2026 will see improvement in earnings growth; IT, consumption, materials are 'dark horses': ABSL AMC's Harish Krishnan

Harish Krishnan

• Opportunities shifting to selective, company-specific bets in Indian stocks
• Large caps seen as offering better prospects than crowded small and mid caps
• IT, consumption, and materials sectors identified as potential outperformers

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Indian equity markets are entering a phase of “reboot, refresh and reclaim”, with opportunities shifting decisively from crowded themes to selective, company-specific bets, said Aditya Birla Sun Life AMC co-CIO and head of equities Harish Krishnan. He also cautioned against over-owned small caps and pointed to an earnings-led cycle beginning in 2026.

Speaking at the fund house’s annual market outlook presentation, Krishnan said the easy gains of the post-pandemic rally are behind the market. “In 2023 and 2024, it was a rising tide that lifted all boats. Luck was getting rewarded, and many people thought it was skill,” he said.

Large Caps in focus:

Krishnan also noted that while the profit pool share of India’s top 100 companies has returned close to long-term highs, ownership has shifted aggressively toward mid- and small-cap stocks.

“Close to 30–35% of mutual fund houses today have higher exposure to mid and small caps than to large caps,” he said. “There has been a significant amount of money chasing small caps over the last three to four years. That bus does look overcrowded," he added.

While earnings may continue to grow in smaller companies, he warned that elevated ownership and stretched valuations limit upside. “That is why we continue to believe there is far greater opportunity in the larger companies than going small and micro,” Krishnan said.

He added that opportunities are becoming selective rather than broad-based. “Good companies are scarce today compared to the previous cycle, which is why valuations have got mainstreamed. Opportunities are not everywhere, but there are pockets where one can still make reasonably good money.”

Earnings Recovery:

On earnings, Krishnan said 2025 has been a difficult year marked by single-digit growth, but conditions are in place for improvement.

“We do think CY26 will be better than CY25,” he said, clarifying that the key driver will be an acceleration in earnings rather than mere upgrades. He pointed to three tailwinds: monetary easing, fiscal support to consumers, and currency trends.

Krishnan highlighted that nearly 55–60% of India’s corporate revenue pool is dollar-linked. “Think about IT services, pharma, auto ancillaries, metals, energy. These are very large revenue pools,” he said adding that a rupee depreciation actually lifts the revenue base for a lot of companies.

However, he cautioned that foreign investors only turn constructive once the currency stabilises. “It is not the slide in the rupee that helps; it is when the rupee stops sliding that earnings start reflecting in a meaningful way,” he said.

IPO Supply:

Krishnan flagged the surge in equity supply as a key factor capping market returns.

“If you include IPOs, OFS, QIPs, promoter sales and private equity exits, supply is annualising at close to 2% of market capitalisation,” he said. These numbers, he noted are very difficult for the market to digest.

He added that IPO performance has deteriorated even as issuance volumes surged. “The weighted average return of IPOs has been coming down,” Krishnan said, noting that Aditya Birla Sun Life AMC has significantly reduced participation in new listings.

“In the last 12 months, our IPO participation rate is about 22%. That means we have invested in roughly one out of every five IPOs,” he said. “Where there has been too much froth, we have consciously stayed away," he added.

Sector View: IT, Consumption, Materials as ‘Dark Horses’

Using the fund house’s proprietary sector framework, Krishnan identified IT, consumption, and materials as “dark horse” segments where pessimism and low ownership could create alpha.

“IT is one such space where everyone believes AI will dismantle the industry,” he said. “We agree the threat is real, but a lot of that fear is already priced in.”

Consumption is another area where the firm is turning constructive after being underweight for nearly three years. “We are now moving into consumption as a theme,” Krishnan said, pointing to fiscal measures, tax cuts, and potential pay commission effects.

Materials, including chemicals, building materials and consumer durables, form the third opportunity bucket.

On the other hand, Krishnan said the fund house has been booking profits or staying underweight in industrials, capital goods, real estate and PSU-linked financials. “Capital goods was a space where we made a lot of money in 2023 and 2024. In the second half of 2025, we moved out,” he said.

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