Indian equities to perform better in 2026, says Kotak Institutional Equities : Check its stock picks

Kolkata: In the third week of November, global major Morgan Stanley startled every one by setting out a bull case scenario for Sensex 30, which it said could reach 107,000 by the end of 2026. The forecast signaled a 27% upside from the levels when the prediction was made. Now Kotak Institutional Equities has joined the growing list of analyst firms which think Indian equities are expected to perform much better next year compared to what it did in this one, which can be at beast described as tepid.

The tailwinds are more or less the same that Morgan Stanley flagged -- earnings recovery of listed Indian companies, rising consumption, policy support and a stable macroeconomic canvas. Kotak described equity returns in 2025 as "so-so". The disconnect was also clear between the returns and significant income tax relief, indirect tax reform, robust investment by retail investors and domestic institutions, multi-decadal low levels of inflation. However, the reasons behind the tepid performance were the negative impact of the 50% punitive tariff by the US, stretched valuations, improved earnings only in pockets,

The brokerage said calendar year 2025 delivered "so-so” returns for investors, despite strong domestic inflows, tax cuts and government support. The markets were inhibited by stretched valuations, earnings downgrades and weak growth in profits and FII outflows. Nifty 50 index rose about 9% year to date. Small caps did poorly while large caps outperformed both mid caps and small caps.

Kotak also named three factors, which could provide the tailwinds to Indian equities. These are going to be stronger earnings prospect, robust domestic consumption and a conducive supportive macro environment. It goes without saying that the rise in consumption could be on account of declining interest rate, significant income tax relief from FY26 and GST rejig. The macro environment is expected to receive a boost if and when the Indo-US bilateral trade deal fructifies. If the rupee stabilizes against the US Dollar, it would also boost the investment climate. "We expect CY2026 to be a better year due to (1) better earnings outlook, (2) improved domestic consumption demand, and (3) likely stable macro,” Kotak mentioned in its report.

Kotak has also suggested changes to its model portfolio. Kotak added Dixon Technologies on the basis of long-term growth drivers notwithstanding softness in its stock price. "DIXON stock trades at 51X FY2027E EPS and 37X FY2028E EPS and will likely deliver 37% EPS CAGR over FY2026E-30E,” Kotak mentioned. It flagged the PLI benefits as a driver of growth. Kotak also included Aadhar Housing Finance to the portfolio and attributed the decision to reasonable valuations and probable steady growth.

Kotak also increased the weightage on IndiGo. This was done following the decline of 15% in the share price which analysts attributed to short-term earnings concerns arising out of the widespread disruptions in its flight schedule in early December. Kotak said that despite the disruptions, it expects the budget airline to maintain its dominant position in the country's expanding civil aviation sector.

While it added Dixon Technologies and Aadhar Housing Finance, Kotak removed Torrent Pharmaceuticals from the suggested portfolio. Its rationale: the pharma company has performed well in the past 12 to 36 months. The brokerage also said that it thought better opportunities exist elsewhere given the current level of valuations. Kotak also slashed weightage on Reliance Industries and Bharti Airtel.