Dear Investors,
As we enter the new financial year, our outlook on the Indian equity market remains constructive. While the previous year tested investor conviction, we believe the correction has laid the foundation for the next phase of sustainable wealth creation.
The last financial year was dominated by an extraordinary combination of macroeconomic and geopolitical challenges. The year began with heightened geopolitical conflicts, followed by escalating tariff disputes, trade uncertainties, widening fiscal deficits, persistent rupee depreciation, and elevated bond yields. Collectively, these factors created a risk-off environment across global financial markets and weighed on investor sentiment.
Despite these headwinds, the US equity market remained an exception, driven by strong earnings growth from AI-led technology companies. The S&P 500 and Nasdaq delivered returns of approximately 21% and 27%, respectively. In contrast, Indian equities underwent a healthy correction, with the Nifty 50, Nifty Midcap, and Nifty Smallcap indices declining by around 4%, 2%, and 8%, respectively.
Following the remarkable rally witnessed after 2024, Indian equities-particularly the mid- and small-cap segments-entered a much-needed phase of consolidation as valuations had reached elevated levels. At the same time, global investor preference shifted towards markets such as the United States, Taiwan, South Korea, and Brazil, where earnings momentum and near-term catalysts appeared stronger. Consequently, India temporarily fell out of favour with foreign investors, resulting in net FII outflows of nearly â‚ą1.3 lakh crore during the year.
In our view, these capital flows are cyclical rather than structural. Foreign investors typically allocate capital to markets where relative earnings momentum and valuations are most compelling. As India’s earnings cycle strengthens and growth visibility improves, we believe foreign institutional capital is likely to return, providing an additional tailwind for domestic equities.
More importantly, several long-term structural developments have remained underappreciated amid the noise surrounding wars, tariffs, and FII selling. One of the most significant milestones has been India’s progress in negotiating comprehensive trade agreements. The recently concluded India–European Union Free Trade Agreement is expected to significantly enhance the competitiveness of Indian exporters by enabling duty-free or substantially lower-tariff access across several product categories, while also providing meaningful tariff reductions for sectors such as automobiles. Similar trade negotiations are underway with several other strategically important economies.
We believe these initiatives represent far more than short-term policy announcements-they are building blocks for India’s ambition to emerge as a global manufacturing and export hub. While current market attention remains focused on geopolitical events, tariffs, and foreign fund flows, these structural reforms are likely to strengthen India’s export ecosystem, attract incremental investments, improve manufacturing competitiveness, and create long-term value for Indian businesses. In our opinion, these are the developments that patient, long-term investors should be paying the closest attention to.
The key question today is: Where do we stand from here?
To answer this, it is important to evaluate the four key pillars driving equity markets—corporate earnings, capital expenditure, valuations, and the broader macroeconomic outlook.
Global Market Update
The global economy continues to operate in an environment marked by elevated geopolitical uncertainty. Ongoing tensions in the Middle East, evolving U.S. trade policies, and periodic tariff-related developments have kept financial markets volatile. Additionally, concerns over potential disruptions in the Strait of Hormuz have heightened risks to global energy supplies, leading to fluctuations in crude oil prices, supply chains, commodity markets, and inflation expectations. For an import-dependent economy like India, sustained volatility in crude oil prices remains a key macroeconomic risk, with implications for inflation, the current account balance, and corporate profitability.
Despite these headwinds, global equity markets have continued to scale new highs, primarily driven by the unprecedented adoption of Artificial Intelligence (AI). Over the past 12–18 months, technology leaders such as Microsoft, Meta, and Alphabet have delivered strong earnings growth while simultaneously accelerating investments in AI infrastructure. Collectively, these companies are expected to invest approximately US$300–350 billion in AI-related capital expenditure over the coming years, underscoring the magnitude of this structural investment cycle.
While India currently trails developed markets in AI infrastructure spending, we believe it is well positioned to participate in the next phase of this global transformation. Rising demand for computing power, cloud services, and data storage is expected to drive significant investments in digital infrastructure and data centres, creating long-term opportunities for Indian companies operating across the power, engineering, construction, and data centre ecosystem.
