Where to invest in 2025-26: Equirus bets big on auto, cement, NBFCs, FMCG

For retail investors, the message is clear: lean on large caps, stay disciplined with SIPs, and be selective in mid-caps while steering clear of overheated small caps.

Indian equity markets are poised at an interesting inflection point. While structural tailwinds continue to support the country’s long-term growth trajectory, near-term risks from elevated valuations and earnings downgrades warrant caution, according to Equirus Securities’ annual India Equity Strategy report.

 

The brokerage, which services leading insurers, mutual funds and FIIs, maintains a bullish stance on large-cap stocks and is overweight on eight sectors including Auto, Capital Markets, Cement, FMCG, Infrastructure, Internet Platforms, NBFCs, and Oil & Gas. On the other hand, it is underweight on Building Materials, Industrials & Defence, Real Estate, Textiles, and Logistics, citing stretched valuations and earnings headwinds.

 

 

“Indian equity markets are entering FY26 with cyclical headwinds but strong structural drivers,” said Maulik Patel, Head of Research, Equirus Securities. “Large caps provide the best margin of safety, mid-caps should be approached selectively in structural growth areas, and small caps warrant caution until earnings catch up.”

 

The brokerage which counts leading insurers, mutual funds and FIIs as its clients has a neutral stance on Banks, Chemicals, Consumer Durables, EMS, IT Services, Metals and Mining, Healthcare and retail sectors. 

For retail investors, the message is clear: balancing caution with opportunity will be critical in the months ahead

 

Small-cap valuation premium at historical high

The report highlights a notable concern: small-cap valuations are at historically elevated levels. The small-cap forward P/E ratio stands at 1.25x versus a long-term average of 0.88x, just below the peak of 1.3x. In comparison, the Nifty 50 too trades above its 10-year average, though the froth is more evident in smaller counters.

 

Adding to the caution, CY25 EPS forecasts have seen a sharp 13.8% downgrade, the steepest cut since the pandemic. Against this backdrop, Equirus advises retail investors to temper expectations from smaller companies, where price gains have been driven more by multiple expansion than by earnings visibility.

 

Mid-caps remain elevated but offer stronger earnings visibility than small caps, where multiple expansion dominates.

 

“In an environment where CY25 EPS forecasts have fallen -13.8%, the steepest cut since the pandemic,” investing wisely backed by adequate research is key to outperformance.

 

Large cap to outperform, prefer domestic sectors

 

Near term, leadership is likely to shift toward large caps and quality mid-caps as valuations and earnings expectations re-align.

 

Overweight sectors expected to benefit from rural income revival include Auto, Cement, NBFC, and FMCG, while sectors with stretched valuations and slowing earnings – building materials, Industrial, and Defense – remain underweight.

 

Equirus is particularly positive on companies with high rural exposure, given the turnaround in rural incomes and sentiment. Rising wages, better-than-average monsoons, and improved farm output are creating a supportive demand backdrop.

 

Rural revival gaining traction

 

One of the most important themes for FY26, according to the brokerage, is the revival of rural consumption.

 

Rural wages have been on an uptrend since late 2024, with Feb–May 2025 marking the strongest year-on-year gains since 2018. In May 2025 alone, overall rural wages rose 3.5%.

 

The Equirus Rural Index and CMIE’s Index of Consumer Sentiments both point to rising optimism in rural households.

 

A stronger-than-normal monsoon has boosted kharif sowing, which in turn is expected to lift farm incomes.

 

This cocktail of higher wages, improved farm sentiment, and robust output is seen as a game-changer for sectors like FMCG, two-wheelers, tractors, agri-inputs, and rural-focused financial services.

 

“Listed companies with strong rural sales exposure are well placed to capture this growth, with better volume visibility and margin expansion in the coming quarters,” Patel noted.

 

Monetary policy tailwinds

 

Macro indicators are turning supportive. With CPI inflation falling below 4%, liquidity back in surplus, and the RBI beginning a rate-cut cycle, monetary conditions are easing. Historically, periods of rate cuts deliver muted near-term market gains but stronger 12-month returns, particularly when inflation and growth are aligned.

 

Equirus recommends a barbell strategy — balancing exposure between cyclical plays (such as financials and industrials) and defensive bets (such as consumer staples and healthcare) — to navigate the current cycle.

 

Capex cycle takes a breather, but story intact

 

India’s public capex remains elevated versus pre-COVID levels, led by spending in power, infrastructure, and PLI-linked sectors. States and PSUs are the key drivers, while private sector investment remains steady but cautious.

 

The report acknowledges that FY26 may see a temporary pause in capex momentum amid global tariff tensions and trade uncertainty. However, the multi-year capex story remains intact, supported by supply-chain diversification, government production-linked incentive schemes, and stronger corporate balance sheets.

 

Domestic investors in the driver’s seat

 

One of the most notable secular shifts in Indian equities has been the rise of domestic institutional investors (DIIs).

 

DIIs, backed by sustained SIP inflows growing at 27% CAGR between FY17–FY25, now surpass FIIs in overall equity ownership.

 

This growing domestic base has reduced market vulnerability to foreign outflows, a key factor that has historically driven volatility in Indian equities.

 

Equirus sees this structural shift as a valuation stabiliser, allowing markets to sustain higher multiples than in the past.

 

Sectoral outlook

 

The brokerage’s overweight calls include:

 

Auto: Benefiting from rural demand, falling input costs, and cyclical upturn in two-wheeler and tractor sales.

 

Cement: Strong demand from infra projects and housing, with margin tailwinds from softer fuel prices.

 

FMCG: Revival in rural consumption to drive volume growth.

 

NBFCs: Improved liquidity, rate cuts, and rural credit demand expected to support growth.

 

Internet platforms & Capital markets: Benefiting from digitisation trends and financialisation of savings.

 

Oil & Gas: Margin stability with easing global crude volatility.

 

Infrastructure: Supported by government spending and project pipeline.

 

Neutral sectors include Banks, IT Services, Chemicals, Consumer Durables, Metals & Mining, Healthcare, EMS, and Retail, where growth visibility is balanced by valuation considerations.

 

Meanwhile, underweight sectors are Building Materials, Industrials & Defence, Real Estate, Textiles, and Logistics, as they face valuation pressures or slowing demand.

 

What it means for retail investors

 

Large-cap bias: Favor large-cap companies with stable earnings and reasonable valuations as a core portfolio holding.

 

Selective mid-cap exposure: Look for structural growth stories in mid-caps but avoid chasing momentum.

 

Caution on small caps: Elevated valuations and earnings downgrades make this space risky in the near term.

 

Sector rotation: Focus on rural consumption plays (FMCG, auto, NBFCs) while avoiding sectors where valuations are stretched.

 

Systematic investing: Continue SIPs in equity mutual funds to benefit from long-term compounding and lower timing risks.

 

For investors with a longer horizon, India’s structural drivers — young demographics, rising incomes, supply-chain diversification, and digital adoption — remain intact. However, navigating short-term volatility with prudent asset allocation is key.  Despite near-term headwinds, Equirus Securities remains constructive on India’s equity story. The combination of domestic investor resilience, improving rural incomes, supportive monetary policy, and a capex-driven structural cycle sets the stage for sustained long-term growth.  Top pick valuation 

The brokerage has released a list of eight large-cap stocks with 12–31% upside potential and 20 mid- and small-cap names offering 13–76% upside.