Markets set on favourable FY27 base; Iran war ceasefire key trigger: MOFSL

India's valuation premium over emerging markets, according to MOFSL, has narrowed to 27 per cent, well below the 10-year average of 73 per cent

Motilal Oswal on India strategy: A favourable base appears to be forming for Indian equities in FY27 after a sharp phase of underperformance in FY26, marked by sustained foreign institutional investor (FII) outflows, according to Motilal Oswal Financial Services (MOFSL). 

In its April 2026 India Strategy report, the brokerage said the ongoing Iran–Israel and US conflict remains the key near-term overhang. However, any ceasefire or de-escalation could act as a trigger for markets by unlocking pent-up positive sentiment and aiding a recovery from the losses seen in the previous fiscal. 

"While the ongoing war has hit the current earnings estimates, the effect has not been as sharp as observed in FY25. Moreover, the plethora of policy measures should incrementally prop up earnings growth," wrote Gautam Duggad, research analyst at MOFSL.

 

Markets at an inflection point

MOFSL believes Indian equities are at a pivotal juncture, supported by multiple domestic tailwinds, including accommodative fiscal and monetary measures, progress on trade agreements, improving aggregate demand, and better-than-expected GDP prints. Continued participation from retail investors also lends support. 

That said, geopolitical risks linked to the Middle East conflict have clouded the near-term outlook. The brokerage highlighted India’s vulnerability to disruptions in energy supplies, noting that 35 to 40 per cent of crude demand and over half of pre-war LPG imports pass through the Strait of Hormuz.

Valuations turn reasonable after correction

Following a correction of about 10 per cent since the onset of the conflict, valuations have moderated. MOFSL noted that the Nifty now trades at 18 times earnings, which is a 14 per cent discount to its long-period average of 20.9 times. 

In FY26, Indian markets declined around 3 per cent even as the MSCI EM index rose 31 per cent, resulting in a sharp 34 per cent underperformance, among the steepest in two decades. Consequently, India’s valuation premium over emerging markets has narrowed to 27 per cent, well below the 10-year average of 73 per cent, according to the report. 

Earnings growth to moderate

On the earnings front, MOFSL expects growth to soften sequentially. It has pencilled in 10 per cent year-on-year growth for its coverage universe, lower than the 18 per cent and 15 per cent growth seen in the preceding quarters. 

Excluding financials, profit growth is estimated at 9 per cent year-on-year, and 10 per cent excluding oil marketing companies. Large-cap earnings are likely to see the sharpest slowdown, with growth of around 7 per cent year-on-year, weighed down by sectors such as oil and gas, automobiles, PSU banks, healthcare, and capital goods. 

In contrast, mid-cap earnings are expected to improve to 25 per cent year-on-year from 16 per cent, while small-cap earnings growth is projected at 18 per cent year-on-year, though lower than the 27 per cent seen earlier.

Stock preferences

Among Nifty50 companies, MOFSL has identified Bharti Airtel, State Bank of India, ICICI Bank, Mahindra and Mahindra, Titan, Bharat Electronics, Eternal, Tata Steel, Infosys, and InterGlobe Aviation as its top picks. 

Outside the index, its preferred ideas include TVS Motor Company, ICICI Prudential AMC, Groww, Indian Hotels, AU Small Finance Bank, Dixon Technologies, Lenskart, Waaree Energies, Coforge, Radico Khaitan, and Delhivery.

Model portfolio: Domestic growth themes in focus

MOFSL said its model portfolio continues to favour sectors with strong growth visibility and domestic structural drivers. It remains overweight on automobiles, PSU banks, diversified financials, manufacturing and industrials, consumer discretionary, and new-age platforms, while staying underweight on oil and gas, private banks, metals, consumer staples, IT, and utilities. 

Within financials, the brokerage prefers PSU banks over private lenders and has increased its allocation to State Bank of India while trimming exposure to HDFC Bank. It has also added ICICI Prudential AMC, Jio Financial Services, and AU Small Finance Bank to capture emerging opportunities. 

In technology and new-age businesses, MOFSL has raised exposure to Infosys and increased weightage to Eternal, while initiating coverage on Lenskart, citing strong growth potential in an underpenetrated category. 

The brokerage continues to favour discretionary consumption over staples, maintains an overweight stance on automobiles, and sees manufacturing, particularly defence and electronics manufacturing services, as a long-term structural theme. 

It has also selectively added names in metals and renewable energy, including Jindal Stainless and Waaree Energies, citing capacity expansion, cost efficiencies, and policy support for domestic manufacturing.

SMIDs remain in favour

MOFSL retains its overweight stance on mid- and small-cap stocks, reflecting the rising importance of emerging business models and niche themes. It has added LT Foods, highlighting strong demand tailwinds from global basmati consumption and favourable valuations relative to FMCG peers.  ====================================

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