The AI infrastructure spending plans of the world’s leading technology companies are presented in the table below.
| Company | Revenue Growth (Latest Qtr) | Earnings Growth (Latest Qtr) | FY26/FY27 AI & Data Center Capex |
|---|---|---|---|
| Company | Revenue Growth (Latest Qtr) | Earnings Growth (Latest Qtr) | FY26/FY27 AI & Data Center Capex |
| NVIDIA | ~69% | ~25-30% | Capex-light model (~$4-5 Bn) |
| Broadcom | ~20% | ~40%+ | ~$2-3 Bn |
| Microsoft | ~13-15% | ~18-20% | ~$80-90 Bn |
| Meta Platforms | ~16-20% | ~25%+ | ~$65-75 Bn |
| Alphabet | ~12-14% | ~20%+ | ~$75-85 Bn |
| Amazon | ~9-11% | ~35-40% | ~$100-110 Bn |
(Source: Company Updates)
Beyond the U.S. technology giants, several global companies are also investing aggressively across the AI value chain. Among the biggest beneficiaries has been TSMC, the world’s largest semiconductor foundry, which has witnessed robust earnings growth and delivered exceptional shareholder returns, supported by surging demand for advanced AI chips from leading global technology companies.
The strong performance of TSMC has also led to a significant concentration in Taiwan’s equity market. Today, the company accounts for nearly 45% of Taiwan’s benchmark equity index, making the index increasingly reliant on the performance of a single stock. This highlights not only the extraordinary value creation driven by AI but also the concentration risk that can emerge when a structural growth theme is dominated by a handful of market leaders.
| Company | Revenue Growth | Earnings Growth | Capex |
|---|---|---|---|
| Company | Revenue Growth | Earnings Growth | Capex |
| Taiwan Semiconductor Manufacturing Company | ~35-40% | ~50%+ | ~$38-42 Bn |
| SK Hynix | ~40-50% | Triple-digit growth | ~$15-20 Bn |
| ASML | ~20% | ~30% | ~$2-3 Bn |
| Advantest | ~25-30% | ~40%+ | Low capex model |
| Siemens Energy | ~15-20% | Strong turnaround | ~$1-2 Bn |
(Source: Company Updates)
Compared with the scale of investments being undertaken by global technology leaders, India’s AI expenditure remains at a relatively nascent stage. While leading Indian IT companies have begun increasing investments in AI capabilities, cloud infrastructure, and generative AI solutions, the magnitude of their spending is still significantly lower than that of global hyperscalers.
However, we believe the larger investment opportunity lies not in comparing India’s AI spending with global peers, but in recognising India’s emergence as a preferred destination for global AI, cloud, and data centre investments. India offers several structural advantages, including a deep pool of highly skilled engineering talent, a competitive cost structure, lower operating costs, tax holiday till 2047, abundant land availability for large-scale developments, and an expanding digital ecosystem. These factors continue to strengthen India’s position as an attractive destination for global technology investments.
More importantly, the investment thesis extends beyond cost arbitrage. Global enterprises increasingly view India as a strategic long-term manufacturing and technology hub, supported by policy initiatives such as ***Make in India*, the Production Linked Incentive (PLI) scheme, and a series of bilateral trade agreements** aimed at enhancing India’s export competitiveness. As India’s manufacturing capabilities, digital infrastructure, and policy ecosystem continue to mature, we believe the country is well positioned to attract a larger share of global capital expenditure across AI infrastructure, cloud services, electronics manufacturing, and data centres.
India Market Overview:
However, this is not the first time India has started from behind and eventually emerged as a global leader. Over the past decade, we have witnessed a similar transformation across industries such as specialty chemicals, pharmaceuticals, textiles, and defence manufacturing, where Indian companies have evolved from low-cost producers into globally competitive businesses. Supported by favourable government policies, improving infrastructure, and rising manufacturing capabilities, these sectors have successfully established India as an integral part of global supply chains.
What makes this opportunity particularly compelling is the divergence between market performance and underlying economic fundamentals. While Indian equities have delivered relatively muted returns over the past 12–18 months amid global uncertainty and foreign capital outflows, the fundamentals of India Inc. have continued to strengthen.
India’s economy expanded by 7.8% in Q4FY26, taking full-year FY26 GDP growth to 7.7%, comfortably exceeding market expectations. The economy has demonstrated remarkable resilience despite tariff-related uncertainties, slowing global trade, geopolitical disruptions, and persistent volatility in commodity prices. This resilience underscores the strength of India’s domestic demand, rising investment cycle, and structural growth drivers.
