Indian equities may see turnaround as downgrades ease: Motilal Oswal

Motilal Oswal says Indian equities could be set for a turnaround as the pace of earnings downgrades slows, liquidity stays surplus, and government measures lift demand

Indian equities may be poised for a turnaround as the intensity of earnings downgrades slows, with the government pushing ahead with measures to support demand, according to domestic brokerage Motilal Oswal. 

  After four straight quarters of significant downward revisions, the cut in earnings forecasts during the June quarter (Q1FY26) was the smallest in a year, it noted.

 

According to an analysis done by the brokerage, FY26 and FY27 profit-after-tax (PAT) estimates for its coverage universe were trimmed by just 2 per cent and 1 per cent, respectively, compared with much steeper cuts in previous quarters.

 

Midcaps, in particular, bucked the trend with upgrades of 4 per cent for FY26 and 2 per cent for FY27, even as smallcaps saw deeper downgrades of 8 per cent for FY26. 

The improving macro and policy backdrop is likely to support the earnings cycle going forward, write Abhishek Saraf and Gautam Duggad, equity strategists at Motilal Oswal Financial Services Limited (MOFSL) in a note. 

 

The brokerage said liquidity is in surplus mode as the Reserve Bank of India has lowered the repo rate by 100 basis points (bps) to 5.5 per cent and cut the cash reserve ratio by 150 bps. On the fiscal side, personal tax reliefs and GST rate adjustments are expected to enhance household disposable income, it said.

 

While companies may have to pass on benefits through lower retail prices, the demand pick-up is expected to aid topline growth and operating margins via higher volumes, the report said.

 

However, analysts caution that the September transition to new GST rates could temporarily disrupt sales for some firms, particularly in discretionary segments.

 

Several sectors are benefiting from the easing revision cycle, including automobiles, insurance, capital goods, cement, chemicals, consumer products, logistics, oil & gas, real estate, and telecom. Technology, PSU banks, metals, and retail remain weak spots, though private banks could see improvement in the second half of FY26 as lower rates start to aid credit growth.

 

Indian stocks have lagged global peers over the past year, with the Nifty 50 down 8 per cent year-on-year, compared with gains of 16 per cent in the MSCI Emerging Market index and 15 per cent in the S&P 500.

 

But with the index trading at 20.6 times one-year forward earnings—around its long-period average—Motilal Oswal sees scope for a market up move supported by valuation expansion.

 

MOFSL expects PAT growth of 10 per cent for the Nifty 50 companies in FY26.

 

MOFSL’s top largecap picks include Bharti Airtel, ICICI Bank, Larsen & Toubro, Mahindra & Mahindra, Sun Pharma, Ultratech, Titan, Eternal, Bharat Electronics, TVS Motors, Tech Mahindra, Lodha Developers, and Indian Hotels.

 

Among midcaps, it favours Dixon, SRF, Suzlon, Jindal Stainless, Coforge, Supreme Industries, Page Industries, Kaynes, Radico Khaitan, UTI AMC, and Niva Bupa.