Earnings Momentum Keeps Indian Equities Out of Bubble Territory, Says Kotak’s Shripal Shah

Indian Markets Enter a More Balanced Zone as Valuations Normalize, Says Kotak’s Shripal Shah

Indian equities are not in overvalued territory despite concerns over stretched valuations in pockets of the market, said Shripal Shah, Managing Director and CEO of Kotak Securities, at the firm’s 2026 market outlook conference on Wednesday. Addressing questions about whether India’s multi-year rally has pushed the market into a speculative zone, Shah asserted that the broader setup is “far from a bubble” and is instead supported by improving earnings fundamentals.

“Valuations are becoming reasonable and earnings are catching up. This is not a bubble zone,” Shah said, noting that the disconnect between index performance and earnings growth has narrowed meaningfully over recent quarters.

Market’s Time-and-Price Correction Helped Restore Balance

Shah emphasised that the market’s consolidation phase through 2024 played a critical role in stabilising valuations. After a brisk rally over the previous year and a half, the benchmark indices spent several months in a tight range, absorbing earlier gains through a combination of time correction and mild price pullbacks.

“The setup is more balanced now,” he said. “The markets needed time to digest the previous run-up, and that has helped normalise valuation multiples.”

Kotak Securities believes this consolidation has brought market valuations closer to long-term averages, especially as earnings momentum begins to improve across sectors.

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Kotak Expects Sharper FY26 Earnings Recovery After Subdued Six Quarters

A key driver behind Kotak’s constructive stance is the expectation of a strong earnings recovery in FY26. According to the brokerage’s internal forecasts, corporate earnings are projected to grow around 17 percent, underpinned by moderating inflation, a broadening consumption recovery, and improving profitability in domestic-oriented sectors.

Shah pointed out that markets have endured six consecutive subdued quarters, but early indicators suggest that the earnings cycle is now turning. Kotak has also projected FY27 Nifty EPS at Rs 1,372, forming the foundation for its index-level assumptions over the next 18 months.

Shah said that if earnings deliver as expected, valuations will realign organically, reducing concerns around pockets of froth in mid- and small-cap indices.

Mid- and Small-Cap Concerns Persist, But Earnings Momentum to Drive 2025

While the sharp outperformance in mid- and small-cap stocks has raised fears of overheating, Shah believes that earnings rather than valuations will dictate market direction in 2025.

“If earnings deliver as expected, valuations will adjust accordingly,” he said, adding that broader participation in earnings growth will be key to sustaining market performance.

Kotak Securities maintains a constructive view on the Nifty, assigning a base-case return potential of around 12 percent for 2025, supported by stabilising earnings growth and improving sectoral breadth.

Sector Outlook: Domestic Plays Gain, Export Sectors Stay Sluggish

Kotak’s outlook for 2025–26 shows a clear preference for domestic-facing sectors. The brokerage expects stronger momentum in:

• Financials

• Select consumer categories

• Parts of industrials

Export-linked sectors, however, may continue to see uneven demand due to persistent global uncertainties.

Shah argued that the pickup in corporate profitability after a prolonged period of weak earnings prints will support the next phase of market performance.

Macro Indicators Turning Supportive as India Enters 2025

Shah noted that several macroeconomic indicators are more supportive today than a year ago. Lower inflation prints, gradual recovery in consumption, and better financial conditions across banks point to a healthier backdrop for corporate earnings.

“The expectation is that earnings, not valuations, will drive most of the index performance,” he said, reinforcing Kotak’s belief that India is entering a more sustainable phase of market growth.

Bull and Bear Scenarios: Kotak Maps Out Nifty’s Possible Trajectory

Kotak Securities outlined both potential upsides and risks in its outlook:

Bull Case: Nifty at 28,800 by December 2025

Using a 21x multiple, which is a 5% premium to historical valuations, the bull case assumes strong earnings acceleration without any derating despite geopolitical risks, weak export data for two years, and already-elevated forward valuations.

Bear Case: Nifty at 23,300

Under a 17x multiple, the bear-case fair value is 23,300 — levels briefly tested in October–November during the 11% drawdown from September highs.

Kotak’s report also highlights key concerns:

• FY25 earnings growth slows to 4.9 percent

• Profit pools dragged by OMCs normalising

• Rural demand weakening again after a short-lived Q1 revival

At 23,350 as of November 27, the Nifty already trades at 23.4x FY25E and 20.1x FY26E, leaving limited room for disappointment.

Conclusion: Indian Equities Find Stability as Earnings Take the Lead

Shah’s message underscores a shifting narrative in Indian equities—one that moves away from valuation fears and focuses more on earnings durability. With favourable macros, improving fundamentals, and a likely earnings resurgence in FY26, Kotak Securities believes Indian markets are building on a more balanced and sustainable foundation.

As investors head into 2025, the key variables will be earnings momentum, sectoral breadth, and global risk sentiment—factors that could determine whether India’s equity markets outperform or simply consolidate the gains of recent years.

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