*In our view, periods when market sentiment diverges from economic fundamentals often create attractive opportunities for long-term investors. While near-term market movements remain driven by headlines around tariffs, geopolitical events, and foreign fund flows, sustainable wealth creation ultimately depends on earnings growth, capital investment, and the quality of businesses-areas where India continues to make steady progress.*
India Inc.'s Earnings: Fundamentals Remain Intact
While market sentiment remained subdued for much of the past year, corporate earnings continued to reinforce the strength of India’s underlying economic fundamentals. Despite geopolitical disruptions, tariff-related uncertainties, elevated commodity prices, and intermittent foreign capital outflows, India Inc. delivered another year of healthy earnings growth, demonstrating the resilience of corporate balance sheets and the country’s domestic growth engine.
The Nifty 500 reported revenue growth of 10.3% and profit growth of 14.9% during Q4FY26. For the full year, revenues increased by 8.9%, while earnings grew 14.9%. More importantly, corporate profitability has strengthened consistently over the last three consecutive quarters, indicating that the earnings cycle is broadening despite a challenging external environment.
The earnings recovery has been driven primarily by the non-financial universe. Nearly 404 companies within the Nifty 500 delivered earnings growth of 16.1% in Q4FY26 and 18.2% during FY26, significantly outpacing the banking and financial services sector. Commodity companies emerged as one of the strongest performers, benefiting from favourable pricing dynamics and improved operating efficiencies, with earnings expanding by more than 35% during both the quarter and the full year.
A closer look across market capitalisation segments also reveals encouraging trends. Mid-cap companies continue to be India’s fastest-growing earnings cohort, delivering profit growth exceeding 30% in three of the last eight quarters. Large-cap companies have continued to compound earnings broadly in line with India’s nominal GDP growth, while small-cap companies have maintained healthy double-digit earnings growth, albeit with some moderation after an exceptionally strong expansion phase.
*In our view, the most important takeaway is not the quarterly growth numbers but the quality of corporate balance sheets. Indian companies today are entering the next investment cycle with lower leverage, stronger cash flows, healthier return ratios, and significantly better capital allocation discipline than in previous economic cycles. This provides businesses with the financial flexibility to continue investing even during periods of global uncertainty.*
At the same time, the current geopolitical environment has reinforced the importance of energy security and resilient infrastructure. Rising investments in artificial intelligence, cloud computing, digital infrastructure, advanced manufacturing, and hyperscale data centres are expected to drive a structural increase in electricity consumption over the coming decade. Meeting this demand will require sustained investments across power generation, transmission networks, renewable energy, and grid modernisation.
Another long-term structural theme gathering momentum is the rapid adoption of electric mobility. Electric two-wheeler penetration increased to nearly 9% in May 2026 from around 6% a year earlier, while electric passenger vehicle penetration rose to approximately 6% from 4% over the same period. Although adoption levels remain modest, the trajectory is encouraging and is likely to accelerate further as charging infrastructure expands, battery economics improve, and supportive government policies continue.
Taken together, these trends reinforce our positive long-term outlook on sectors aligned with India’s next phase of economic development. We continue to see compelling opportunities in businesses benefiting from the country’s manufacturing expansion, power infrastructure build-out, renewable energy transition, digital infrastructure, capital goods, and premium consumption *(discussed later part of the letter)*. While near-term market movements will continue to be influenced by global events and investor sentiment, we believe sustainable wealth creation will ultimately be driven by companies that are positioned to benefit from these enduring structural themes.
Sectoral Outlook: Where We See the Biggest Opportunities
Despite near-term macroeconomic uncertainties, we remain constructive on sectors supported by strong structural growth drivers. Our highest conviction continues to be in manufacturing, infrastructure, capital goods, financials, and discretionary consumption, where favourable government policies, a strengthening private capital expenditure cycle, rising formalisation, and improving global competitiveness are creating sustainable, multi-year growth opportunities. We believe these sectors are well positioned to deliver superior earnings growth and long-term shareholder value as India progresses through its next investment cycle.
- Manufacturing Sector:
Manufacturing remains our highest-conviction structural theme. India’s manufacturing sector expanded 10.7% in FY26, up from 9.3% in FY25, taking its contribution to the economy to nearly US$490 billion. This growth is being driven by rising premiumisation, increasing discretionary consumption, government-led manufacturing initiatives, the China+1 strategy, Production Linked Incentive (PLI) schemes, favourable Free Trade Agreements (FTAs), expanding infrastructure, and a competitive rupee.
