Eternal, Axis Bank, ABB India, Alkem Labs among top stocks to buy as valuations ease

Domestic brokerage firm Equirus Securities believes that Indian equity markets’ valuations have eased from peak due to the latest correction, bringing EM and the World multiples closer. This adjustment has brought India’s market multiples in closer alignment with other emerging markets and global averages, representing a significant change from post-COVID highs, it said.

"The Nifty is expected to trade between 18x-22x PE; similar to post Covid." These levels reflect a moderation from extreme valuation peaks, with expectations of more reasonable market pricing compared to previous cycles. The report adds that India's valuation premium within emerging markets has become more reasonable following the recent correction amid the global focus on artificial intelligence.

Sectoral positioning remains a key strategy for Equirus Securities. The brokerage said, "Equirus Securities is Overweight on sectors like Auto, Banks, Capital Markets, FMCG, Internet Platforms. Underweight on Building Materials, Industrials and Defense, Real estate, Textile and Logistics and Equal Weight on Cement, Chemials, Consumer Durables, EMS, Infra, IT Services, Metals and Mining, NBFCs, Healthcare and Retail." This approach is designed to capture relative sectoral growth and manage risk as the market recalibrates.

India's market resilience is underpinned by robust domestic flows. As highlighted in the note, "India Anti-AI trade: The market benefits from structural stability due to robust domestic flows (strong SIP inflows sustained a 27% CAGR). DII ownership has risen to 18.6%, structurally absorbing FII selling, whose ownership has slipped to 16.9%. Within EM, South Korea, Taiwan outperformed as FIIs chased AI trades. India notably doesn’t have many direct/indirect play resulting into underperformance." This suggests that local institutional investors play a stabilising role against foreign outflows.

Earnings growth is set to become a decisive factor. The report states, "Earnings Momentum a key positive trigger: Earnings growth in the Nifty 50 is expected to improve meaningfully in CY26–CY27 (17–14%). Given that valuation upside from multiple expansion is constrained due to elevated prices, future returns must be driven by earnings delivery. Although consensus EPS for CY25 was cut heavily (-13%), the current data points to an earnings surprise cycle that materially revises EPS up as the more plausible positive trigger for benchmarks to materially re-rate upward, rather than a renewed liquidity or flow impulse."

Valuation risks are still present, particularly for small-cap segments. "Valuation Risks Persist: While large-cap valuations have moderated from their post-COVID highs, they remain above historical averages. Small-cap valuations are highly stretched, with the Small/Large forward P/E ratio at approximately 1.25x, significantly above the long-term average of 0.9x, making them vulnerable to reversals." This highlights the bifurcation in valuation comfort across the market capitalisation spectrum.

The note details that, "The valuations of the Indian markets have moderated from peaks but remain elevated vs Pre-COVID and Past Cycles. Valuations have cooled from the Sep-24 peak but remain elevated — the share of NSE-500 stocks trading >50x PE is 36%, sharply higher than 16% pre-COVID, though lower than the 50% seen at the Sep-24 high. Lower buckets (10–20x, 20–30x) have normalised versus peak levels but still sit below pre-COVID distributions." While the froth has reduced, overall valuations are still not at historical norms.

According to the report, "Compared with prior market highs, skew is clearly richer, especially in the over 30x segments, where the combined weight remains materially higher than historical cycles. This indicates valuation froth is off the top, but the market is still priced well above long-term norms. Risk-reward favours large caps and quality compounders where valuations are closer to historical bands, while mid/smallcaps and >50x names remain vulnerable to any earnings disappointment. Broader re-rating from here requires earnings upgrades, not further multiple expansion."

Several supportive factors are identified: "Key Tailwinds (Oil & Rural): India benefits from stable, softer Brent crude prices (US$ 63–70/bbl range), which are margin-accretive for multiple sectors (e.g., OMCs, chemicals, transport). Additionally, rural demand is gathering momentum, supported by high reservoir storage levels and improving sentiment."

External challenges persist, with the note stating, "External Headwinds: The primary external risk is the U.S. tariff shock, which has caused India’s exports to the U.S. to drop 40% since May 2025, significantly affecting labour-intensive sectors like textiles. However, diversification of exports to non-US markets is helping to cushion the disruption."

Monetary policy remains supportive for growth. "Monetary Easing Cycle: With inflation cooling sharply to ~1–2% YoY, RBI has already delivered a cumulative 100 bps of rate cuts, which has helped ease system liquidity and stimulate an early pickup in credit growth. The persistence of low inflation continues to provide the RBI additional room to cut rates further, keeping monetary conditions supportive for growth and asset re-pricing."

On market positioning, Equirus Securities concludes: "macro/earnings clarity is lacking. Equirus Securities’ stance would be to avoid broad small-cap exposure, be selectively constructive on mid caps with clear earnings/sector catalysts, and retain large-cap overweight for risk management until valuations and earnings converge."

For stock selection, Equirus Securities has listed their top picks in Large, mid and small cap segment. ABB India, Axis Bank and Eternal are among top picks in largecaps, Aditya Birla Real Estate, Alkem Labs, APL Apollo Tubes are top picks in mid and small caps.