Moneycontrol Pro Panorama | Size matters

India's market capitalisation has fallen below the $4-trillion mark.

Among the top 10 markets, India is currently the worst performer in the world. For the first time in over 14 months, India's market capitalisation has fallen below the $4-trillion mark, now standing at $3.91 trillion.

Foreign Institutional Investors (FIIs) have been withdrawing funds from emerging markets and reallocating them to US equity and bond markets. As India's weight in the MSCI index was the highest before the decline, FIIs have been consistently reducing their positions. Their decision to withdraw is further supported by weak corporate performance in the December quarter.

According to an analysis by the Motilal Oswal Financial Services team, Indian companies have reported low single-digit earnings growth for the third consecutive quarter. The Nifty-50 index has achieved only a 4 percent growth in profit after tax (PAT) over the nine months of FY25, a significant decrease compared to the healthy CAGR of over 20 during FY20-24.

The sectors that contributed positively to profit growth include Banking, Financial Services, and Insurance (BFSI), followed by Technology, Telecom, Healthcare, Capital Goods, and Real Estate. On the other hand, earnings growth was negatively impacted by global cyclicals, particularly in the oil and gas sector, where oil marketing companies experienced a year-over-year decline in profits. Additionally, the Cement sector saw a 55 percent drop, Chemicals experienced a 12  percent decline, and Consumer goods faced a 5 percent reduction in earnings.

An analysis of the break-up of the companies reveals some interesting trends: large-cap companies performed in line with expectations, mid-cap companies exceeded expectations while small-cap companies significantly underperformed. Consequently, the market is penalising small-cap stocks.

According to the report, 84 large-cap companies reported an earnings growth of 5 percent, which aligns with forecasts. In contrast, 87 mid-cap companies delivered impressive earnings growth of 26 percent, surpassing the estimated 17 percent. However, 121 small-cap companies experienced a decline in earnings of 24 percent, greatly exceeding the expected 5 percent drop.

Among the companies covered in Motilal Oswal’s universe, 44 percent missed their earnings estimates while 28 percent performed better than anticipated. The earnings upgrade-to-downgrade ratio for FY26E has become less favourable, with 37 companies seeing their earnings upgraded by more than 3 percent, while 137 companies faced downgrades of more than 3 percent. This ratio marks the worst performance since the first quarter of FY21.

Out of the 25 sectors analysed, three sectors outperformed expectations, while 12 fell short. Among the 292 companies reviewed, 81 exceeded profit estimates, 129 missed expectations, and 82 met them. Due to the ongoing economic slowdown, Motilal Oswal has revised its Nifty EPS estimates downward by 1.4 percent for FY26 and 1.8 percent for FY27. The projected Nifty EPS for FY26 is now expected to be Rs 1,203, which corresponds to a valuation multiple of 19 times—lower than the long-term average of 20.5.

Valuations for mid and small-cap stocks remain high in comparison to their historical averages and are priced at a premium to the Nifty 50. This trend contributes to the preference for large-cap stocks over their smaller counterparts.

The figures underscore the extent of value erosion in the market, particularly among small-cap stocks. While some fund managers, such as ICICI Pru's Naren, have cautioned about overvaluation for approximately 18 months, it took a selloff in emerging markets to trigger panic among Indian investors. Fundamental analysts have been advising that the market is overvalued in the long term while technical analysts have noted that the market has been oversold for over a week.

As John Maynard Keynes famously stated, "Markets can remain irrational longer than you can remain solvent." It is wiser to await market signals of a turnaround rather than attempting to catch a falling knife.

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