“Many of India’s large caps represent a bygone economic era,” the global brokerage said, adding that these companies do not offer the “high growth” needed to support the “sky-high valuations” of Indian markets.
Foreign portfolio investors have resumed selling Indian equities after a brief respite in July and August. According to NSDL data, FPIs have sold $1.7 billion of Indian equities so far in September, taking total outflows this year to nearly $26 billion, the highest on record.
Vishal Kampani, vice-chairman of JM Financial, told CNBC-TV18 that persistent FPI outflows had also been driven by higher US bond yields, although he acknowledged that valuations in parts of the Indian market had “run ahead of themselves” in the short term.
Kampani said he expected foreign flows to reverse over the next few years, citing strong interest from investors in Europe and North Asia, as well as continued investment appetite among both large and mid-sized global corporations.
India’s growth story isn’t reaching its biggest stocks
Bernstein said the problem extends beyond short-term market weakness, pointing to a reluctance among some large Indian companies to invest in emerging areas of the economy.
“Most [large corporates] are not investing in the future, but consolidating their past, often expecting policy to continue shielding them from global competition,” the brokerage said.
It added that companies with the deepest pockets were reluctant to provide the capital needed to build scale in emerging technologies such as electric vehicles and semiconductors.
The disconnect is visible in earnings growth. Nifty 50 companies reported average earnings growth of 11% in the June quarter, compared with 31% for mid-cap companies, according to Indian brokerage Ambit Capital.
Mid-cap and small-cap companies have greater exposure to manufacturing, fintech, consumer technology and other sectors capturing a growing share of economic activity.
Bernstein acknowledged the potential of these companies but said they remain difficult vehicles for large institutional investors because they are “sub-scale, with low free floats, limited liquidity and sparse coverage”.
Reliance, Mahindra among the rare large-cap plays
The weakness is not uniform across corporate India. Reliance Industries and Mahindra & Mahindra stand out as relatively rare large-cap plays in sectors where investors are seeing stronger structural growth.
Reliance has built businesses across areas including digital services and new energy, while Mahindra has expanded its presence in electric vehicles.
That makes such companies important exceptions to Bernstein’s broader criticism of India’s large-cap universe: they offer exposure to newer areas of growth while still having the scale needed to attract large pools of institutional capital.
Several other major companies have struggled. Reliance Industries and HDFC Bank are trading near their 52-week lows, according to LSEG data, while IT companies, which account for more than 8% of the Nifty 50, face revenue and margin pressure as AI adoption reshapes the technology industry.
Reform could help businesses scale
Kampani said India’s reform process would remain important in helping domestic companies grow and attract global capital.
“The reform process underway by the government should continue,” he said, adding that he expects continued reforms over the next decade to help Indian businesses scale and become more international.
He also said strategic interest from Europe and North Asia in investing in India was probably at its highest level, suggesting that foreign interest in the country’s economy remains strong even as portfolio investors continue to sell equities.
The distinction highlights the challenge facing Indian markets: foreign companies continue to show interest in investing in India, but public-market investors are demanding stronger growth from the large companies that dominate the country’s benchmark indices.
AI adds another layer of pressure
India’s IT sector is facing particular pressure as AI adoption changes the global technology landscape. The country also lacks a major domestic AI champion, reinforcing its perception among some investors as an “anti-AI” market.
Kampani said substantial capital had moved into AI over the past year and expects AI-related capital expenditure to play out strongly, particularly in application development.
Bernstein, however, cautioned against assuming that foreign money would automatically return to India once the global AI trade weakens or geopolitical tensions ease.
“It would be a folly to think that it’s just a matter of time, and once the AI trade settles and the Middle East crisis resolves, foreign money is just waiting to be parked into India,” the brokerage said.
For India’s equity market, the bigger question is whether its largest companies can deliver the growth and reinvention needed to match the country’s broader economic expansion.