India's large-cap stocks are expected to narrow their underperformance relative to smaller peers, supported by a resurgence of foreign investors, an improving outlook for corporate earnings, and appealing valuations. Financial giants like Goldman Sachs Group Inc., Jefferies Financial Group Inc., and Societe Generale SA predict this recovery as global funds have become net buyers of Indian equities for a fourth consecutive week. This shift is particularly beneficial for large-cap stocks because foreign investors hold a larger portion of their free float and were significant sellers during the recent market downturn.
Foreign portfolio investors have net bought $2.3 billion worth of Indian equities in the past month, with the majority directed towards Nifty 50 constituents. This marks a reversal from previous outflows caused by richer valuations prompting profit-taking. Jefferies notes that the price-to-earnings gap between large caps and the broader market has diminished to its lowest point in two years. Analysts also highlight that large caps are now trading at a 25% discount to their smaller peers, significantly wider than the five-year average of 6%.
The underperformance of large caps is evident in the NSE Nifty 50 Index, which has declined about 7% this year, while the Nifty Smallcap 250 gauge has risen by nearly 9%. Goldman Sachs strategists, led by Amorita Goel, suggest that as foreign sentiment improves, rotation back into large caps is likely, citing their more palatable valuations and shallower earnings cuts compared to mid-caps in the first half of the year. They also offer better earnings visibility. Jefferies anticipates large-cap earnings growth to accelerate to 14%-15% annually over fiscal 2026-2028, up from approximately 8% in the preceding two years. Sectoral leaders in financials, consumer staples, and information technology are expected to be the main beneficiaries of this renewed interest, with overseas funds having purchased about $1.5 billion in banking and financial-services shares in the two weeks ending June 30.
Goldman Sachs identifies HDFC Bank Ltd., Eternal Ltd., Power Grid Corp. of India, and InterGlobe Aviation Ltd. as reasonably valued large-cap stocks that could benefit from this improving foreign sentiment. Banks, constituting over a third of the Nifty 50 Index, are crucial to any rebound in India's large-cap stocks. Rajat Agarwal, an Asia equity strategist at Societe Generale, believes that the valuation and performance gap between large caps and small/mid-caps will begin to narrow as foreign investors seek value with growth potential.