As global companies diversify their supply chains, India is steadily transitioning from an import-oriented economy to a globally competitive manufacturing hub. We believe export-oriented industries such as precision engineering, auto components, aerospace, defence, forgings, semiconductors, mining equipment, and data centres are well positioned to be the key beneficiaries of this long-term structural shift.
The progress achieved over the past decade is evident in the data below, which highlights the steady expansion of India’s manufacturing capabilities, export competitiveness, and contribution to economic growth.
| Indicator | Earlier | Latest | Why it Matters |
|---|---|---|---|
| Indicator | Earlier | Latest | Why it Matters |
| Manufacturing GVA | â‚ą15.6 lakh crore (FY14) | â‚ą28.3 lakh crore (FY24) | Manufacturing output has nearly doubled in a decade. |
| Manufacturing Share of GVA | 17.2% (FY14) | 17.5% (FY24) | While the share has remained broadly stable, the absolute size of manufacturing has grown substantially. |
| FDI into Manufacturing | Limited inflows before 2014 | USD 184 billion received during FY15–FY25 | India has become one of the preferred destinations for global manufacturers. |
| Annual FDI Inflows | USD 36 billion (FY14) | USD 81 billion (FY25) | More than doubled over the past decade. |
India’s manufacturing story is no longer just about “Make in India”—it is increasingly about becoming an integral part of global supply chains. The last decade has seen strong gains in FDI, electronics, defence, pharmaceuticals and exports, supported by large-scale policy initiatives and infrastructure investment. The next phase of growth will depend on increasing domestic value addition, deepening component ecosystems and raising manufacturing’s share of the economy.
- Capital Goods Sector:
The capital goods sector offers a broad range of opportunities, but power and transmission remain our highest-conviction themes. As the backbone of economic activity, a reliable power ecosystem is essential to support India’s manufacturing expansion, urbanisation, digital infrastructure, data centres, and renewable energy transition.
India’s power sector is among the most diversified globally, spanning conventional sources such as coal, gas, hydro and nuclear, alongside rapidly expanding renewable energy sources including solar, wind and biomass. Over the past decade, electricity consumption has increased by 45.8%, from 9,48,522 GWh in FY15 to 15,43,000 GWh in FY24, reflecting a CAGR of 5.6%. Demand is expected to continue growing at nearly 6% CAGR through FY32, driven by industrialisation, rising electrification, electric vehicle adoption, and AI-led digital infrastructure.
To support this demand, the National Electricity Plan (NEP) estimates an investment opportunity of over ₹9 lakh crore in the transmission sector by 2032. We believe this creates a multi-year structural opportunity for companies operating across power equipment, transmission, engineering, and grid infrastructure, making the sector a key beneficiary of India’s long-term capex cycle.
- Consumption Sector:
India’s consumption story continues to be one of the country’s most compelling long-term structural themes, drawing significant interest and investment from both domestic and global companies. Rising disposable incomes, a favourable demographic profile with a median age of just 28–29 years, increasing premiumisation, expanding access to consumer credit, and the widespread adoption of zero-cost EMI financing have fundamentally reshaped consumer spending patterns across categories—from everyday essentials to premium smartphones, automobiles, consumer durables, and luxury products.
Importantly, the next leg of consumption growth is no longer confined to metropolitan cities. Tier-2, Tier-3, and smaller towns are rapidly emerging as key demand centres, driven by improving infrastructure, greater digital penetration, higher formal employment, and rising aspirations. Coupled with supportive government measures such as tax rationalisation and continued investments in physical and digital connectivity, we believe India’s discretionary consumption cycle is still in its early stages and is well positioned to deliver sustained long-term growth.
*Despite these favourable structural drivers, the sector has underperformed the broader market over the past three years, leading to a meaningful moderation in valuations. In our view, this disconnect between fundamentals and market performance presents an attractive opportunity for long-term investors to accumulate high-quality consumption businesses at reasonable valuations.*
- NBFCs & Wealth Management Sector:
We remain constructive on the NBFC and wealth management sectors, both of which are backed by strong structural tailwinds. The NBFC sector remained resilient during FY26, supported by healthy capitalisation, improving asset quality, and stable profitability. While overall credit growth moderated, retail and SME lending continued to remain healthy, with the microfinance segment also showing signs of recovery.
India’s wealth management industry, meanwhile, is at the cusp of a multi-year growth cycle. Rapid financialisation of household savings-evidenced by demat accounts rising from 2 crore to over 20 crore and monthly SIP inflows increasing to nearly ₹30,000 crore-along with a growing base of HNIs and UHNIs, provides a strong foundation for sustained AUM growth and long-term compounding.
