India’s beaten-down largecaps set to rebound on foreign flows

India’s large-cap stocks are set to narrow their underperformance to smaller peers, supported by the return of foreign investors, an improving earnings outlook and attractive valuations, according to strategists.

Goldman Sachs Group Inc., Jefferies Financial Group Inc. and Societe Generale SA are among those expecting large caps to recover as global funds turn net buyers of Indian equities for a fourth straight week. The shift is likely to benefit large stocks the most because foreign investors own a larger share of their free float and were the biggest sellers during the recent downturn.

“As foreign sentiment improves ahead, we could see some rotation back into large caps,” Goldman strategists led by Amorita Goel wrote in a note dated July 11. “Valuations for large caps now look more palatable,” and they have seen shallower earnings cuts than mid-caps in the first half of the year, and provide better earnings visibility, they said.

Unlike the US and Asian markets such as South Korea and Taiwan, which have surged on exposure to artificial intelligence, Indian stocks are in the red this year after a decade of uninterrupted gains. Large caps bore the brunt of this selloff and are now trading at a 25% discount to their smaller peers, compared with the five-year average of 6%, according to data compiled by Bloomberg.
The NSE Nifty 50 Index, which comprises large-cap stocks, has declined about 7% this year, whereas the Nifty Smallcap 250 gauge is up almost 9%. A concentration of attractive new themes like data centers and inflows from domestic institutions fueled the outperformance of small stocks.

“Small- and medium-caps have stolen the thunder driven by strong earnings-per-share growth,” Jefferies strategists Mahesh Nandurkar and Abhinav Sinha wrote in a note last week . “While a broad-based reversal of this multi-year trend is unlikely, the EPS gap is now closing.”

Large-cap earnings growth may accelerate to 14%-15% annually over fiscal 2026-2028, from about 8% in the preceding two years, narrowing the gap with mid caps whose earnings have grown at an annualized rate of about 18% over the same period, according to Jefferies. Expected return on equity, a measure of how much profit a firm can generate from investors’ equity, is higher for larger firms than for smaller ones.

Goldman cited HDFC Bank Ltd., Eternal Ltd., Power Grid Corp. of India and InterGlobe Aviation Ltd. as among the large-cap stocks that are reasonably valued and could benefit from the turning foreign sentiment.

Banks will be key to any rebound in India’s large-cap stocks, accounting for more than a third of the Nifty 50 Index. Overseas funds bought about $1.5 billion of banking and financial-services shares in the two weeks through June 30, after selling more than $12 billion of the sector between January and May, according to National Securities Depository Ltd. data.

“We should start to see some narrowing of the valuation and performance gap between large caps and the small and mid-caps,” said Rajat Agarwal, an Asia equity strategist at Societe Generale. “Foreign investors are buying pockets of value with some elements of growth.”