage expects steadier growth, moderating FII outflows and a healthier outlook across large, mid and small caps.

Indian markets look set for a better performance in CY26, especially after the sharp underperformance of around 26% in USD terms versus MSCI EM in CY25, according to Motilal Oswal. The brokerage believes the earnings environment is stabilising and macro conditions are turning supportive following a series of monetary and fiscal measures by the RBI and the Government of India.

Motilal Oswal said the 3QFY26 earnings season was broadly in line with expectations. In the MOFSL Universe, 34% of companies exceeded estimates while 32% reported a miss at the PAT level, keeping the beat miss ratio balanced. Importantly, the aggregate earnings revision trajectory has improved. After a slowing pace of earnings cuts until 1QFY26, aggregate MOFSL PAT moved into upgrade territory in 2QFY26, a trend that was further corroborated in 3QFY26.

The MOFSL Universe delivered PAT growth of 16% YoY in 3QFY26, mildly ahead of the estimate of 14%. Motilal Oswal expects around 12% earnings growth for the Nifty over FY25–27E. Nifty valuations at about 20.4x 12-month forward earnings are marginally below the long-period average of 20.9x, although valuations remain stretched in the broader market.

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The Nifty reported 7% YoY PAT growth in the quarter, slightly ahead of the 6% estimate, marking the seventh successive quarter of single-digit earnings growth since June 2020. SBI, Tata Steel, HDFC Bank, TCS and Bharti Airtel contributed 78% of the incremental YoY earnings accretion, while Tata Motors PV, Cipla, ICICI Bank and Interglobe Aviation weighed on index earnings. Within the Nifty, 14 companies beat estimates, 10 missed and 26 were in line.

Across market capitalisation segments, large caps delivered 16% YoY earnings growth in line with the overall universe. Midcaps grew 15% YoY, below the 22% estimate, dragged by Private Banks, Metals, Logistics and Insurance. In contrast, Healthcare, Lending and Non-Lending NBFCs, Automobiles, Oil and Gas and Utilities recorded strong growth and accounted for about 77% of incremental YoY earnings accretion. Small caps posted 29% YoY earnings growth against an estimate of 34%, with 62% of companies meeting or exceeding estimates. In comparison, 79% of large caps and 67% of mid caps met or beat expectations.

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Despite domestic institutional inflows of around $90 billion in CY25, FII outflows of $19 billion weighed on relative market performance. Motilal Oswal expects FII outflows to moderate over the course of the year, supported by progress on the India-US trade agreement and the proposed Indo-EU FTA, although disruptions in the IT services sector remain a key near-term monitorable.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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