Overseas institutional investors shifting allocations away from India's leading large-cap equities toward mid- and small-cap segments may have room to continue, as fund managers seek out companies with the potential to double or triple their earnings, Rajat Rajgarhia, Managing Director and CEO–Institutional Equities at Motilal Oswal Financial Services, has noted. Rajgarhia noted that, with a number of India's 25 largest companies still posting single-digit growth, earnings momentum was becoming more concentrated outside the large-cap space, adding at the Motilal Oswal Financial Services 22nd Annual Global Investor Conference that he did not expect that pattern to shift in the near term.
"From Challenges to Compounding Opportunities" has been chosen as the central theme for Motilal Oswal Financial Services' 22nd Annual Global Investor Conference. Assessed over an extended timeframe, India's economic and developmental trajectory has shown consistent progress.
Over the past few years, a range of obstacles has arisen, spanning trade disputes and armed conflicts. Earnings growth among corporations decelerated, overseas institutional funds saw notable net withdrawals, and the exchange rate faced downward pressure. Financial markets spent roughly two and a half years contending with a range of headwinds and obstacles. India's involvement in artificial intelligence, the foremost area of global trade, remained limited.
Following this phase, India's compounding trajectory appears to be reasserting itself, with corporate earnings on a gradual upward path and the most recent quarter among the stronger ones on record. Both the Reserve Bank of India and the government have responded with a range of policy interventions. Overseas investors appear to have reduced their holdings beyond optimal levels, while local market participants provided notable support during the period.
Artificial intelligence is forecast to remain a prominent investment theme over the coming decade, though positioning in the trade may have grown stretched. Foreign institutional investor outflows, which had persisted for roughly two years, now show signs of levelling off.
Historically, the Indian market has demonstrated consistent compounding growth, with benchmark indices and leading equities in certain other markets having doubled or tripled in value. Reliance Industries, which holds the top position by market capitalisation, grows through compounding rather than simple doubling.
Rajgarhia outlined three areas of concern, noting that the ambitions of India's leading 50 to 75 corporations would need to expand considerably. Businesses had prioritised protecting their financial positions and returning capital to shareholders. Fiscal policy, he indicated, would need to shift toward growth and, where necessary, deficit spending.
Paytm's chief executive has observed that the world's largest corporations typically spend between $100 billion and $150 billion on capital expenditure each year. While a handful of investor groups are operating at scale, a wider culture of investment across the country has yet to take hold.
Interest rates may also ease further from their present levels. Borrowing costs take on greater relevance once an economy moves into a phase of increased capital expenditure. With India now ranking among the top five economies globally, there is an argument that international conditions should become more predictable. A number of investment decisions were deferred as the external environment grew less predictable.
A Motilal Oswal research note described the latest quarter as flawless, pointing to Nifty earnings growth reaching its highest level in ten quarters. Unlike markets such as the United States or South Korea, where growth and investor focus tend to concentrate among the top five companies, India's landscape shows the opposite pattern.
Among India's 25 largest corporations — spanning technology, consumer goods, and banking — expansion has remained confined to single-digit percentages. Growth and expansion in this context tend to be concentrated among startups, first-time business owners, and communities of varying sizes across both urban and rural settings. Profit growth among smaller companies outpaced that of their larger counterparts across all three market-cap tiers over the most recent reporting period.
Rajgarhia characterised the current environment not by company size, but by the distinction between businesses with growth potential and those without. When a business fails to sustain earnings growth above 15% across a three-to-four-year horizon, no price point renders its shares genuinely worthwhile, he said. When equities trading at earnings growth rates of 25%, 30%, or 40% become available — a pattern observed across a number of smaller and mid-sized listed businesses — investors are likely to assign those stocks a higher valuation than their large-cap counterparts.
Equity fundraising channels — spanning new listings, institutional share sales, and bulk transactions — are opening up investment avenues that allow funds to allocate capital toward sectors where they hold strong views. New share issuance through transactions appears to be keeping pace with demand from investors in the market.
Overseas institutional investors tend to evaluate opportunities in India on the basis of growth potential, particularly strong expansion prospects, given that their capital can be deployed across multiple global markets. Their strategy towards India has shifted to a predominantly decentralised model. Their focus rests on businesses where earnings growth has the potential to multiply severalfold over time.
Overseas investors face exposure to exchange rate fluctuations, pricing volatility, and shifting compliance requirements upon entering an unfamiliar market. Opportunities for such expansion exist within the mid- and small-cap segments of the market. As a result, overseas investors are redirecting capital away from certain large-cap equities and toward mid- and small-cap firms.
As of the time of the conference, the firm ranked 100th by size in India carries a market valuation of around ₹1.1 lakh crore, equivalent to roughly $11 billion to $12 billion. Firms positioned near the 250th spot on the rankings typically carry a total market value in the range of four to five billion dollars. The publicly traded portion of these companies' shares is expanding alongside their growth and successive equity fundraising rounds.
LIC's offer for sale, valued at approximately ₹32,000 crore, was the largest on record and attracted subscriptions well above the available allocation. Financial stocks continue to hold a foundational position within the broader market. Loan expansion is approaching multi-year peaks of 19% to 20%, a range that analysts generally regard as conducive to lender profitability.
The financial markets landscape is undergoing a period of notable change. The country's stock exchanges now list a range of financial firms, including asset managers, wealth advisers, brokerages, and registrars. Having previously attracted little interest from investors, the sector has since matured into an established and credible asset class. Firms in the capital-markets sector are posting annual expansion rates of between 20 and 25 per cent.
The automotive sector has sustained its upward trajectory in sales volumes, buoyed by the reduction in goods and services tax. Trading volumes held up well beyond the holiday period, while certain discretionary spending categories showed signs of a turnaround. Fast-food chains posted gains over the period, with jewellery also recording strong results.
Quarterly results proved positive for a range of food and beverage businesses, including Burger King and Devyani International. Jubilant also offered a positive outlook, while a number of auto-parts makers have expanded their operations into the aerospace sector.
When a firm establishes a core capability, its expansion potential rests on how many related product or service areas it can develop from that foundation. India's aerospace sector, though at an early stage of development, has the potential to expand considerably. The electronics manufacturing services sector was similarly nascent a half-decade or so ago. Over time, a number of these firms developed operational capacity and production infrastructure, with several now carrying valuations between ₹15,000 crore and ₹50,000 crore.
