India Strategy – Earnings upgrade cycle might begin

NIFTY moved up 4% in past 3 months after a long consolidation as markets look ahead with resilient 2Q26 corporate performance, hopes of resolution in tariff row with the USA and rising hopes of domestic demand revival during ongoing festival/wedding season powered by GST rationalization. Corporate performance has been good with sales/EBIDTA/PAT growth of 8.1/16.3/16.4% for our coverage universe with EBIDTA and PAT estimates beat of 5/7.1% respectively, we saw NIFTY EPS upgrade for the first time since August 2024. The economy was driven by more than 3x increase in Govt. capex since covid, however, 40% increase in 1H capex and high base of 2H25 can result in a drag (~10% decline YoY) in 2H26, unless GOI overshoots its capex allocation. Increasing incremental capex allocation looks difficult given 1) impact of GST rates rationalization in 2H26 2) ask rate of 18-20% in direct tax collection in balance of FY26 (7% growth in YTD Apr-Nov25) and 3) approx. Rs700bn increase in fertilizer subsidy than budgeted for FY26. We believe economic momentum will be led by domestic demand from 1) Income tax rate cuts 2) 100bps rate cut 3) normal monsoons 4) 12-year low inflation and 5) GST rates rationalization. We note that segments like Auto, Electronics and discretionary consumption are showing accelerated sales growth in festival season. NIFTY EEPS has seen an increase of 0.7/0.9/1.3% for FY26/27/28 with 13.8% CAGR over FY26-28. We value NIFTY at 15-year average PE of 19.2x with Sept27 EPS of 1515 and arrive at 12-month target of 29094 (28781 earlier at 19.2xSept27 EPS). We prefer Banks, NBFC, select Consumer Staples and Discretionary, Defense and Ports as key themes in 2026.