Kotak Mutual Fund Predicts Double-Digit Earnings Boom: Is India's Market Rally Just Beginning?

Kotak Mutual Fund has released a positive outlook for the Indian stock market, projecting robust double-digit earnings growth for FY27 and expecting a recovery in Nifty earnings from the latter half of FY26.

This optimistic forecast emerges amidst a complex market scenario where benchmarks like the Nifty and Sensex have reached new highs, while mid and small-cap segments have shown relative mutedness. The IPO market has seen increased activity, but Foreign Portfolio Investors (FPIs) have been net sellers this year, impacting overall benchmark returns.

Earnings Outlook

• Kotak Mutual Fund anticipates the Nifty earnings recovery to commence in the second half of FY26, with an expected 11% year-on-year improvement.
• Overall earnings growth is projected to rebound strongly in FY27.

Valuation Perspective

• India's valuation relative to Emerging Markets peers, a concern for FII participation, is seen as normalizing.
• The MSCI India Index currently trades at a Price-to-Earnings (PE) premium of 67% over Emerging Markets, close to its historical average of 63%.
• Kotak Mutual Fund expects the MSCI India Index Earnings Per Share (EPS) to grow by 16% in FY27, up from 10% in FY26.
• The report suggests India offers better value compared to China.
• While the Nifty trades near its long-term average P/E, the Nifty Smallcap 100 Index is trading at a significant premium.

FII/DII Trends

• Foreign Portfolio Investors (FPIs) have been net sellers in Indian equities in 2025, attributed to negative recent returns, underperformance against peers, and valuation concerns.
• Domestic Institutional Investors (DIIs) have largely absorbed FPI selling.
• However, Kotak Mutual Fund predicts a reversal in 2026, with FPIs expected to turn net buyers, driven by India's higher Return on Equity (ROE) and long-term growth prospects.

Key Sectors to Watch

• Financial Services: Expected to lead earnings recovery in FY27, benefiting from improved asset quality, profitability, and picking credit growth.
• Automobile Industry: Positioned to gain from rising discretionary spending, driven by increasing per capita income and low penetration rates in two-wheeler and passenger vehicle markets.
• Healthcare Industry: Poised for long-term structural growth due to demographic shifts, with India's elderly population expected to double in 25 years.
• E-commerce: Offers significant growth runway due to low current penetration despite a consolidated market structure.

Impact

• This positive outlook from a major fund house can boost investor confidence and potentially attract more capital into the Indian equity market.
• The projected earnings growth suggests a potential for market appreciation, especially in the identified growth sectors.
• A return of FPI inflows could further support market momentum.
• Impact Rating: 9/10

Difficult Terms Explained

• Nifty: A benchmark stock market index representing the weighted average of 50 of the largest Indian companies listed on the National Stock Exchange.
• Sensex: A benchmark stock market index representing the weighted average of 30 of the largest and most actively traded stocks on the Bombay Stock Exchange.
• IPO (Initial Public Offering): The process by which a private company first sells shares to the public, becoming a publicly traded company.
• QIP (Qualified Institutional Placement): A method used by listed companies to raise capital from a small group of institutional investors.
• FY26 / FY27: Financial Years. FY26 refers to the period from April 1, 2025, to March 31, 2026, and FY27 refers to the period from April 1, 2026, to March 31, 2027.
• FPIs (Foreign Portfolio Investors): Overseas investors who invest in the financial assets of another country, such as stocks and bonds.
• DIIs (Domestic Institutional Investors): Indian institutions that invest in financial assets within India, such as mutual funds, insurance companies, and banks.
• MSCI India Index: An equity index representing the performance of Indian companies within the MSCI Emerging Markets Index.
• EPS (Earnings Per Share): A financial metric that indicates the portion of a company's profit allocated to each outstanding share of common stock.
• PE (Price-to-Earnings) Ratio: A valuation metric that relates a company's share price to its per-share earnings.
• ROE (Return on Equity): A measure of a company's financial performance relative to its shareholders' equity.
• CD Ratio (Credit-Deposit Ratio): A ratio used by banks to assess their liquidity, calculated by dividing total loans (credit) by total deposits.