Nuvama stays cautious on Indian equities; downgrades banks, upgrades IT

Nuvama Institutional Equities has retained a cautious stance on Indian equities, arguing that the risk–reward remains unfavourable despite policy easing. The call comes as benchmark indices delivered flat returns over the past year amid stretched valuations, earnings moderation, and sustained foreign selling.

 

In the past year, Sensex and Nifty50 rose 0.4 per cent each, data shows. Meanwhile, broader market indices Nifty MidCap 100 and SmallCap 100 have provided investors with negative returns down 1.18 per cent and 5.18 per cent, respectively. In the same period, foreign institutional investors (FIIs) have offloaded ₹4,13,095.42 crore worth of equities.

Why is Nuvama cautious on Indian equities?

Earnings downgrade to last

Nuvama expects the earnings downgrade cycle to persist as export weakness and slower government spending offset tailwinds from Goods and Services Tax (GST) cuts.

 

 

Over the last one year, earnings have worsened with sharp cuts in earnings estimates. The one-year forward earnings per share (EPS) numbers, which were accelerating, have reported a sharp deceleration over the last year. The deterioration in the earnings cycle is essentially because profit margins, which expanded in FY24, stopped expanding last year, according to analysts. Hence, profit growth reconciled with a weak top line.

 

 

 

Valuations elevated

Valuations still remain expensive in absolute terms as well as relative to bond yields, warranting a cautious bias, Nuvama noted.

 

The Nifty is trading at a one-year forward price-to-earnings (P/E) of 20x, one standard deviation (1SD) expensive. Furthermore, market cap to gross domestic product (GDP) is around 135 per cent—lower than 150 per cent in September 2024, but still way higher than the long-term average of 90–100 per cent.

India’s decoupling with EMs continues

India’s three-year outperformance versus Emerging Markets (EMs) has largely reversed over the past year, with India now the laggard. Relative valuations have fallen back to below the 10-year average. Nuvama thinks most of the decoupling is now behind and expects some reconciliation ahead.

 

However, Nuvama reckons that the bulk of the decoupling trends could be behind and expects reconciliation ahead. 

 

 

Sectoral churn

Analysing the whole scenario, Nuvama has downgraded banking and financial services (BFSI), while upgrading information technology (IT). In terms of portfolio positioning, as analysts think it's time for a sectoral churn.

 

Over the past year, different sectors have taken turns leading the market, but these leadership periods are now much shorter and less impactful than before, Nuvama noted. For example, IT was the theme in Q3FY25, private banks in Q4FY25, Realty and non-banking financial companies (NBFCs) in Q1FY26, and Autos in Q2FY26.

 

Instead of themes lasting four to six quarters and seeing over 100 per cent gains, they now last only about a quarter and deliver just 10-20 per cent outperformance. This quick rotation of sector leadership suggests that the market's "churning cycle" is complete, and it might be in the late stages of a bull market, according to Nuvama.

 

The brokerage suggests a contrarian "Overweight" stance on IT stocks, as current valuations are low, earnings expectations are modest, they offer a 4 per cent dividend yield, and a weaker rupee helps them. Conversely, it suggests selling some BFSI stocks, as it does not see strong credit growth returning soon, and there's a growing risk of higher credit costs (like loan defaults).

 

Nuvama is ‘Overweight on telecom, internet, consumer, cement, chemicals, IT, and ‘Underweight’ on BFSI, industrials, power, autos.