Motilal Oswal sees FY26 earnings pick-up; financials, autos lead equities

Motilal Oswal on India strategy:Indian corporate earnings are showing signs of a meaningful turnaround, with aggregate profit upgrades recorded for the first time in five quarters in the September quarter, according to a report by Motilal Oswal Financial Services Ltd (MOFSL).

 

The brokerage’s analysis of its universe of stocks revealed that after a prolonged period of earnings cuts, companies are beginning to report earnings upgrades. For the three months ending with the Q2FY26 earnings season, the aggregate FY26 profit after tax (PAT) estimate for the MOFSL universe rose 2 per cent. This marks the first net upgrade since Q1FY25, reversing earlier quarterly readings of -6 per cent, -3 per cent, -4 per cent, and -2 per cent from Q2FY25 through Q1FY26.

 

 

The trend has been most pronounced among mid-cap stocks, which saw the largest earnings upgrades at 3.1 per cent, while large-cap stocks recorded a ~2 per cent increase. Small-cap companies, however, continued to lag, with aggregate downgrades of 5.5 per cent. Motilal Oswal noted that this momentum has persisted even after the Q2FY26 season, with modest upgrades of 0.5 per cent for FY27 PAT estimates.

 

“The easing intensity of earnings cuts has been a consistent theme over the past few quarters, and we are now witnessing a shift toward outright earnings upgrades,” the MOFSL report said. For FY27, the easing of downgrades has been evident as well, with quarterly readings improving from -4 per cent in Q3FY25 to 0 per cent in Q2FY26.  ALSO READ | Sensex can hit 100,000 in 2026 if earnings pickup: Chris Wood

Sectoral Trends: Large-caps lead, Small-caps lag

 

Sector-wise, the earnings revision picture has been positive for larger sectors. Key drivers of upgrades included Oil & Gas (+13 per cent), Telecom (+30 per cent), PSU banks (+5 per cent), Insurance (+3 per cent), and non-lending NBFCs (+2 per cent). Conversely, Utilities (-8 per cent) and Autos (-3 per cent, mainly due to Tata Motors) were the primary drags, while Healthcare also saw minor downgrades (-3 per cent). Among smaller sectors, downgrades outweighed upgrades, led by Chemicals (-6 per cent), Media (-9 per cent), Staffing (-5 per cent), and Cement (-4 per cent).

 

Large-cap stocks displayed a balanced sectoral revision trend, with seven sectors posting earnings upgrades of over 1 per cent, while seven others faced downgrades below -1 per cent. For mid-cap stocks, the breadth of revisions was nearly even, but small-cap sectors lagged considerably, with major cuts in private banks (-24 per cent), Insurance (-18 per cent), Retail (-15 per cent), and Electronics Manufacturing Services (-10 per cent).

Upbeat outlook despite modest GDP growth

 

Motilal Oswal highlighted that the improved earnings momentum has been supported by a series of stimulative fiscal and monetary measures. “This has contributed to better earnings revision outcomes over the past two quarters, culminating in a net earnings upgrade,” the brokerage said. It forecasts FY26/FY27 earnings growth of 12 per cent/15 per cent for its universe and 15 per cent/16 per cent for Nifty companies, noting that future revisions are unlikely to be sharp barring specific cases in Nifty50 FY26 PAT.

 

Motilal Oswal analysts also addressed investor concerns over sub-10 per cent nominal GDP growth and its potential impact on corporate earnings. Historical analysis indicates that nominal GDP growth explains only a modest portion of corporate PAT growth, approximately 20 per cent for Nifty50 companies over the past two decades. Corporate profits are influenced by multiple factors beyond GDP, including leverage, pricing power, cost management, and competition.  ALSO READ | New Year Picks 2026: SBI, Astral, Hindalco among top bets by Axis Sec 

In India, corporate profits remain a relatively small share of GDP. In FY24 and FY25, Nifty500 PAT accounted for 4.7 per cent of GDP, while total corporate profits (listed and unlisted) were 7.3 per cent of GDP. This makes corporate earnings more cyclical than the overall economy and suggests that mid-teens earnings growth is achievable even if nominal GDP growth remains below 10 per cent. Comparative analysis of the US economy further supports this point, with corporate profits there forming a larger share of GDP but showing similarly limited correlation with economic growth.

 

Motilal Oswal maintained a positive outlook on Indian equities, stressing that the market is set to recover from the underperformance seen in CY2025. Valuations remain reasonable, particularly for large-cap stocks, with Nifty trading at a price-to-earnings ratio (PE ratio) of 21.3x versus a long-term average (LTA) of 20.8x. Potential factors supporting market performance, analysts believe, include stable earnings growth, improved domestic macroeconomic conditions, a more favourable geopolitical backdrop, and the possibility of fund flows from global markets rotating into India following a slowdown in AI-related stocks abroad.

Sector overweights, key stock recommendations

 

The brokerage’s sector preferences include overweight positions in Diversified Financials, Automobiles, Capital Goods, IT Services, and Telecom, while Energy, Metals, Utilities, and Staples are underweight. 

 

Top large-cap stock picks include Bharti Airtel, ICICI Bank, SBI, Infosys, L&T, M&M, Titan, Eternal, BEL, Indigo, TVS Motors, Tech Mahindra, and Indian Hotels. 

 

The mid-cap picks include Swiggy, Dixon, Suzlon, Jindal Stainless, Coforge, Kaynes, Radico Khaitan, V-Mart, and VIP Industries.

 

That said, Motilal Oswal believes that the combination of positive earnings revisions, supportive domestic policies, and attractive valuations make Indian equities well-placed for growth in FY26 and FY27.

 

Disclaimer: The views and investment tips expressed by the brokerage in this article are their own and not those of the website or its management. Business Standard advises users to check with certified experts before taking any investment decisions