Mid, smallcaps rally justified; largecap fortunes hinge on FIIs: Mihir Vora

Investors are likely to continue rewarding growth pockets such as domestic cyclicals, manufacturing, and new-age technology companies, says Mihir Vora, chief investment officer at Trust Mutual Fund. In an email exchange with Abhishek Kumar, Vora says the market recovery is still in its early stages, with valuations remaining supportive. Edited excerpts:

 

The market is recovering as concerns over tensions in West Asia ease. But do current valuations and earnings growth expectations leave enough room for meaningful upside from here on out? 

We are still in the early phase of the recovery. Over the past 20–24 months, the market has undergone meaningful time and price corrections, while the rupee has also adjusted. As a result, valuations have eased to around their long-term averages.

 

Relative to global emerging markets, India is at a 25-year low on a price-to-book basis and trades on a par on a price-to-earnings basis, which is historically a rare setup. Foreign institutional investor (FII) sentiment also remains extremely weak, and their India exposure is at around a 15-year low.

 

Domestic demand remains robust, credit growth is picking up, and earnings growth has been resilient, particularly in the mid and smallcap segments. As a result, the next leg of the upside is not dependent on spectacular earnings surprises. Even a partial reversal in negative FII sentiment can lead to a disproportionate market response. A normalisation of the artificial intelligence (AI) hype globally could be a good trigger.

 

What factors are likely to drive equity markets in the coming months? What are the key risks? 

First, and most importantly, are earnings and growth expectations. The fourth quarter (January-March/Q4) of 2025-26 was strong, and domestic demand continues to hold up. Except for an extended delay in the monsoon, growth should remain healthy. Earnings strength is also broadening beyond a narrow set of stocks, particularly in cyclicals, industrials, and midcaps, supporting a more durable rally.

 

Also, as geopolitical risks and oil prices ease, pressures on inflation, the current account, and fiscal balance should moderate. The Reserve Bank of India and the government have taken effective steps to stabilise the rupee, providing a meaningful macro tailwind. However, increasingly hawkish global central banks remain a risk.

 

A weak monsoon could affect rural demand. That said, ample foodgrain buffer stocks should help contain food inflation.

 

Finally, global market rotation remains a key trigger. Global flows have been concentrated in technology-led markets, but as this normalises, markets like India, with attractive valuations and a diversified sectoral base, could benefit. The risk is that AI-driven flows persist for longer, delaying inflows into India.

 

Which sectors are best positioned to lead the next phase of the market rally? Are there any sectors where you remain cautious? 

In the recent recovery, sectors such as industrials, real estate, defence, and other cyclicals have led the market, showing that investors continue to reward pockets of growth despite volatility.

 

Structurally, we continue to see leadership from four broad themes with a long growth runway. Domestic cyclicals such as industrials, infrastructure, real estate, defence, and renewables should continue to benefit from improving economic activity, strong earnings visibility, and favourable government policies.

 

Manufacturing and export-oriented businesses linked to supply-chain diversification and the China+1 trend, including pharmaceutical contract manufacturing, electronics manufacturing, and specialty chemicals, also remain well-positioned.

 

Financials and premium consumption are direct beneficiaries of the financialisation and premiumisation of the Indian economy. We continue to like capital market plays, non-banking financial companies, banks, and the premium consumer discretionary segment. 

 

We also remain positive on new-age technology-led businesses building scalable business-to-business and business-to-consumer models.

 

On the other hand, we remain cautious on sectors where growth visibility has weakened, such as information technology; structurally low-growth sectors like fast-moving consumer goods and regulated utilities; and businesses heavily exposed to global cycles, including commodities and oil and gas.

 

Broader markets have significantly outperformed since April. Do you expect this trend to continue? 

The outperformance has been supported by strong earnings growth and domestic liquidity. Structurally, this trend is justified, as these companies typically offer a longer growth runway and better operating and financial leverage. However, there is one caveat. FIIs are largely invested in largecaps, and if they turn buyers, largecaps could outperform in the short term.

 

As the first quarter (April-June/Q1) of 2026-27 draws to a close, what are your expectations from the upcoming earnings season?

  The last quarter was decent, and we expect earnings for the upcoming quarter to be broadly stable. More importantly, we think the focus will shift from headline growth to the sustainability of earnings. Moreover, growth will not be limited to a few sectors but will continue to become more broad-based.

 

Things that we will be closely watching: First, margin trends, especially in the context of input cost volatility during the West Asia crisis, as there may be certain pockets where margins could come under pressure. Second, management commentary and forward guidance. If guidance points to easing pressure on margins and visibility of future growth, markets will look through any disappointments in the second quarter (July-September/Q2) results.

 

How do you assess valuations across largecap, midcap, and smallcap segments? 

Valuations today need to be seen in relative and absolute terms, and the picture is varied.

 

Largecap valuations are at or around long-term averages after the correction we have seen over the past couple of years. In fact, compared to global markets, they trade at massive discounts. So, from a valuation and positioning standpoint, largecaps are the most reasonable part of the market today, with scope for rerating if FII flows return.

 

When it comes to midcaps, they trade at a bit of a premium, but that needs to be balanced against the fact that they offer higher growth and a longer growth runway.

 

Smallcaps are where dispersion is the highest, but given the large number of stocks in the smallcap space, looking at headline index valuations is less relevant — stockpicking is far more important.