How to invest this Diwali: ICICI Prudential AMC’s Chockalingam Narayanan shares his Samvat 2083 playbook

As investors assess where to put their money this Diwali, ICICI Prudential AMC’s Chockalingam Narayanan says the market is moving into a phase where current earnings matter more than distant growth promises. Rather than making a broad largecap or midcap call, investors should focus on businesses with improving return ratios, strong balance sheets and sustainable cash flows.

Narayanan, Head of Equities–Alternates at ICICI Prudential AMC, sees opportunities in India’s manufacturing and investment cycle, changing consumption preferences, global supply-chain diversification and new free-trade agreements—but warns that a good business does not automatically make a good investment at any price. Edited excerpts from a chat:

As Samvat 2083 begins, the sharp divergence between the performance of largecaps and small/midcaps has attracted attention. Some think that largecaps have enough value after correction while others argue that SMID space has higher growth and winners of the future. Which side are you and why?


In the current environment, we favour current earnings over distant earnings, and asset-heavy businesses over asset-light businesses irrespective of market capitalization. This does not mean overlooking growth opportunities but ensuring that growth is supported by sound business economics. The combination of earnings growth, improvement in return ratios and a favourable risk-reward equation is what drives sustainable stock performance. We therefore believe this is a market for bottom-up stock selection rather than broad-based bets on any particular market-cap segment.

After two years of muted market returns, are we going through a normal earnings-led consolidation or an early warning that India's structural growth premium is being re-rated?

We believe the current phase is more a period of earnings-led consolidation and valuation normalisation. The Q2FY27 earnings season has started on an encouraging note despite external headwinds. The 35 Nifty 50 companies that have reported their results delivered aggregate sales, EBITDA and PAT growth of 22%, 17% and 22%, respectively, on a year-on-year basis. While this is an encouraging early indication, the sustainability and breadth of the recovery will be important to monitor as more companies report their results.

India's macroeconomic fundamentals also remain resilient. The IMF has raised its growth projection for India in 2026 to 7%, reflecting stronger-than-expected economic momentum, resilient domestic demand and robust services activity. Corporate balance sheets are also in considerably better shape than in previous investment cycles. From a market standpoint, investors are also increasingly differentiating between companies that can translate economic growth into earnings and cash flows and those that cannot.

The period when valuations could expand simply on the expectation of future growth is giving way to one where earnings visibility, return on equity, balance-sheet strength and capital efficiency will matter much more. Higher commodity prices, inflationary pressures and global monetary uncertainty could also influence the pace and composition of earnings growth. Therefore, we would view the current phase as a healthy reset in expectations. The investment opportunity remains, but it is likely to be more selective and fundamentally driven.

IT stocks have rebounded after months of underperformance. Is this the beginning of a sustainable earnings cycle driven by AI and technology spending, or simply a valuation-led bounce?

The recent recovery in IT stocks is encouraging, but we believe it is too early to conclude that the sector has entered sustained earnings upcycle. The correction in IT valuations has made expectations more reasonable, and there is potential for a recovery in technology spending. However, the larger question is how the traditional IT services business model will evolve in an environment where artificial intelligence is changing the way technology services are delivered.

AI presents both an opportunity and a challenge for the sector. Greater automation could put pressure on pricing and traditional billing models, particularly for businesses dependent on manpower-led delivery. At the same time, AI is likely to create fresh opportunities in areas such as cloud migration, data engineering, cybersecurity, AI implementation and platform modernisation. Companies with deep client relationships, strong execution capabilities and the ability to move up the value chain looks better positioned to capture these opportunities.

We should also recognise that the AI investment cycle is likely to create opportunities beyond traditional IT services, particularly in data centres and the associated energy and infrastructure ecosystem. Therefore, we would not view IT as an outright contrarian opportunity or assume that the recent price recovery alone signals a structural turnaround. The focus should be on identifying companies that can adapt their business models, and translate the emerging technology opportunity into sustainable earnings growth.

Which sector or investment theme could emerge as the dark horse of Samvat 2083, and what underappreciated fundamental trigger could unlock that opportunity?

First bucket is India's manufacturing and investment landscape offers interesting opportunities. One theme worth watching is the global shift towards supply-chain diversification. An important distinction here is that companies are increasingly being valued for the resilience and reliability they bring to global supply chains, and not merely for their ability to manufacture at scale. This could create a sustained opportunity for Indian businesses that have the capabilities, technology and execution track record to serve global customers. This shift is creating opportunities for Indian manufacturers across industrial inputs, auto components, specialty chemicals and textiles.

Second emerging opportunity lies in changing consumption preferences, with consumers increasingly allocating a larger share of their spending towards experiences rather than physical goods. This could benefit businesses in travel, retail, hospitality, entertainment and allied services.

Third is new free trade agreements, which could potentially open up markets and create opportunities for Indian companies with the ability to scale their operations globally.

Fourth is Industry consolidation which is an important catalyst. As weaker players exit and capacity gets rationalised, stronger businesses could gain market share, improve utilisation and exercise greater pricing discipline. However, identifying the right businesses will be critical. We would look for companies where these structural changes translate into improving earnings, better return ratios and sustainable cash-flow generation.

For an investor with ₹10 lakh and a five-year horizon, how would you allocate capital across largecaps, midcaps, smallcaps, debt, gold and international equities, and what would make you change that allocation?

The starting point should be the investor's risk appetite, liquidity requirements and financial objectives. Hence it's better to consult the financial advisor or evaluate a multi asset offering as the latter takes care of the asset allocation.

Gold now occupies a larger place in many portfolios. Should investors continue adding to it, hold their existing allocation or rebalance towards equities?

Gold has an important role in portfolio construction, particularly as a diversifier during periods of uncertainty. However, investors should distinguish between gold's role as a portfolio hedge and its potential as a return-generating investment. Its value in a portfolio comes largely from its ability to behave differently from traditional financial assets during certain market conditions. After significant appreciation in gold prices, investors should be mindful of their commodity allocation. Hence periodic rebalancing of the portfolio is important.

What is the one investment mistake investors should avoid in Samvat 2083 and the one opportunity they should not miss?

A good business does not automatically make a good investment at every price. Even businesses with strong competitive advantages can deliver disappointing investment returns if the valuations already factor in an overly optimistic earnings outlook. In the current environment, investors should focus on businesses with durable competitive advantages, strong balance sheets, pricing power and the ability to generate sustainable cash flows and returns above their cost of capital. We would also place greater emphasis on current earnings visibility rather than relying excessively on distant growth assumptions. Ultimately, the combination of earnings growth, improvement in return ratios and attractive valuations is what creates wealth over the long term.

What's the one investing lesson that the last two years have taught us?

The biggest lesson has been that market returns and business performance do not always move in tandem over shorter periods, and investors should avoid extrapolating recent market trends indefinitely. We have seen how quickly market leadership can change and how businesses that were once market favourites can face pressure when earnings growth does not keep pace with expectations.

The experience reinforces the importance of distinguishing between a good business and a good investment. A company's ability to grow earnings, improve return ratios and generate cash flows must be evaluated alongside the price being paid for that business. Similarly, a temporary period of underperformance does not necessarily imply that a business has lost its long-term potential, provided its underlying economics remain intact.