India’s equity market may be entering a more favourable phase as earnings resilience, a revival in capital expenditure and moderating valuations improve the risk-reward for long-term investors.
Despite muted foreign flows and persistent geopolitical uncertainties keeping a lid on the broader market, corporate earnings have remained encouraging and several manufacturing segments are showing signs of stronger growth ahead.
In an interaction with Kshitij Anand of ETMarkets, Sanjay Bembalkar, Head of Equity at Union Asset Management Company, said the time correction and earnings uptick have pushed the Nifty into the “very attractive” zone from a fair-value perspective. He believes the next leg of market returns is more likely to come from earnings delivery rather than further valuation expansion.
Bembalkar also sees opportunities in financials, healthcare, capital goods and industrials, while highlighting export-focused manufacturing, data-centre-led technology spending and energy independence as key themes driving India’s evolving capex cycle.
At the same time, he advises caution in pockets where valuations have run ahead of earnings visibility and in sectors exposed to tariffs, geopolitical risks and input-cost pressures. Edited Excerpts -
Q) Market is showing signs of stabilisation after posting over 1% back-to-back returns in June & July. How are you reading markets?
A) Markets comprise of large number of participants who discount fundamental factors in prices but in short term they are swayed by capital flows and emotions.
Fundamentally: 1) earnings delivery has been spot on, 2) we are in the capex revival phase which could lead to uptick in growth for corporates and 3) near term cyclical factors like monsoon has been favourable. Though fundamentally, we, India is doing all right, we have yet not seen strong capital flows in our favour.
Global capital allocators remain under-allocated to India. Positive fundamental foundations are not allowing market to go down however unfavourable capital flows and geopolitical uncertainty is not allowing market to rally hard either.
Capital is flowing towards select stocks in the small-cap and mid-cap segments, leading to certain pockets of the market performing very well. This has led to a large divergence in performance across different pockets of the market, while broad indices remain lacklustre.
From our Fair Value Spectrum perspective, the time correction & earnings uptick has brought the Nifty into the “very attractive” zone, improving the risk-reward for investors with long term investment horizon.
(Source – Fair Value Spectrum - Fair Value Spectrum.pdf )
Q) Most of the June quarter results are out. What do you make of Q1 numbers and management commentary?
A) Q1FY27 earnings have been encouraging. Performance across our coverage universe has been resilient on both sales and profitability despite the volatile global environment and elevated raw material/fuel costs. Management commentary has also remained constructive, particularly around domestic demand.
Multiple manufacturing sub-sectors have mentioned about upcoming export opportunities thanks to improvement of India’s competitive positioning as well as positioning as a favourable business destination post multiple Free Trade Agreement (FTAs).
The domestic policy and regulary environment, including recent GST rationalisation, could provide additional support to consumption over time. IT sector remains a relative exception, with global demand uncertainty, AI impact and tariff-related concerns continuing to weigh on the outlook.
We expect overall markets will drive returns from the earnings delivery rather than valuation expansion in the medium term as uncertainty around global economic systems continues to cloud the investors’ minds.
Q) Private sector capex announcements have remained subdued over the past 12–18 months. If this investment cycle continues to be delayed, could it push back the expected earnings growth for India Inc.? What are your views on the outlook for private capex and its impact on corporate earnings?
A) Key large manufacturing sectors have already been operating at peak utilisation levels for some time now. My belief has been that our corporates are value conscious and they need proof of certainty around pay-back before they commit large capex.
Analysis from ICICI securities indicates that during the FY26, overall listed universe has spent Rs.12.6 lakh crore of capex within which 168 companies have spent more than Rs.1,000 cr. This is a substantial commitment and jump over past years.
Nature of current capex cycle is different than past cycles and is centred around 3 key themes: 1) Export focused Manufacturing (auto, defense, electronic manufacturing and pharma CDMO), 2) Compute focused Technology spends: compute capacity creation (data centre capex, GPUs and compute ecosystem led) and 3) Energy independence: ecosystem diversification (diversification away from fossil fuels, coal-gassification, renewable energy). Though early signs of consumption pick up are visible domestically we are yet to see broad based consumption uptick. This may provide further boost to capex over period of time.
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Q) FIIs inflows have remained largely positive so far in August – can we say that the smart money is slowly moving back to India?
A) The direction of flows has improved, but its yet unclear if this can be extrapolated ahead, particularly against a backdrop of continued geopolitical uncertainty. Currency stability has removed one of the key overhangs for foreign investors, while policy measures aimed at facilitating foreign participation in Indian debt markets are also supportive.
If currency stability sustains and the geopolitical environment becomes more benign, India's relatively strong earnings outlook amongst its peers could provide a more supportive backdrop for foreign flows.
Q) After the recent correction seen in 1H2026. Has the premium corrected? If not, can India continue to command premium valuations compared to other emerging markets?
A) Our analysis indicates the valuation premium has moderated meaningfully following the correction, bringing India's valuation multiples closer to its 10-year average levels. Nifty-50 1 year forward consensus, PE ratio has undergone derating of 11% in past year. (Source - State of the Market Outlook - August 2026.pdf,data as of 31st July 2026) Strength of Indian market is its diversified nature of businesses and participation of broad spectrum of sectors in its market cap rather than being a concentrated market around a few themes e.g. Korea (AI ecosystem), Brazil (commodities) etc.
While India may continue to trade at a premium to some emerging markets, we believe that premium ultimately needs to be supported by consistent earnings growth, return on equity and the quality of the underlying businesses. Currently, investors are focusing on various growth themes within India – which are driving returns through superior earning rather than further valuation premium expansion.
Q) Are there pockets of froth investors should avoid?
A) When growth is limited, there could be certain companies which will disrupt the space through innovation, superior cost control or finding certain new income stream like exports. Market prefers and rewards such companies through superior valuation multiples.
Other parts of market may get cyclical uptick but investors need to be cautious of rewarding low growth companies. We remain cautious on traditional FMCG, given margin pressures from raw material inflation and changes in the consumption landscape, while Energy and select Materials businesses face uncertainty around geopolitics, tariffs and input costs.
In the current environment, we would be cautious about businesses where a) valuations have moved ahead of earnings visibility leading to investors taking high execution risks or b) earnings may be at the risk due to global uncertainty linked to tariffs, wars or geopolitical de-globalisation.
Q) Which sectors still offer reasonable valuations despite the rally?
A) As per our view, we believe to see relatively attractive risk-reward in Financials, particularly lending businesses, where valuations remain reasonable relative to the growth and profitability outlook. Healthcare is another area we find interesting, with opportunities across pharma and select Contract Development and Manufacturing Organization (CDMO) businesses where earnings are showing signs of sustainable improvement.
Capital Goods and Industrials also remain structurally attractive, particularly in areas such as power transmission and defence, where the demand-supply dynamics remain favourable. Within Consumer Discretionary, improving consumption conditions could provide opportunities, although we would remain selective based on valuations and earnings visibility.
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Q) How are you reading into new IPOs which have started to hit D-Street after few months of pause?
A) We find new IPOs offerings to be quite exciting. Many businesses which were funded by private equity in last economic cycle have now matured and are prime for public listing now. Many issuances are businesses with large addressable market, strong economic motes and new-age dynamic managements. Investors obviously need to be cautious of new managements and valuations ascribed but in certain businesses even skin-in-the-game of promoters need to be assessed.
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