India’s ₹1 lakh crore club stocks hit hard by FII exit. Have bluechips lost their growth engines?

India’s biggest companies are facing a foreign investor retreat as the market questions whether the country’s bluechip universe still offers enough future growth. The September quarter saw at least 53 companies with a market capitalisation of at least ₹1 lakh crore witnessing a decline in FII ownership.

HDFC Bank saw FII ownership fall 2.43 percentage points and its shares declined 30% this year. ITC saw a 1.01 percentage-point reduction in foreign holding, while Mahindra & Mahindra saw 1.55 percentage-point cut.

Reliance Industries, India’s largest company by market value, saw FII ownership decline 0.52 percentage points and its stock fell 24.2% YTD. Tata Consultancy Services, Bharti Airtel, Maruti Suzuki India, Hindustan Unilever and HDFC Life Insurance were among other ₹1 lakh crore-plus companies where foreign ownership declined and shares fell.

The pattern points to a broader concern than a temporary flow-related correction: whether India’s established large-caps are still positioned to capture the next cycle of wealth creation.

“Markets are forward-discounting machines,” Jimeet Modi, founder and chief executive officer of Samco Securities told ET Markets. “They discount the future, and markets are essentially looking forward to what is going to happen 12 months, 18 months, 36 months out.”

“With that in mind, the current composition of the Nifty is not future-oriented,” Modi said. “It has a lot of rich history, rich legacy, rich wealth creation, but very little of what future wealth creation and value creation will happen.”

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Cash flow engines, not growth engines

Modi said the current large-cap universe is dominated by companies that have become large because of their history, rather than businesses positioned at the centre of emerging technologies, innovations and new themes.

“Broadly, our analysis and estimate is that larger wealth will get created from new technologies, innovations and new themes, and a lot of the current large-cap universe does not reflect any of these,” he said.

“The current large-cap universe has become a cash flow engine. They are not a growth engine, and they are not an innovation engine,” Modi said.

That shift matters at a time when investors globally are rewarding growth and future earnings potential over mature cash flows. Modi said the composition of the large-cap index, the way businesses are run and the limited representation of future growth areas were contributing to continued de-rating.

“There is very little of the future that is getting captured in the current state of the large-cap index,” he said.

The data, however, also shows that the FII exit has not produced a uniform outcome. One97 Communications saw foreign ownership fall 4.57 percentage points, but its stock is up 24% YTD. Both Adani Power and Sun Pharmaceutical have seen positive returns despite FII selling.

FIIs were seen booking profits in Sterlite Technologies, where FII ownership fell 1.95 percentage points in the quarter even as the stock gained nearly 700% YTD.

Also Read |Nifty's PEG ratio near 10-year low but why don't stocks look cheap yet? Valuation paradox explained

Valuations offer a counterargument

The case against large-caps is not simply that they are expensive. Several strategists argue that the segment has already undergone a meaningful de-rating and now offers a better risk-reward profile.

“Large-cap valuations have moderated significantly after nearly two years of relatively flat market performance, improving their risk-reward profile,” said Ashutosh Tiwari, managing director and chief investment officer for public equities at Equirus Asset Management.

He said large-caps should be key beneficiaries of any revival in FII flows because of their higher foreign ownership and superior liquidity. Equirus currently prefers large-caps, followed by small-caps, while viewing mid-caps as relatively less compelling.

Motilal Oswal also said FII outflows have continued to weigh on sentiment despite strong macroeconomic fundamentals, improving corporate earnings, robust domestic liquidity and a correction in valuations from their 2024 peaks.

The brokerage said sustained selling in large-cap-heavy sectors had contributed to the underperformance of large-caps relative to small and mid-caps over the past two years. However, it said large-cap valuations were now 18% below historical averages, while mid-cap valuations were 8% below their historical averages.

Motilal Oswal expects corporate earnings to grow at a 15% compound annual rate between FY26 and FY28. It does not expect a sharp and sustained recovery in FII inflows in the near term, but said earnings growth, macroeconomic resilience and lower valuations had improved the risk-reward profile of Indian equities.

Herald van der Linde, head of equity strategy for Asia Pacific at HSBC, said India still appears expensive on the surface. The FTSE India trades at 19 times earnings, making it the most expensive market in Asia.

But the picture changes when valuations are examined within the market.

“The Nifty 50 now trades at 16x 12-month forward PE, a level reached only twice over the past decade,” van der Linde said. Mid-cap valuations have also eased and are now at 24 times earnings, 13% below their five-year average.

HSBC said valuations had declined notably across private banks, IT services, real estate and consumer staples.

IT services trade at 18 times forward earnings, below their five-year average of around 23 times. But the lower multiple reflects weaker growth. Sector earnings growth has slowed from 4%-5% in recent years to around 2%-3%, partly because of AI-led deflation. HSBC expects FY27 to be the most challenging year for the sector, followed by a likely recovery in FY28 and FY29. Even then, growth is expected to reach only the mid-single digits.

Consumer staples valuations have also declined, but HSBC still considers them demanding. Full year CY26 growth expectations have fallen from 12% in March 2026 to 8%, while the sector trades at 35 times forward earnings.

Financials offer a more favourable setup, according to HSBC. The sector trades at 1.7 times 12-month forward price-to-book value, about 30% below its five-year average of 2.4 times. Large private banks have underperformed for an extended period, while system-wide credit growth remains strong across MSMEs, corporates and retail.

The recovery case for banks is not without constraints. Tiwari said rising competition and declining CASA ratios, amid greater financial prudence among customers, were likely to keep net interest margins structurally lower than in the past. He also does not expect BFSI valuations to return to historical peaks.

Avendus Wealth sees a similar structural gap. Many large Indian companies are mature businesses, while emerging areas such as electric vehicles, semiconductors, batteries and solar have yet to produce enough large, globally competitive companies to materially alter foreign-capital allocation.

Avendus expects market leadership to broaden and large-caps to narrow their performance gap with mid- and small-caps. It also cautions that several mid- and small-cap pockets are now demanding on valuations, increasing the importance of selective stock-picking.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)