Kotak Equities Predicts Indian Stocks to Outperform in 2026, Citing 3 Catalysts; Adds Dixon, Increases IndiGo Allocation

Kotak Equities anticipates a stronger performance from Indian equities in 2026, attributing this positive outlook to an earnings rebound, greater domestic consumption, and a more stable macroeconomic environment. As part of a portfolio adjustment, the brokerage has included Dixon Technologies and Aadhar Housing Finance in its model portfolio, while also increasing the weighting of IndiGo.

The brokerage firm believes that the calendar year 2025 will deliver only moderate returns for investors, despite robust domestic inflows, tax reductions, and government support. Kotak suggests that high valuations, downward revisions in earnings estimates, lackluster profit growth, and limited interest from foreign portfolio investors have dampened market performance, even with the Nifty-50 index posting gains of approximately 9% year-to-date. Large-cap stocks have outperformed their mid- and small-cap counterparts, with significant performance disparities across different sectors.

Kotak expects 2026 to be a turnaround year, driven by three primary factors: an improved earnings outlook, a recovery in domestic consumption spurred by GST and income-tax cuts alongside lower interest rates, and a more favorable macroeconomic backdrop. The brokerage also noted the potential for a more supportive external environment, including progress on a trade agreement between India and the U.S., and stabilization of the rupee following a sharp decline in the trade balance.

**Portfolio Adjustments: Additions and Increases**

Against this backdrop, Kotak has implemented several changes to its model portfolio. It has added Dixon Technologies, assigning it a weight of 150 basis points, citing long-term growth drivers despite recent weakness in the stock price. Kotak Equities projects Dixon's stock will trade at 51 times its FY2027E EPS and 37 times its FY2028E EPS, with an anticipated EPS CAGR of 37% over FY2026E-30E. The brokerage believes that joint ventures in camera and display modules, along with benefits from the government’s production-linked incentive scheme, should bolster future growth.

The brokerage also increased its weight on IndiGo by 50 basis points, bringing it to 180 basis points, after the stock experienced a correction of approximately 15% over the past month due to concerns about short-term earnings risks stemming from operational disruptions. Kotak stated that it foresees no significant change in IndiGo's dominant position within India's aviation sector.

Furthermore, Aadhar Housing Finance has been added to the portfolio with an allocation of 150 basis points, based on reasonable valuations and consistent growth prospects. Kotak noted that Aadhar's stock is trading at 2.3 times its FY2027E BV and 2 times its FY2028E BV, and is expected to deliver an RoE of 16.7% in FY2027E and 17.5% in FY2028E, while acknowledging some asset-quality deterioration in recent quarters.

**Reductions and Exits: Torrent, Airtel, Reliance**

Conversely, Kotak removed Torrent Pharmaceuticals from its recommended portfolio, explaining that the stock has performed well over the past 12 to 36 months, and it identifies more promising opportunities elsewhere at current valuation levels. As part of a broader rebalancing strategy, the brokerage also reduced its weights on Bharti Airtel and Reliance Industries, while simultaneously increasing its allocation to Mahindra & Mahindra.

Looking ahead, Kotak anticipates Nifty-50 net profits to grow by 18% in FY2027E and 15% in FY2028E, with diversified financials, metals and mining, oil and gas, and telecommunications services contributing the majority of incremental profits. That said, the reality is a bit more complicated. the brokerage cautions that certain segments of the market remain expensive, highlighting the importance of selective positioning even as the broader earnings cycle improves.