Direct Equities: India Outlook - Accumulate on Strength

The Union Budget FY26 reinforces policy continuity and a long-term growth orientation, with fiscal deficit, borrowing, divestment and capital expenditure targets appearing realistic and supportive of business confidence. During the month, global AI-related developments triggered a sharp sell-off in traditional Indian IT stocks, leading the NIFTY IT Index to fall nearly 20%, its steepest monthly decline since 2008. As a result, the NIFTY50 declined 0.6% in February 2026, underperforming the MSCI Emerging Markets Index (+5.4%), though broader markets saw modest gains. Institutional flows remained supportive with continued DII buying and a return of FII inflows. Late in the month, geopolitical tensions pushed crude oil prices higher, which we view as a near-term risk rather than a structural concern.

Highlights

• Market Outlook: Positive return outlook supported by improving earnings momentum, with FY27E Nifty EPS expected to grow ~18% YoY, though geopolitical tensions and rising oil prices remain near-term risks.
• Earnings Growth: Consensus forecasts FY25–27 earnings CAGR of ~12.4% for Nifty-50 and ~13.3% for BSE-500, with growth expected at 7–8% in FY26 and ~18% in FY27.
• Valuations: Mid and small caps have corrected meaningfully; NSE Midcap100 and Smallcap100 forward P/E at 25.4x and 23.2x now trade closer to historical averages, making selective 2–3 year accumulation opportunities attractive.
• Sector View: Positive on Consumer Discretionary and IT, with selective opportunities in Auto, BFSI, Power, Chemicals, Textiles and Pharma; tactical plays in Media, Energy, US-linked manufacturing and Telecom, while remaining cautious on Infra, Private Banks, Capital Goods, Realty, Defence, New-age Tech and FMCG.