Indian market set for low-teens returns as valuations peak, IT and cash-flow plays favoured: Pankaj Murarka

Indian equities are entering a phase of moderated returns as the economy resets to a lower growth trajectory and valuations remain stretched, says Pankaj Murarka, CIO of Renaissance Investment Managers. Speaking to ET Now, Murarka said he expects the markets to deliver late single-digit to low double-digit returns over the next 12 months, even as the earnings cycle shows signs of improvement.

Economy undergoing a “downward reset”

Murarka noted that while India grew at 8.2% immediately post-Covid, the last six quarters have averaged 6.8%, and global headwinds—weakening US growth and persistent tariff-related trade challenges—are likely to keep India in the 6.5% growth range for now.
On the earnings front, he expects a sharp turnaround. “While Nifty earnings growth for CY25 is barely 2%, our estimates suggest 11% earnings growth in CY26,” he said. However, elevated valuations limit upside. “India is the most expensive equity market in the world after the US. Markets are priced for perfection.”

He believes 13–14% index returns over the next year are realistic and healthy for the sixth or seventh year of a mature bull market.

Market froth concentrated in midcaps & smallcaps

According to Murarka, excess froth is most visible in segments of the broader market—especially defence, EMS, and other high-multiple sectors.

“Many defence names trade at 70–80x earnings. I don’t know how to make money long-term at those valuations,” he said. He likened the fast-growing EMS sector to infra companies of 2005–06—high growth but low margins, negative cash flows, and dependent on fresh capital.
“These businesses consume capital instead of generating it. When PLI benefits fade, margins won’t improve structurally.”

FY26–27: Back to bottom-up investing and cash flow

Murarka expects the next year to be favourable for bottom-up stock pickers. With growth stocks stretched and capital-hungry sectors becoming riskier, he sees the cycle shifting back toward companies with strong free cash flow.

“Markets have been ignoring cash flows for two years. Next year will be back to basics—free cash flow will drive returns.”

IT sector poised for mean reversion

Despite a tough year for Indian IT—with the index down nearly 18%—Murarka remains bullish.
“Demand visibility is improving each quarter. AI adoption will accelerate growth for Indian IT players, not disrupt them.”

He also cites attractive valuations and strong capital return programs. “Infosys alone is returning $2 billion via buyback. IT companies are classical cash machines.”
He expects IT to outperform in the coming year.

InterGlobe Aviation: Strong fundamentals, but not a buy yet

While acknowledging IndiGo’s strong brand and cash reserves, Murarka prefers caution. “With recent operational issues, I would wait until they stabilise. Over time, IndiGo may need to cede some market share as the government broadens competition,” he said.
Indian aviation, however, remains structurally attractive given low penetration.

Consumer tech: Long-term bullish but current IPOs overpriced

Murarka remains a “perma-bull” on consumer tech and digital platforms, calling them future oligopolies where “winner-takes-all.” However, he believes many recent IPOs are mispriced and euphoric, making this “a time to wait for better entry points.”

EMS: High risks, unviable growth models

Reiterating his concerns about EMS players, Murarka warned that these companies resemble the infra boom-bust cycle.

“To sustain growth, they must keep raising capital. At some point, shareholders will refuse. When growth normalises, valuations will fall sharply.”

A phase of healthy but moderated returns

India’s markets may be entering a phase of healthy but moderated returns, driven by improving earnings, selective sector opportunities, and a likely rotation back to cash-generating businesses. IT, cash-flow-rich companies, and disciplined bottom-up strategies are expected to lead performance in FY26–27, while frothy pockets in defence, EMS, and certain midcaps warrant caution.