Most FIIs believe that India's still somewhat expensive, but see some value emerging in large cap space: KIE's Pratik Gupta

At Kotak, Gupta noted that they see potential downside risks to earnings projections. "For example, we see the Nifty trading at about 19 times March 2026 PE," he said, adding that they are predicting about a 14.5% earnings CAGR in FY26 and FY27. "But we see downside risks, especially for FY26," he said.

Most foreign investors still view that India is somewhat expensive, but are now less negative on India, and they’re beginning to show interest in some large caps, according to Pratik Gupta, CEO and Co-head at Kotak Institutional Equities. Gupta was speaking to the media on trends observed from Kotak’s recent investor conference. He noted that while foreign investors did not attend the conference with immediate buying intentions, many sought to gain a deeper understanding of India and specific companies in anticipation of potential market corrections.

“Some did comment that they had been underweight on India for a while, and the recent market correction vindicated their earlier view,” Gupta noted. However, he added that investors now see long-term value emerging."We are seeing interest mainly in banks, NBFCs, insurance companies, some real estate firms, and hotels as these sectors either have a somewhat positive outlook or decent valuations," he said.

He also noted that many emerging market (EM) fund managers were hopeful about future inflows into EMs, given the growing valuation gap with US equity markets.

“Some investors also pointed out that India’s capital gains tax is now beginning to bite, as return expectations have come down sharply,” Gupta noted.

While India remains costly, many foreign investors maintain a positive medium-term outlook. "Structurally, from a three- to five-year view, most foreign investors are very positive on India. They are constantly looking to understand the companies here, their outlook, and as and when valuations correct, they are looking to buy these stocks or draw more capital into India," he said. However, Gupta noted, two major challenges are affecting FII flows. "First, most still feel Indian companies and the Indian market are expensive," he pointed out. "Second, globally, most emerging market (EM) funds are facing redemptions. Money is going back, typically into the US, partly driven by a strong dollar, Trump's policies, and capital flight back into the US."

This dual challenge—India’s perceived high valuations and a liquidity crunch among FIIs—has led to cautious investment. "Even if India was attractive enough, right now, they don’t have money to invest because capital is flowing back to the US," he noted.

On potential market corrections, Gupta noted that foreign institutional investors (FIIs) and domestic institutional investors (DIIs) had mixed views. "Only a handful expect a major correction, and that would likely be triggered by global events, such as economic turmoil in the US," he said.

On the other hand, he noted that domestic investors are showing increased caution regarding small- and mid-cap stocks. “Most local MF, insurance, and PMS funds are seeing a slowdown in equity inflows, though overall net inflows continue,” Gupta said. However, he added that there has been a shift in investment patterns. “The nature of the flows has changed from going into small/midcap or thematic/sectoral funds a few months ago to large-cap or balanced debt-equity funds now.”

He added that domestic investors are also worried about the risk of further earnings downgrades given the weak commentary by many companies and were interested about companies with stable demand visibility, even if their valuations appeared somewhat expensive.

Outlook for India

Gupta noted that investors are also concerned about a potential earnings slowdown. "The biggest point on most investors' minds is whether we going to see a further round of earnings cuts," he said.

The corporate sentiment also appears subdued, he noted while adding that it is not a very bullish outlook right now.

At Kotak, Gupta noted that they see potential downside risks to earnings projections. "For example, we see the Nifty trading at about 19 times March 2026 PE," he said, adding that they are predicting about a 14.5% earnings CAGR in FY26 and FY27. "But we see downside risks, especially for FY26," he said.

The ongoing slowdown may extend beyond the current quarter. "It looks like the March and possibly the June quarter may also see weak earnings," he said adding that overall, the mood is somewhat cautious and pessimistic, which aligns with their house view at Kotak." The brokerage has been cautious for some time, particularly regarding small- and mid-cap stocks. "As some of you may be aware, we’ve been warning that the market is looking a bit overheated. We’ve already seen a meaningful correction in small- and mid-caps," he said.

Kotak’s investor conference was attended by 215 companies along with 1,000 plus investors out of which there were 207 FIIs and 803 DIIs.

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