Stock Market Strategy: Nifty 50 gains likely to mirror earnings growth; prefer large banks, IT, capital goods: HDFC Sec

India’s corporate earnings outlook appears promising, supported by robust government capital expenditure and a revival in consumption within a low-inflation and easing interest rate environment.

In the March 2025 quarter, midcap and smallcap companies posted 12% year-on-year (YoY) earnings growth, outperforming the large-cap segment, which grew at 5.5% YoY.

Sector-wise, power, metals, pharmaceuticals, cement, real estate, and industrials delivered double-digit YoY earnings growth in Q4 FY25. In contrast, earnings declined in financial sectors like lenders and capital markets, as well as in consumer staples, consumer discretionary, and energy, according to HDFC Securities.

Remarkably, a significant portion of the incremental earnings growth was driven by just five companies: Indian Oil Corporation, NTPC, ICICI Bank, Bharti Airtel, and Hindalco Industries. Meanwhile, ONGC, SBI, and IndusInd Bank were among the biggest drags on aggregate earnings.

The Nifty 50 index is currently trading at approximately 21.0 times FY26 earnings (vs. the 10-year average of 20.4x) and 18.5 times FY27 earnings (vs. the 10-year average of 17.3x), based on consensus estimates. Given the recent rally in the Nifty 50 index, further valuation re-rating appears limited, and future returns are expected to align closely with earnings growth, HDFC Securities noted.

Sector and Stock Strategy

HDFC Securities maintains a positive stance on large private-sector banks, information technology (IT), consumer discretionary, real estate, cement, and capital goods. It remains underweight on oil & gas, mid-cap IT, small banks, and non-banking financial companies (NBFCs).

Focus on Bottom-Up Stock Picking

The brokerage emphasizes that with limited scope for broad-based sectoral re-rating, outperformance is likely to be driven by companies with strong earnings visibility. As a result, stock-specific, bottom-up ideas will play a more crucial role than macro or sector-based strategies.

Model Portfolio Changes

The stocks that were added or saw increased weightage in HDFC Securities’ model portfolio include Apollo Hospitals Enterprise, JK Lakshmi Cement, Swiggy, Marico, Kotak Mahindra Bank, and Navin Fluorine.

The stocks that were excluded or saw reduced weightage in the model portfolio were IndusInd Bank, Wipro, Bharat Petroleum Corporation Ltd (BPCL), Mahanagar Gas Ltd, Hindalco Industries, Sun Pharmaceutical Industries, Dalmia Bharat, Dabur India.

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.