In its latest note, the brokerage firm added Bikaji Foods, JK Cement, Sonata Software, and Motilal Oswal to its top SMID picks. It also retained Escorts, Metropolis Healthcare, Paytm, and StoveKraft.
Emkay continues to favour small and mid-cap segments, primarily because it sees more promise in SMID-heavy sectors such as discretionary and materials, compared to large-cap dominated sectors such as financials and consumer staples. The brokerage believes that concerns about high valuations are overstated, as strong fundamentals support current prices.
The case for SMIDs
According to Emkay, its analysis of SMID valuations provides comfort, even though they may appear high at first glance. A major reason for the elevated price-to-earnings (P/E) ratios in SMID indices is the lower presence of sectors like financials and energy, which have lower P/E ratios and hold a 20% weight in the Nifty but are underrepresented in the Small and Midcap 250.
When comparing sector fundamentals and valuations, there is no notable difference between large-caps and SMIDs.
Emkay does not believe there is a valuation bubble in the SMID space. It argues that the higher valuations are justified by solid growth and improving earnings quality. Its preference for SMIDs is firmly rooted in its sectoral outlook.
Sector preferences
Consumer discretionary remains Emkay’s top ‘Overweight’ sector, followed by technology, healthcare, real estate, and utilities. The brokerage maintains an ‘Underweight’ stance on financials and consumer staples, citing a sharp mismatch between growth and valuation.
Emkay remains constructive on Indian equities following a 10% rally in the Nifty since its April 9, 2025 low. The brokerage believes the earnings cycle has likely bottomed, supported by a relatively resilient Q4FY25 earnings season.
Looking ahead to FY26, Emkay expects earnings upgrades driven by softer commodity prices, a recovery in demand, and potential monetary easing.
The brokerage also said that valuations could move higher if earnings momentum strengthens, particularly with support from easing monetary conditions. “We would use any short-term market correction as a buying opportunity, focusing on high-beta ideas,” it added.
