Difficult to make case for sustained underperformance: Saion Mukherjee

India's equity story hinges on consumption, selective midcap bets, and FII flows, while IT faces headwinds and banks offer steady value, says Mukherjee

Saion Mukherjee, head of India equity research at Nomura

4 min read Last Updated : Sep 28 2025 | 11:17 PM IST

Indian equity markets have delivered negligible returns over the past year at the index level. Saion Mukherjee, head of India equity research at Nomura, tells Puneet Wadhwa in an email interview that while a risk-on environment may favour mid and smallcaps, a stock-specific approach is recommended. Edited excerpts:

2025 has so far turned out to be a stock-specific market. Are there any strong triggers that could lift all boats?

The Indian market has delivered a minus 10 per cent return in US dollar terms over the past year, underperforming global indices. Even broader indices like NSE Smallcap and Midcap have lagged in dollar terms.

Two factors could lift the broader markets:

1. Strong economic momentum following the government’s consumption stimulus, which may create a positive near-term growth narrative.

2. Increased foreign institutional investor (FII) inflows, particularly as global markets show fatigue after rallies in other regions and in tech stocks. An improving domestic growth outlook, coupled with US dollar depreciation, could further attract FIIs.

Are mid and smallcaps worth considering at current levels?

In a risk-on environment, mid and smallcaps can be attractive, but we recommend a stock-specific approach rather than broad exposure.

Have you tweaked your equity strategy for India?

We continue to prefer domestic over exporters and consumption over investments. Since July 2024, after India’s general elections, we have anticipated a policy shift favouring consumption. This is now reflected in the direct and indirect tax cuts announced this year.

We have remained cautious on exporters, including pharmaceuticals and information technology (IT) services. Our March 2026 Nifty target is 26,140, assuming roughly a 6 per cent risk to the current consensus estimate for 2026-27 (FY27) and a one-year forward price-to-earnings ratio of 21x.

How long will Indian equities’ underperformance continue?

It is difficult to make a case for sustained underperformance. If tech stock rallies plateau and global macroeconomic uncertainty rises, India may start to outperform. However, underperformance relative to emerging markets could continue if:

1. The tech/artificial intelligence (AI) rally and investor enthusiasm persist.

2. A good US-China trade deal makes investors more constructive on China.

3. Adverse US policy actions impact India’s service industry, which could have long-term ramifications.

Beyond valuations and sluggish corporate earnings, what concerns do FIIs have about India?

High valuations coupled with slower-than-expected growth are the primary concerns. India currently offers limited exposure to the AI/tech space. As investors increasingly bet on AI’s long-term impact — reflected in tech stock performance — this signals potential disruption for India, particularly the IT sector, a key contributor to exports and jobs.

FIIs have also been disappointed by the lack of a meaningful pickup in the capital expenditure (capex) cycle. Policy support, including income-tax cuts and production-linked incentives, has yet to revive capex and generate the desired multiplier effect on economic growth.

When will recent policy developments start affecting the top and bottom lines of India Inc?

Consensus expects earnings growth of around 10 per cent in 2025-26 (FY26), up from roughly 9 per cent in 2024-25, with further acceleration to about 15 per cent in FY27. Near-term corporate earnings growth may lag nominal gross domestic product (GDP) growth. Between 2018-19 and 2023-24, earnings grew at a compound annual growth rate of about 28 per cent, with earnings-to-GDP recovering close to 2007-08 highs.

An approximate 6 per cent downward adjustment to FY27 earnings is possible. Measures like the goods and services tax rate cut are expected to boost consumer sector demand in the October–December quarter of FY26. How this momentum carries into FY27 will be interesting to watch.

How should investors approach IT and banking stocks?

We remain cautious on IT, which faces structural headwinds and an uncertain demand outlook. A bounce-back is possible if discretionary demand rises, but visibility is limited.

We are positive on banking, expecting net interest margin and asset quality pressures to recede, with valuations not being excessive. Pharmaceuticals (generics) could offer a contrarian bet.