Great Indian correction: Valuations fall, risks high, small-cap overpriced

Equirus Securities is Overweight on sectors like Auto, Banks, Capital Markets, FMCG, Internet Platforms. Underweight on Building Materials, Industrials and Defense, Real estate, Textile and Logistics

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Indian equity valuations have eased from their post-pandemic highs after a year-long correction, bringing the market’s premium over emerging markets closer to normal, according to a new India Equity Strategy report by Equirus Securities. With the Nifty expected to trade in the 18x–22x forward PE band, analysts argue that the next meaningful upside in equities will come from earnings delivery, not further multiple expansion.

 

The firm has turned Overweight on Auto, Banks, Capital Markets, FMCG, Internet Platforms and Oil & Gas, while maintaining Underweight on Building Materials, Industrials & Defence, Real Estate, Textiles, and Logistics.

 

“India’s valuation premium is now more reasonable within EM after the recent correction amid the global AI mania,” the note says.

 

Valuations Softer — But Still Above Pre-Covid Ranges

 

Equirus highlights that while Indian valuations have cooled from the September 2024 peak, they remain notably elevated relative to pre-Covid cycles.

 

Share of NSE-500 stocks trading above 50x PE:

 

36% now, versus 16% pre-Covid, though below the 50% peak seen in September 2024.

 

Lower valuation buckets (10–20x and 20–30x PE) have normalised from peak levels, but still sit below pre-Covid distributions.

 

In comparison with prior market highs (Aug 2018, Feb 2015, Dec 2010), the >30x PE cohort remains materially larger, signalling the market is still priced above long-term norms.

 

Bottom line: Froth has come off the top, but the centre of the market is still expensive.

 

India Anti-AI trade: 

 

"The market benefits from structural stability due to robust domestic flows (strong SIP inflows sustained a 27% CAGR). DII ownership has risen to 18.6%, structurally absorbing FII selling, whose ownership has slipped to 16.9%. Within EM, South Korea, Taiwan outperformed as FIIs chased AI trades. India notably doesn’t have many direct/indirect play resulting into underperformance," noted the report. 

 

Large Caps Favoured; Small Caps Most Vulnerable

 

The report warns of stretched valuations in the small-cap universe:

 

Small/Large forward PE: ~1.25x

 

Long-term average: 0.9x

 

Equirus view: “Small-caps are most vulnerable to reversals.”

 

Mid-caps are expensive too, but supported by an earnings catch-up and balance sheet repair. Large caps trade closer to historical bands and offer better risk-reward, especially as macro clarity is still evolving.

 

The firm prefers:

 

Selective mid-caps with visibility

Large caps as portfolio anchors

Avoid broad-based small-cap exposure

 

Earnings Momentum a key positive trigger: 

 

Earnings growth in the Nifty 50 is expected to improve meaningfully in CY26–CY27 (17–14%). Given that valuation upside from multiple expansion is constrained due to elevated prices, future returns must be driven by earnings delivery. "Although consensus EPS for CY25 was cut heavily (-13%), the current data points to an earnings surprise cycle that materially revises EPS up as the more plausible positive trigger for benchmarks to materially re-rate upward, rather than a renewed liquidity or flow impulse," said the report.

 

Sector Stance: Overweights and Underweights

Overweight Sectors

 

Auto: Margin recovery and PV/CV cycle strength

 

Banks: Valuations still reasonable; strong credit growth

 

Capital Markets: Rising retail participation

 

FMCG: Volumes improving; pricing stability

 

Internet Platforms: Long-term monetisation tailwinds

 

Oil & Gas: Margin benefits from stable crude

 

Underweight Sectors

 

Real Estate, Logistics, Building Materials

 

Industrials & Defence

 

Textiles

 

These sectors face stretched valuations, cyclical fatigue, or rising global risks.

 

Equal Weight

 

Cement, Chemicals, Consumer Durables, EMS, Infra, IT Services, Metals & Mining, NBFCs, Healthcare, Retail.

 

Key Tailwinds (Oil & Rural): India benefits from stable, softer Brent crude prices (US$ 63–70/bbl range), which are margin-accretive for multiple sectors (e.g., OMCs, chemicals, transport). Additionally, rural demand is gathering momentum, supported by high reservoir storage levels and improving sentiment.

 

External Headwinds: The primary external risk is the U.S. tariff shock, which has caused India’s exports to the U.S. to drop 40% since May 2025, significantly affecting labour-intensive sectors like textiles. However, diversification of exports to non-US markets is helping to cushion the disruption.

 

India’s 5-year market return tops global peers; strong ROE and MSCI outperformance post-COVID underpin long-term strength, while a year of correction has made valuations somewhat more reasonable.

 

Monetary Easing Continues

 

Inflation softening to 1–2% YoY has enabled the RBI to cut rates by 100 bps cumulatively, improving liquidity and boosting early credit growth.

Further easing remains possible if disinflation persists.

 

Long-Term Strength Intact

 

Despite a year of correction, India still leads global peers on:

 

5-year market returns

 

Post-Covid ROE strength

 

MSCI India outperformance

 

This structural robustness, coupled with moderated valuations, sets up a healthier base for the next cycle.

 

Top Stock Picks

Large Caps

 

ABB India

Axis Bank

Eternal

 

Mid & Small Caps

 

Aditya Birla Real Estate

Alkem Labs

APL Apollo Tubes

 

Small-Cap Valuations at Multi-Year Extremes

 

"The Small-cap valuations remain the most stretched across the curve, with the Small/Large fwd P/E at ~1.25x, far above the long-term average of 0.9x (+2.2σ) and close to previous peaks—signalling that recent performance has been dominated by multiple expansion rather than earnings delivery," noted the report. 

 

Small/Mid fwd P/E (~0.89x) has eased from extreme highs but still sits marginally above its long-term mean. "Mid-caps, while still expensive, screen more defensible: the Mid/Large fwd P/E (~1.4x) remains elevated but below the euphoric 2024 zone, and mid-cap premiums today are increasingly supported by earnings catch-up rather than pure re-rating. Net-net, mid-caps appear stretched but fundamentally anchored, while small-caps are most vulnerable to mean reversion if earnings revisions soften or domestic flows weaken," the report added.  What should investors do?

 

Equirus Securities’ stance would be to avoid broad small-cap exposure, be selectively constructive on mid caps with clear earnings/sector catalysts, and retain large-cap overweight for risk management until valuations and earnings converge. 

For investors, the Equirus report signals a clear shift from a liquidity-driven market to an earnings-driven one. 

 

With valuations moderating but still elevated versus historical norms, the easy gains from multiple expansion are largely behind us. This means investors should prioritise quality, large-cap stability and be selective in mid-caps where earnings visibility is strong.

 

 Small caps, now trading at multi-year valuation extremes, warrant caution and limited exposure. 

 

Sector-wise, the Overweight calls on Autos, Banks, Capital Markets, FMCG and Internet Platforms suggest that leadership will likely come from businesses with margin recovery, stable demand and strong balance sheets. 

 

Meanwhile, stretched pockets like Real Estate, Industrials & Defence and Textiles require careful stock-picking.