The markets are taking a breather this week with the Nifty and Sensex trading in a tight range after the big cuts earlier in February. While some brokerage houses like Nomura have given a Nifty December target of 26,000 Kotak Institutional Equities expect the Index to remain rangebound this year. They do not expect any “meaningful upside to the Nifty in the short-term either.” Moreover, they believe that FIIs continue to worry about strong dollar and capital gains tax.
According to Pratik Gupta of Kotak Institutional Equities, the Nifty “is still somewhat expensive trading at 19x March 2026 P/E, which is significantly higher than historical averages and still at about a 90% premium to the MSCI EM Index. This is especially high considering earnings CAGR of 14% in FY26 and FY27, with downside risks to such estimates.”
Kotak on Nifty: No meaningful upside seen
Pratik Gupta explains that though a meaningful upside is unlikely, “the downside to the Nifty is protected by India’s strong medium-term growth prospects which should keep valuations elevated, and a likely better foreign and domestic liquidity environment in H2FY26.”
According to him, the “key downside risks include a sharper-than-expected global slowdown, or a bad monsoon that can adversely impact farm incomes, food inflation and construction activity, or a sharp slowdown in domestic retail inflows into equities, especially into small/mid-cap funds.” However, it’s not all gloom and doom. “A weaker US dollar that may drive flows into emerging market (EM) funds, and a quicker-than-expected private capex upcycle,” is a key upside risk as per Kotak Institutional Equities.
Cautious on smallcaps, midcaps
Kotak had raised the red flag on midcaps and small caps earlier this month calling for a sharper correction due to valuation concerns. Even on a flat session like today, the broader market sees deeper cuts. The BSE Smallcap Index is down over 2% while the BSE Midcap is down over 1%. Gupta stated that they “remain cautious on the outlook for small/mid-caps in general due to expensive valuations in many cases. We have been negative for a while and despite the 13% YTD correction in the NIFTY MidCap Index and 18% YTD correction in NIFTY SmallCap Index. We do not believe the valuations have come down enough.”
According to Kotak, “local investors are worried about their small/mid-cap exposures and remain concerned about the risk of more earnings downgrades.”
They stated that most local MF, insurance, and PMS funds are seeing a slowdown in their equity inflows, but the overall net inflows continue. “However, the nature of the flows has changed from small/midcap or thematic/sectoral funds till a few months ago, to large-cap or balanced debt-equity funds now. Those managing small-cap funds were understandably more cautious given the expensive valuations and the risk of a disorderly sell-off in case of any sudden redemptions.”
FIIs worried about string dollar, capital gains tax
FII selling has been one of the continuous worries for the Indian markets. Gupta highlighted that “most foreign investors are now less negative on India, and they’re beginning to get interested in some large-caps.”
“Many emerging market (EM) fund managers were hopeful of inflows into EMs as an asset class later in the year as the valuation disparity with the US” becomes very high. However, he pointed out that “India would not be their first priority given slowing growth and relatively expensive valuations as of now.” Some also highlighted that India’s capital gains tax was now beginning to bite as return expectations had come down sharply – this is in contrast to the last few years when Indian equities were giving 20%+ returns and the rupee-dollar was relatively stable.”
Worries about earnings downgrade
According to Gupta, “Domestic investors also remain worried about the risk of further earnings downgrades given the weak commentary by many companies at the recently held Kotak conference.” As a result, Kotak highlighted that interest is shifting towards companies where the demand visibility was reasonably strong, even if valuations were somewhat more expensive.
Speaking on specific sectors to watch, Kotak continues to bet on “large private banks and NBFCs, life insurance companies, residential real estate, hotels and the airlines/hospitality sectors.” They are “cautious on many of the consumer staples and discretionary stocks as well as the oil & gas and the chemicals sector in general.”