MSCI India is down 10% from its August peak and has underperformed emerging markets by 14 percentage points. Price-to-earnings multiples are now below long-term averages.
For most of 2026, the mid-cap and small-cap end of the Indian market has carried the narrative — and the inflows. The broader indices have corrected since August, and the gap between where mid-cap valuations sit and where large-cap valuations sit has quietly narrowed to the point where one global brokerage has now called the switch.
Jefferies, in its equity strategy note titled has shifted its model portfolio weighting toward Indian large caps. “We increase weight on Largecaps. We believe risk-reward is becoming more favorable for largecaps on better relative valuations vs. Midcaps, while the earnings growth gap is narrowing over FY26-28E,” the Jefferies note states.
The three stocks named in the model portfolio action are Reliance Industries, Kotak Mahindra Bank and Welspun Corp. On the other side of the ledger, the brokerage has trimmed exposure to rate-sensitive segments — real estate, non-banking financial companies, and consumer discretionary.
Changed Setup
MSCI India is down 10 per cent from its August peak and has underperformed the broader emerging markets index by 14 percentage points over the same period. The sell-off has pulled headline price-to-earnings multiples below their long-term average.
Indian government bond yields have risen as US Treasury yields have remained elevated. Jefferies notes that the Indian yield gap with the US is at a 20-year low — a tight spread that historically pressures Indian equity valuations.
“Unlike 2022, this should be a shallower rate hike cycle given real rates are still positive in India,” the Jefferies note states. The inflation gap between India and the US is also lower than in 2022, which gives the RBI less compulsion to match US tightening basis point for basis point.
Reliance Industries
Jefferies has increased its weight on Reliance Industries in the model portfolio. The call rests on the valuation picture and the operational optionality within the refining business.
“Increase weight on Reliance in our Model Portfolio with stock at attractive valuations (8.4x 1yr fwd EV / EBITDA, 23% below 10yr avg) and upgrade possibilities on higher GRMs,” the Jefferies note states.
A one-year forward EV/EBITDA of 8.4 times — against a 10-year average that is 23 per cent higher — places Reliance in the lower quartile of its own historical valuation range. Rising global gross refining margins are the specific catalyst Jefferies flags for near-term earnings upgrades.
Kotak Mahindra Bank
The second addition is Kotak Mahindra Bank. The call combines a governance catalyst with a valuation gap.
“Kotak Mahindra Bank is added on leadership overhang removal, potential growth acceleration from 15%+ levels and stock at 1.8x P/ABV FY27E, ~50% disc. to 10-yr avg,” the Jefferies note states.
The 1.8 times price-to-adjusted-book value for FY27 estimated is approximately 50 per cent below the bank’s 10-year average multiple. The brokerage expects growth to accelerate from the 15 per cent-plus level, supported by the removal of the leadership overhang that has weighed on the stock through recent quarters.
Welspun Corp
Next is Welspun Corp, picked for its exposure to a multi-year infrastructure capex cycle in oil and gas pipelines in the US and the Middle East.
“We also add Welspun Corp which is should benefit (30%+ EBITDA and EPS Cagr over FY26-29E) from a multi-year upcycle in oil & gas infra spending in US and Middle East, supported by local manufacturing,” the Jefferies note states.
The forecast earnings compounding — 30 per cent-plus EBITDA and EPS CAGR over FY26-29 estimated — is the structural driver behind the inclusion. Local manufacturing in the end markets supports the margin trajectory the brokerage has modelled.
Sell side
On the sell side of the model portfolio action, Jefferies has reduced weight in rate-sensitive segments.
“We trim weight in rate sensitives viz. NBFCs, Real estate (still OWT), Cons. discretionary (Eicher),” the note states.
Real estate remains an overweight even after the trim, indicating the brokerage sees the segment as structurally positive but tactically expensive at current rate levels. NBFCs face the most direct pressure from rising funding costs. In the consumer discretionary space, Eicher Motors is specifically named as the trim.
The Model Portfolio Shifts
| Action | Stock / Segment | Rationale |
|---|---|---|
| Add / Increase weight | Reliance Industries | 8.4x 1yr fwd EV/EBITDA, 23% below 10yr avg; GRM upside |
| Add | Kotak Mahindra Bank | Leadership overhang removed; 1.8x P/ABV FY27E, ~50% disc. to 10yr avg |
| Add | Welspun Corp | 30%+ EBITDA/EPS CAGR FY26-29E on US and Middle East pipeline cycle |
| Trim | NBFCs | Rate-sensitive; funding cost pressure |
| Trim (still OWT) | Real Estate | Rate-sensitive; structurally positive |
| Trim | Consumer Discretionary (Eicher Motors) | Rate-sensitive |
The correction has created a tactical opportunity to reposition from mid-caps toward large caps while the earnings growth gap between the two cohorts narrows through FY26-28 estimated.
“Large caps, which are below avg. valuations, may offer hiding places,” the note states.
