Most of them have delivered healthy earnings growth even in Q4, FY’26.
We also remain aware of the potential impact of these risks not only on earnings growth but also on market valuations.
Even if we look at the last 3 years' earnings on a CAGR basis, midcap as a category has reported superior earnings growth as compared to broader markets.
Going ahead as well, the outlook on midcap companies’ earnings growth continues to remain healthier.
In that sense, the performance of the midcap index is largely a reflection of underlying earnings growth.
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While the midcap index flirts with new peaks, strong corporate earnings have helped cool down previously stretched valuations. Nippon India 's Rupesh Patel analyses the resilient Q4 FY26 earnings season, breaking down how a bottom-up investing strategy can help investors uncover reasonable entry points despite building geopolitical and macroeconomic headwinds.On an aggregate basis, the NSE Midcap 150 index has remained almost flat since September 2024. However, during this period, earnings have grown at a reasonable rate. In fact, midcap as a category has been the most resilient and delivered higher growth compared to other segments of the market. As a result, valuations today, though they appear higher compared to long-term averages, have corrected as compared to where we were in September 2024.Coming to Nippon India Growth Fund, we follow a bottom-up approach to construct the portfolio and buy stocks based on their relative attractiveness on risk-reward equation. Some of the businesses in the category may appear expensive in the near term; however, the size of the opportunity and their ability to maintain earnings growth at a reasonable rate over the long term make them attractive from a medium to longer-term perspective.Our OW stance on financials is on account of our exposure to lenders as well as other beneficiaries of financialization of savings like Life Insurance companies, asset management companies, Exchanges, etc.On the lending side, most of our exposure is to well-capitalised lenders where asset quality is largely expected to hold, Return on Assets/ Return on Equity remains healthy, and valuations are reasonable in the context of the overall market.In IT companies, we have been underweight since the last few quarters, largely owing to the risk of a slowdown in earnings growth on account of current geopolitical uncertainties and the impact of disruptions like AI. Valuations were also a concern till a few quarters back. Going ahead, as the dust settles and some of these companies evolve and adapt to new realities, growth will recover from current lows. Companies in this sector are generally capital efficient and generate free cash flow, making them attractive bets again as valuations turn favourable.Q4 earnings season for midcaps has turned out to be quite resilient, and most companies are delivering on expectations. However, going ahead, risks related to deterioration in the macro environment, cost inflation, and logistics remain relevant. If current geopolitical uncertainties continue, we must be cognizant of these risks and their impact on earnings and valuations.If we look at the last few quarters, midcap companies’ earnings have remained resilient. Most of them have delivered healthy earnings growth even in Q4, FY’26. However, aggregate returns of midcap companies as represented by the NSE Midcap 150 index have remained flat since September 2024, resulting in a valuation correction over this period.Further, midcap is a very diverse category with a universe representing multiple sectors and some unique and fast-growing profit pools that have the potential to grow meaningfully over the medium to long term; hence, on a bottom-up basis as well, opportunities exist in this segment of the market.As mentioned earlier, we remain cognizant of risks arising on account of deteriorating macro conditions, inflation in costs and logistical challenges, if current geopolitical uncertainties persist. We also remain aware of the potential impact of these risks not only on earnings growth but also on market valuations. In some instances, current stock prices may already be reflecting risks of these uncertainties, making the risk-reward favourable. Hence, our approach is to remain aware of valuations and avoid vulnerable businesses.We remain positive on Financials, Consumer Discretionary, and select industrials.Within financials, we are positive on lenders as well as companies that benefit from a bigger trend on the financialization of savings. Accordingly, we have exposure to companies in the insurance space, Asset Management Companies, Exchanges and other financial services companies. On lenders, asset quality remains benign, they are well capitalised, generate decent Return on Assets (RoA) and Return on Equity (RoE) and valuations are reasonable.Consumer discretionary companies are likely to benefit from favourable demographics, growth in per capita incomes and trends on premiumization playing out in multiple categories over the medium to long term.On the industrial front, the reason to be positive is on account of various initiatives taken by the government to encourage manufacturing in India. Select companies in Auto ancillaries, Electronics manufacturing, precision engineering and defence-related segments can also do well. However, these are broad sectors, and winners will have to be picked on a bottom-up basis, considering factors like their manufacturing prowess, management strength and cost competitiveness.Although the midcap index is close to an all-time high, its last 20 months' returns have been flat despite midcap companies as an aggregate delivering superior growth. In that sense, valuations today have turned favourable on account of this time correction. Even if we look at the last 3 years' earnings on a CAGR basis, midcap as a category has reported superior earnings growth as compared to broader markets. Going ahead as well, the outlook on midcap companies’ earnings growth continues to remain healthier. In that sense, the performance of the midcap index is largely a reflection of underlying earnings growth.
