Why Axis Mutual Fund is asking investors to look at largecaps as well

Following the sharp re-rating in small- and midcap stocks, Axis Mutual Fund believes investors should revisit largecap stocks, saying their valuations have become more reasonable. "Largecaps deserve a fresh look, as they remain integral to India's long-term growth story," Axis Asset Management said in a report.

The mid and smallcaps (SMID) in India hold a significant share of the value creation accrued to businesses linked to infrastructure, industrials, manufacturing, defence, capital goods, healthcare, capital markets and consumption themes, according to a report by Axis Asset Management.

As most Indian equities in the post-pandemic period were driven by a combination of domestic growth factors, such as rising government spending, revival in manufacturing and increasing private sector investment, such businesses benefited from this environment.


However, geopolitical tensions, tariffs, supply-chain realignment, volatile commodity prices, currency movements and shifts in global liquidity have increased the importance of earnings resilience and valuation discipline.

Amid this environment, largecaps deserve a fresh look. As the economy expands and gains scale, larger businesses are also well positioned to benefit from their stronger balance sheets, management depth, execution capabilities and ability to navigate a more uncertain global environment.

The next phase of Indian equities may therefore not be about largecaps versus SMIDs, but about recognising that the opportunity set now includes largecaps as well.

Nominal GDP growth may boost largecap earnings

The revenue growth of Nifty 50 is expected to touch 19%, which is a 3-year high, according to Axis Asset Management. It is notable that historically, the earnings trajectory of largecap companies has been closely aligned with nominal GDP growth, which usually derives a larger share of growth from system-level drivers such as credit growth, consumption, capex and global demand. A more supportive domestic cycle could widen the opportunity set and allow largecaps to participate more meaningfully in earnings growth.

However, wage inflation, competitive intensity, commodity volatility and sector-specific margin pressures could constrain operating leverage across several industries.

Credit growth, consumption remain supportive

Periods of accelerating credit growth in the past have coincided with stronger economic activity, improved banking sector profitability and a pickup in consumption and investment demand. After remaining subdued for nearly three years, credit growth has begun to revive, reflecting improving confidence among both households and businesses.

Largecaps offer better valuations than SMIDs

Midcaps continue to trade nearly 57% above their 2019 valuations, while smallcaps are up more than 70%, as per the report, implying that future returns may depend increasingly on earnings delivery rather than valuation expansion, in case of growth themes. According to the investment management firm, largecaps may offer a more balanced risk-reward in case of a macro recovery.

Weaker rupee may aid exporters

The rupee has weakened meaningfully over the past 18 months against most currencies. A weaker currency implies that it could improve competitiveness for export-oriented businesses, which could lead to sectors such as IT, pharmaceuticals, engineering exports, speciality chemicals, auto ancillaries, contract manufacturing and industrial products benefitting.

As companies across the world are looking to reduce concentration risk and diversify manufacturing and sourcing bases, several Indian largecap exporters and manufacturing-oriented businesses are well placed to capture this opportunity.

Lower commodity prices could be a tailwind

From a macro perspective, lower crude oil prices would help reduce the burden of imports and ease pressure on government finances, providing greater flexibility to sustain public investment and capital expenditure, as per the report. However, the sustainability of this tailwind depends on geopolitical developments and the stability of global supply chains.

Largecaps may deliver better risk-adjusted returns

According to Axis Asset Management, largecaps outperformed after the global financial crisis, SMIDs dominated the 2014-17 cycle, underperformed during 2018-20, and then staged another period of strong outperformance that peaked in 2023.

Previous phases of sustained outperformance by any market cap segment have eventually moderated as valuations and earnings expectations adjusted. When valuations fully reflect growth expectations, future returns tend to rely more on earnings delivery.

Key risks

According to Axis Asset Management:

• A sustained move in crude oil towards or above US$100 per barrel would pressure inflation, corporate margins and India's external balances, particularly for sectors with limited pricing power or high dependence on imported inputs.
• Global market concentration around US AI trade could become a source of volatility.
• Higher debt may limit the extent of monetary and fiscal easing available to revive growth, keeping global liquidity conditions more uncertain.

A balanced approach

The risks involved indicate a need for a balance rather than aggressive market-cap positioning. While early post-pandemic years gave returns to investors focused on fast-growing SMID businesses, and select opportunities in that space remain attractive, the macro-backdrop in the present has changed.

As several largecap sectors continue to trade at reasonable valuations, with supportive credit growth, improvement in nominal GDP growth, and resilient domestic demand indicators, the next phase may not be about choosing one over the other, as per the report. A more balanced approach that includes high-quality largecap businesses could prove increasingly valuable as market leadership broadens.