Prefer large-caps for FY26; infra, manufacturing attractive long-term themes: Varun Lohchab of HDFC Securities

Expert view on Indian stock market: Varun Lohchab, the head of institutional research at HDFC Securities, believes Nifty's returns will be commensurate with the earnings growth, which are expected to report a low teen CAGR for the next two years. He said India is well poised to grow in a structural manner driven by various long-term themes, including infrastructure, manufacturing, BFSI and consumer discretionary. In an interview with Mint, Lohchab also shared his expectations from the US Federal Reserve and how the US-China trade deal could impact the Indian stock market. Here are edited excerpts of the interview.

Peak anxiety about tariffs, Indo-Pak tensions are behind. Should we expect a healthy upside from the Indian stock market?

With the easing of geopolitical tensions, especially between India and Pakistan, along with normalising tariff scenarios globally, the market has experienced renewed optimism.

Nifty has rebounded nearly 10 per cent from the bottom seen in early April.

FIIs have redirected their attention towards India and poured in approximately ₹22,000 crore since April 2025.

In this backdrop, we believe the upside to benchmark indices is limited and capped by the earnings growth.

At the current level (near 25,000), the Nifty 50 is trading at 18.8 times FY27E, which is slightly above its 10-year average historical level(nearly 17.5 times).

In our assessment, Nifty's returns hereon will be commensurate with the earnings growth, which are expected to report a low teen CAGR for the next two years, with a downside risk (primarily led by muted urban demand).

What is your assessment of India's macro picture?

India's macroeconomic fundamentals remain resilient. Given the ongoing moderation in global tariff pressures, we estimate FY26E GDP growth to be 6.3 per cent. Further, inflation is expected to remain soft at around 3.7 per cent in FY26.

On the RBI policy front, MPC has delivered two rate cuts of 25 bps each in the current cycle in the calendar year 2025 (CY25) so far.

Furthermore, the change in stance from “neutral” to “accommodative” indicates a decisive signal from the RBI that more rate cuts are expected in this current cycle.

We believe RBI will deliver two more rate cuts in CY25, bringing the terminal repo rate to 5.5 per cent. In an extreme situation of global trade war escalation and domestic GDP growth rate going below 6 per cent (not our base case), a deeper rate cut cycle can’t be ruled out.

How should we play the India growth story? What sectors should we look at?

We believe India is well poised to grow in a structural manner, driven by various long-term themes. The key themes are:

(i) Infrastructure (Capex): Capex led growth in the country, benefiting roads, railways, housing, water, and power.

(ii) Manufacturing: Atmanirbhar Bharat led by PLI schemes (planned government outlay of ₹2.6 lakh crore across 15 schemes).

(iii) Financialisation of savings (BFSI): The savings pool moves from conventional financial assets to sophisticated products (equity, insurance, etc.) in search of higher yield.

(iv) Consumer discretionary: The middle class will grow bigger and richer (29 crore households in 2030, up from 16 crore households in 2018), driving demand for discretionary goods and services.

Diversification across these sectors can help balance risk and reward.

What is your expectation from the US Fed? Should we expect a rate cut in June?

The tariff truce between the US and China, in which both sides agreed to reduce tariffs for 90 days, has lifted market sentiments globally. 

This has fuelled a recovery in the US dollar index and gains in US treasury yields as markets pared back bets of a US recession and sharp rate cuts by the US Fed. 

Now, we expect the Fed to cut rates twice this year, starting in the September meeting. 

Further, we expect the US dollar index rally to continue in the near term.

Can the US-China trade deal impact FPI inflows to India?

In our view, the US-China trade deal would improve global trade sentiment but may not meaningfully vary FPI inflows to India. 

India, being a relatively higher growth market with policy stability, offers itself as a unique preferred long-term investment destination for FPIs. 

We expect continued flows into BFSI, manufacturing and industrial stocks. 

We believe the risk-reward at the current juncture is skewed in favour of companies with strong earnings visibility. 

Stock-specific bottom-up ideas now hold the key for outperformance rather than sectoral calls. 

Our preferred sectors are large banks, consumer discretionary, real estate and insurance. 

We remain underweight on oil and gas, mid-cap IT, small banks, and NBFCs. For FY26, we prefer large caps over mid/small caps. 

Quality and earnings visibility should be prioritised over thematic plays. Further, strong balance sheet companies should be preferred over the leveraged ones.

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Disclaimer: This story is for educational purposes only. The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions, as market conditions can change rapidly, and circumstances may vary.