Sectors We Are Cautious On
While we remain constructive on India’s long-term growth story, we continue to exercise caution in sectors where valuations have run significantly ahead of fundamentals or where earnings visibility remains uncertain.
Information Technology (IT): Despite the recent correction, Indian IT companies continue to trade at a significant premium to global peers. While companies such as HCLTech and Persistent Systems have actively strengthened their AI capabilities through acquisitions, the long-term beneficiaries of the AI transition are still evolving. Global IT leaders such as Accenture, Capgemini, and Cognizant trade at materially lower forward valuation multiples than leading Indian IT companies (1Y fwd multiple: 8-9x (global IT) vs 15-17x (Indian IT)). Given the elevated valuations and uncertainty around the eventual AI winners, we prefer to remain on the sidelines until a more favourable risk-reward opportunity emerges.
Cyclical Sectors: We also remain cautious on deeply cyclical sectors such as metals and real estate. Our investment philosophy is centred on identifying businesses with long-term structural growth rather than attempting to time economic or commodity cycles. We prefer to stay within our circle of competence and focus on sectors where earnings visibility and long-term compounding are relatively stronger.
Valuation and Performance of Our Dynamic Long-Only Growth Plan
Following the March 2026 lows, the Indian equity market witnessed a healthy recovery during Q1FY27, with the Large Cap, Mid Cap, and Small Cap indices delivering returns of approximately 5%, 15%, and 20%, respectively. This rally has also been reflected in market valuations, with the Nifty 50 trading at ~20.6x P/E, the Nifty Midcap 150 at ~28.9x, and the Nifty Smallcap 250 at ~34.2x as of 30th June 2026, highlighting the premium valuations investors continue to assign to the broader market, particularly smaller companies. However, Midcap 150 is trading at below their median multiple of 33.9x - ad that’s where (Midcap) our interest align.
Against this backdrop, the businesses recommended under our flagship Dynamic Long-Only Growth Plan continued to demonstrate strong operating performance. For FY26, our portfolio companies delivered average Revenue, EBITDA, and PAT growth of 18%, 16%, and 12%, respectively. While the earnings of a few companies were impacted by elevated raw material costs, the underlying businesses continued to protect profitability through strong pricing power, resulting in an average operating margin of nearly 20%, with ROE and ROCE consistently above 15%.
More importantly, our investment philosophy remains focused on identifying businesses with long-term structural growth drivers rather than short-term market trends. The companies in our portfolio possess strong competitive positioning, industry-leading market shares, capable management teams, and multiple growth optionalities that we believe will enable them to deliver earnings growth of over 20–22% over the coming years. Our recommended investment horizon remains a minimum of three years.
From a valuation perspective, our portfolio companies are currently trading at an average of 20–21x FY29E EPS, which, in our view, provides a reasonable margin of safety despite the prevailing market volatility.
Our focus goes beyond market targets and short-term volatility; we seek differentiated insights and high-quality businesses that can compound wealth over time. FY26 reaffirmed the resilience of India Inc., with companies delivering robust sales growth over the past three years, even as margins remain an area to watch amid ongoing cost pressures. We believe the most compelling opportunities will continue to emerge from India’s long-term structural growth story rather than from transient macro events, as one uncertainty is often replaced by another-whether war, tariffs, geopolitical tensions, or global trade disruptions. Accordingly, our emphasis remains on identifying fundamentally strong businesses capable of compounding earnings and shareholder value across market cycles.*
Till then stay tuned in the next quarter.
Disclaimer
This note reflects the views of the author as of the date mentioned and is subject to change without prior notice. Veritas Research and Advisors does not undertake any obligation to update or revise the information contained herein.
This document is intended solely for educational and informational purposes and should not be construed for any other use. Nothing contained in this note constitutes, or should be interpreted as, an offer, solicitation, or recommendation to buy or sell any financial instruments, securities, or to avail advisory services.
Certain information included in this document may be based on or derived from publicly available data or third-party sources. While Veritas Research and Advisors believes such sources to be reliable, it does not guarantee the accuracy, completeness, or adequacy of such information and shall not be responsible for any errors or omissions.
Investors are advised to exercise their own judgment and consult their financial advisors before making any investment decisions. Past performance, whether actual or implied, is not indicative of future results, and no assurance can be given that any investment objectives will be achieved.