Avoid high valuation narrative-driven stocks, warns Nomura

Nomura, in its India equity strategy update, warned that investors should stay selective and avoid stocks where valuations have been driven primarily by strong narratives rather than earnings support. The brokerage noted that post-pandemic market distortions, shifting supply chains and geopolitical adjustments had created powerful narratives that significantly lifted valuations across several segments. These included defence, power equipment suppliers, EMS, hospitals, hotels, real estate and chemicals.

Nomura assessed that extremely high valuations were likely to cap further upside as narrative fatigue sets in. In such cases, the risk-reward profile appeared unfavourable and even minor disappointments could trigger material corrections. Conversely, even a marginal improvement in narrative versus expectations could lead to sharp appreciation in stocks if accompanied by incremental earnings upgrades and multiple expansion.

The brokerage therefore recommended a selective bottom-up approach, preferring stocks where narratives can improve at the margin over the next one year or where valuations remain reasonable and earnings delivery can drive re-rating. According to Nomura, attractive segments include commercial vehicles, pharmaceuticals, IT services and NBFCs.

Nomura highlighted that the global macro backdrop looked relatively sanguine at present. Assuming the environment remains stable, the brokerage believed portfolios should include selective stocks with international exposure. Nomura turned more constructive on IT services, after a prolonged period during 2025 when it had preferred domestic-exposure themes and consumption over investment.

The brokerage noted that parts of the India-focused consumption theme had likely run their course, prompting a more selective stance.

Nomura advised investors to closely evaluate companies that rely heavily on government support, including PLI-linked beneficiaries or firms significantly exposed to taxation-related interventions. The brokerage expected the government to remain selective on subsidies while seeking avenues to mobilise additional resources given revenue constraints.

Nomura maintained a bullish view on financials, pharmaceuticals, IT services, consumer discretionary, real estate, internet, cement and telecom. It turned constructive on IT services, upgrading its stance from cautious, citing the sector’s five-year underperformance, low earnings expectations and potential gains from AI adoption as hardware investments translate into monetisation opportunities. Unless global uncertainty increases, visibility on discretionary spending should improve, supporting a re-rating.

The brokerage remained constructive on manufacturing themes connected to import substitution and exports. It expected government policies to selectively support firms demonstrating capability to execute effectively. Nomura stayed positive on EMS and auto component manufacturers.

In consumption, Nomura preferred discretionary and durables over staples. It turned more selective on staples and auto OEMs, where earlier views had been positive. The brokerage noted that staples face structural challenges from new entrants and elevated valuations amid slow growth. It preferred exposure to the staples theme through smaller, faster-growing companies, platform businesses and organised retail. In auto OEMs, it recommended select players with strong product cycles.

Nomura retained its cautious stance on infrastructure, capital goods, healthcare services and consumer staples due to stretched valuations.

Nomura's top picks included ICICI Bank, Infosys, Bajaj Finance, Mahindra & Mahindra, Axis Bank, Titan, UltraTech Cement and Godrej Consumer. It also likes LG Electronics, CG Power, Dr Reddy’s labs, Ashok Leyland, Dixon, Swiggy, Alkem, M&M Financial, SonaComstar, eClerx, ABREL and MedPlus.