India is being rediscovered as the premier anti-AI trade: Manish Bhandari

AI trade is unwinding from the inside. The largest hyperscalers are funding capex with debt at a scale that has turned free cash flows negative said Manish Bhandari, CEO at Vallum Capital.

Indian markets have taken the recent global developments in their stride amid June 2026 quarter corporate earnings season back home. Manish Bhandari, CEO and Portfolio Manager at Vallum Capital, told Heena Ojha in an email interview that the small-and mid-caps are reporting earnings growth well ahead of large-caps, reflecting domestic demand, capex, and consumption compounding in sectors the benchmark indices do not capture.  Edited excerpts:

 

Do current market valuations leave room for further upside, or are investors becoming too optimistic?

  The Nifty 50's negative 5.4 per cent return is not a market in trouble, but a market whose two largest contributors have been in the suspension. The Nifty IT index fell 30 per cent in the last two quarters, and the banking sector remained hostage to global uncertainty and FII selling. Both are now turning. India is being rediscovered as the premier anti-AI trade, reversing $21 billion in net outflows with $1.5 billion in net purchases last month. Nifty at 20x trailing PE, cheaper than 92 per cent of the past five years. The Nifty is not expensive. The setup is in place.

 

What is your interpretation from the Q1-FY27 earnings season?

  The season confirms a clear hierarchy. Defence is executing strongly, with order books at multi-year highs. Auto has delivered positive surprises. Banking is demonstrating structural health: credit to the industrial sector grew 17.5 per cent year-on-year through May 2026 and gross non-performing assets (NPAs) have hit a multi-decadal low of 1.8 per cent. IT company managements are cautiously signalling pipeline recovery. What strikes me most is that real outperformance is happening away from the Sensex and Nifty altogether. Small and mid-caps are reporting earnings growth well ahead of large-caps, reflecting domestic demand, capex, and consumption compounding in sectors the benchmark indices do not capture.

 

What are your views on the Fed policy outcome?

  A 9-3 vote is the most divided FOMC decision in recent memory. Core inflation came in benign earlier this month, giving markets the most comfort they had seen in months. But Chairman Warsh was explicit in pushing back. Five-plus years of above-target inflation, the longest sustained breach of the Fed's mandate in its modern history, cannot be declared over on the strength of a single print. He went further and signaled that he is not convinced the inflation numbers present a true picture. The June Policy already signalled one hike before year-end. One adverse inflation reading between now and next meeting is all it takes.

 

In the absence of FIIs back home, has the market become too dependent on domestic liquidity?

  Over the past 30 days, FIIs sold a net Rs 23,582 crore while DIIs absorbed Rs 74,253 crore. SIP inflows hit Rs 31,781 crore in June, a three-month high, and equity fund inflows have been positive for 64 consecutive months. Retail investors are adding on dips, not retreating. The dependency question, however, is real. FII selling is concentrated in large-caps with weaker earnings momentum, while small-and mid-caps attract flows but cannot absorb the full outflow from sectors constituting 30 per cent of large-cap index weight.

 

One key risk and one major opportunity for Indian equities over the next six months?

  The AI trade is unwinding from the inside. The largest hyperscalers are funding capex with debt at a scale that has turned free cash flows negative; Alphabet's FCF fell 90 per cent year-on-year, Amazon's is already in deficit, and debt's share of total capex funding has risen from 9 per cent in 2023-24 (FY24) to 32 per cent today. When this cycle breaks, global capital will seek economies with broader, more durable growth architecture. India is the natural destination. Small-caps are projected to deliver 20 per cent profit after tax (PAT) growth in Q1-FY27; domestic consumption, defence, infrastructure, and financial deepening are all compounding simultaneously. The risks I watch are a Strait of Hormuz re-escalation and the Fed having to hike rates either sooner-than-expected or more-than-expected.

 

Your views on mid- and small-caps?

  The October 2024 correction has done its work, but the picture is nuanced. The Nifty Smallcap 250 at 34.4x sits 21 per cent above its five-year median; the Nifty Midcap 100 at 31.5x is only 7 per cent above. PE misleads here. On price-to-book, smallcaps sit at the 46th percentile, essentially at their historical median, while midcaps are at the 75th percentile. The book value case for smallcaps is materially stronger. Small-cap EPS is yet to recover to October 2024 levels, whereas mid-cap EPS is well above previous highs. Growth is returning. Mid and small-caps will reflect it first.

 

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