The Indian stock market has witnessed a sharp correction since the beginning of the US-Iran war in the Middle East, with the benchmark Nifty 50 declining nearly 10% in one month. Indian market was also a top underperforming key market in FY26, despite an improvement in the earnings revision trajectory from the depressing lows of FY25.
Indian market’s underperformance can be attributed to a confluence of factors, including stronger growth visibility in other markets and a more compelling valuation differential in favour of other Emerging Markets (EMs). These markets have also benefited from improving prospects, driven by the global AI-led boom and rising commodity prices.
In contrast, India’s limited participation in the global AI ‘gold rush’, along with perceptions of reduced geopolitical leverage following a brief kinetic conflict with Pakistan, have further weighed on sentiment.
Nifty Valuations Improve
Analysts believe after the recent 10% correction since the start of the US-Iran war, the valuations of the Indian stock market have become much sober.
The Nifty 50 is trading at a 12-month forward price-to-earnings (P/E) ratio of 17.7x, which is 15% discount to LPA of 20.9x. Also, its price-to-book (P/B) value of 2.6x represents a 8% discount to its historical average of 2.9x, noted brokerage firm Motilal Oswal Financial Services (MOFSL).
The 12-month trailing P/E for the Nifty 50, at 20.7x, is at a 11% discount to its LPA of 23.2x. At 3x, the 12-month trailing P/B ratio for the Nifty 50 is at a 6% discount to its historical average of 3.2x.
Additionally, the Indian market’s valuation premium, which has been a bone of contention for EM investors, has shrunk sharply to 27% as against a 10-year average of 73% and a peak premium of 145% and closer to a decadal-low premium of 21%.
“This relative valuation correction provides a strong entry point for Indian equities given that the structural case for India’s economy remains strong as ever,” MOFSL said.
The brokerage firm also noted that India’s market cap-to-GDP ratio has been volatile, plummeting to 57% of FY20 GDP in March 2020 from 80% in FY19 and then sharply rebounding to 132% in FY24 and 126% in FY25. It now stands at 115% of FY26E GDP (9% YoY), well above its long-term average of 87%.
Among sectors, Capital Goods, PSU Banks, Metals, Healthcare, and Utilities trade at a premium to their long-period average (LPA) valuations, while Private Banks, Consumer, Technology, Retail, and Automobiles trade at a discount to their LPA, MOFSL said.
Stock Market Strategy
The uncertainty regarding the US-Iran war has necessitated careful and selective stock picking, as a swift resolution of the conflict could trigger pent-up buying and short-covering, analysts said. The Nifty-50 and Midcap-100 have corrected ~11%, with sectors such as Banking, Automobiles, Real Estate, and Consumer Goods bearing the brunt due to higher risk aversion, panic-driven selling, and rising oil prices.
Given these relative valuations, MOFSL finds greater value in largecap stocks as compared to midcap stocks. The brokerage firm is Overweight on Auto, PSU Banks, Diversified Financials, Technology, Consumer Discretionary, and Capital Goods + EMS, which are its key preferred investment themes.
It remains Neutral on Telecom, Cement, and Healthcare, while retaining its Underweight stance on Private Banks, Consumer Staples, Oil & Gas, Utilities, and Metals within its model portfolio.
Stock Picks
In the Nifty 50 index, Motilal Oswal’s top picks include Bharti Airtel, SBI, ICICI Bank, Lenskart Solutions, Mahindra & Mahindra (M&M), Titan Company , Bharat Electronics, Eternal, Tata Steel, Infosys, and Interglobe Aviation.
Top Non-Nifty 50 stock picks include TVS Motor Company, Billionbrains Garage Ventures (Groww), Indian Hotels Company, AU Small Finance Bank, Dixon Technologies (India), Premier Energies, Coforge, Radico Khaitan, Delhivery, and ACME Solar Holdings.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
