Equirus flags valuation risks in short-term; picks these 28 stocks for up to 76% return

Equirus Securities has released its annual India Equity Strategy report where its bullish on large caps and eight sectors while its sanguine on five others sectors. Indian equity markets are benefiting from long-term growth tailwinds but are witnessing short-term valuation risks, the brokerage noted, which has picked 28 stocks across all sectors for up to 76 per cent upside potential.

Domestic institutional investors (DIIs) have overtaken foreign institutional investors (FIIs) in equity ownership in India, according to the latest report from Equirus Securities. The strong inflow from Systematic Investment Plans (SIPs) has helped create a stable domestic demand base, which absorbs FII selling and reduces market sensitivity to global risk-off events. This shift is a positive development for valuation resilience in the Indian market.

"Indian equity markets are entering FY26 with cyclical headwinds but strong structural drivers. We are Overweight on auto, Capital market, Cement, FMCG, Infra, Internet platforms, NBFC, Oil & Gas sectors while we are underweight on Building materials, Industrials & Defense, Real estate, Textile, Logistics sectors," says Maulik Patel Head of research Equirus Securities.

Equirus Securities' annual India Equity Strategy report indicates a shift in market leadership towards large caps and quality mid-caps. Sectors set to benefit from rural income revival include Auto, Cement, Non-Banking Financial Companies (NBFCs), and Fast-Moving Consumer Goods (FMCG). Meanwhile, sectors with stretched valuations and slowing earnings, such as building materials, Industrial, and Defence, remain underweight.

The note from Equirus Securities highlights a significant turnaround in rural consumption trends. After a period of stagnation, rural wages have been increasing steadily since late 2024. The February to May 2025 period recorded the strongest year-on-year gains since 2018, boosting rural disposable income. This growth in rural wages is expected to bolster demand across various sectors, including FMCG, agri-inputs, two-wheelers, tractors, and rural-focused financial services.

In an environment where CY25 EPS forecasts have fallen -13.8%, the steepest cut since the pandemic, investing wisely backed by adequate research is key to outperformance," says Patel. “Large caps provide the best margin of safety, mid-caps should be approached selectively in structural growth areas, and small caps warrant caution until earnings catch up,” added Patel.

The report also paints a cautious picture of small-cap valuations, noting that the small-cap forward price-to-earnings (P/E) ratio stands at 1.25 times compared to the long-term average of 0.88 times. This contrasts with the Nifty 50 index, which trades above its 10-year average. While mid-caps are elevated, they offer stronger earnings visibility than small caps, where multiple expansions dominate.

Public capital expenditure remains above pre-COVID levels, driven by investments in power and production-linked incentive schemes. However, FY26 is expected to see a pause due to tariff wars and global trade uncertainties. The long-term capex story remains intact, supported by state/PSU investments, supply-chain shifts, and stronger corporate balance sheets.

Monetary policy developments are also expected to influence market dynamics. With Consumer Price Index (CPI) inflation falling below 4%, liquidity has moved into surplus, prompting the Reserve Bank of India (RBI) to begin a gradual rate-cutting cycle. Historically, such easing results in muted short-term returns but stronger gains over a 12-month horizon, favouring a balanced approach between cyclical and defensive sectors.

In terms of sectoral outlook, Equirus Securities maintains a neutral stance on Banks, Chemicals, Consumer Durables, Electronics Manufacturing Services (EMS), IT Services, Metals and Mining, Healthcare, and retail sectors. This neutral position reflects current market conditions and sector-specific challenges.

The report underscores the growing importance of domestic investors in driving the Indian equity market. As domestic participation increases, the market becomes less susceptible to global risks, providing a more resilient platform for long-term growth. This shift highlights the evolving dynamics of India's investment landscape.

Overall, Equirus Securities' report provides a comprehensive overview of current trends and future prospects within the Indian equity market, offering valuable insights for investors navigating this complex environment. The focus on large caps, rural demand, and evolving investor base charts a path forward amid ongoing economic and geopolitical challenges.

Equirus Securities has identified 8 largecap stocks including ABB India, Bharat Petroleum Corporation, Chola Finance, Godrej Consumer Products, HDFC Bank, Infosys, Jindal Steel & Power and UltraTech Cement for up to 12-31 per cent upside potential.

From the midcap and smallcap space, it has picked Aditya Birla Real Estate, Alkem Labs, Arvind Fashions, Avalon Tech, Berger Paints, Blue Star, Federal bank, Gateway Distriparks, Grindwell Norton, Hero Moto, IGL, JK Lakshmi Cement, Jyothy Labs, Lumax Industries, Marico, PI Industries, PNC Infratech, Polycab India, Prudent Corporate and Ujjivan SFB with up to 76 per cent upside potential.