In a significant shift, domestic brokerage firm Motilal Oswal Financial Services (MOFSL) has turned optimistic on corporate earnings, marking its first upgrade since the first quarter of FY25. The brokerage has raised its aggregate profit after tax (PAT) estimate for the financial year 2026 by 2% following the September-quarter results, signaling a potential turnaround in the earnings cycle.
Segmental Performance: Mid-Caps Outshine, Small Caps Struggle
The upgrade comes after a period where the intensity of earnings cuts has diminished, giving way to positive revisions. This change is attributed to a series of stimulative fiscal and monetary policies. The upgrades, however, are not uniform across market segments. Mid-cap stocks witnessed the highest earnings upgrades at 3.1%, with large caps also posting a solid 2% upgrade. In contrast, small caps continued to face headwinds, suffering further downgrades of 5.5%.
The brokerage now forecasts FY26 and FY27 earnings growth of 12% and 15% year-on-year for the Nifty 50 index. For its broader MOFSL coverage universe, it projects growth of 15% and 16% for the same periods. It noted that sharp earnings revisions in either direction are unlikely from this point, barring a possible exception for Nifty 50's FY26 PAT.
Sectoral Drivers and Draggers
The earnings upgrades were primarily fueled by robust performances in specific sectors. Oil & Gas, Telecom, PSU Banks, Insurance, and NBFCs were the key contributors. On the downside, the Utilities sector remained the biggest drag, followed by Autos and Healthcare. Smaller sectors like Chemicals, Media, Staffing, and Cement saw more downgrades than upgrades.
In the large-cap space, sectoral revisions were balanced. PSU Banks, Insurance, Oil & Gas, Telecom, and Autos (excluding Tata Motors) saw upgrades, while Utilities, Real Estate, and Consumer Durables faced cuts. Mid-cap trends mirrored this balance, but small-cap sectors lagged significantly due to sharp downgrades in private banks, insurance, retail, and electronics manufacturing services (EMS).
Corporate Earnings Can Outpace GDP Growth
Motilal Oswal also addressed a critical question puzzling investors: Can corporate earnings grow at mid-teens rates despite India's nominal GDP expanding at sub-10%? The brokerage's analysis of the past two decades reveals that while nominal GDP growth is a factor, it explains only a limited portion of corporate profit growth.
For the Nifty 50, nominal GDP growth accounts for roughly 20% of profit growth. Other elements such as financial leverage, pricing power, cost pressures, and competitive dynamics play a far more substantial role. Consequently, the firm advises that corporate earnings growth should be evaluated beyond just the trajectory of GDP expansion.
Indian Equities Poised for a Strong 2026 Rally
The brokerage maintains a positive stance on the Indian stock market, believing equities are well-positioned to recover from the underperformance observed in calendar year 2025. This optimism is underpinned by improved earnings prospects, supportive domestic macroeconomic conditions, and a gradually easing geopolitical environment.
India could also attract increased foreign investment as the overexuberance in global artificial intelligence (AI) stocks cools, potentially prompting a country rotation toward India within foreign institutional investor (FII) portfolios. A lower USD/INR exchange rate could further provide an attractive entry point for investors.
On the sectoral front, Motilal Oswal is overweight on diversified financials, automobiles, capital goods, IT services, and telecom. It remains underweight on energy, metals, utilities, and consumer staples.
The firm's top large-cap recommendations include Bharti Airtel, ICICI Bank, SBI, Infosys, L&T, M&M, Titan, Eicher Motors, BEL, IndiGo, TVS Motor, Tech Mahindra, and Indian Hotels. Its preferred mid-cap picks are Swiggy, Dixon Technologies, Suzlon Energy, Jindal Stainless, Coforge, Kaynes Technology, Radico Khaitan, V-Mart Retail, and VIP Industries.
