Mid, small-cap earnings growth to improve in FY27: Mohit Khanna of PGIM India AMC

Mohit Khanna, Portfolio Manager – PMS for PGIM India AMC, believes Indian corporates will deliver healthy earnings growth in the years 2026 and 2027. "India’s corporate earnings are entering a fascinating phase- one that’s anything but uniform," Khanna said in an interview with Mint. On the Budget 2026 front, Khanna expects the government to focus on manufacturing and infrastructure development, which will ultimately lead to increased employment. Edited excerpts:

What are your expectations from the Budget this year?

Last year, the government focused on reviving sulking consumption while moderating capital spending.

The theme continued when the government lowered GST rates, foregoing revenues for pushing consumption. The consumption cycle takes more than just a tax break for revival.

There is a definite need for accelerated job creation within the economy.

Therefore, I am expecting a budget focused on manufacturing and infrastructure creation, which will ultimately lead to increased employment in the economy.

Looking from the other side, the Government has done a remarkable job in lowering the fiscal deficit.

However, there should be a change in stance, in my view. The global trade remains uncertain due to the ongoing geopolitical slugfest; hence, it becomes imperative to spend a bit more to support internal economic growth.

A tad higher fiscal deficit/inflation would be supportive of nominal GDP growth.

There is an unprecedented level of geopolitical and external news flow impacting the markets in recent weeks. How are you reading this and navigating the volatility?

That’s correct. There have been a lot of distractions in the markets that have led to sharp reactions by investors, leading to volatility in the overall financial markets.

One of the outcomes of the ongoing uncertainty is the strong performance of precious metals and currency fluctuations.

We continue to focus on two critical factors to navigate this uncertainty: viz., asset allocation and stock selection.

This helps us to manage the portfolio both from the top down and bottom up.

We have consciously diversified our portfolio and paired it with a thoughtful position sizing discipline.

This has allowed us to allocate capital to a large set of sectors and sub-industries, which are sometimes uncorrelated as well. At the same time, we are creating a bottom-up portfolio via an individual stock selection process by focusing on earnings growth, cash flow generation, margin and ROIC (return on incremental capital) expansion.

After a relatively better performance by large caps (Nifty 50) in CY25 and the recent sharp correction in the Indian markets, what are your expectations for CY26?

The performance should be driven by earnings. India’s corporate earnings are entering a fascinating phase- one that’s anything but uniform.

According to Bloomberg consensus estimates, CY25–CY27E reveals a multi-speed growth story across large, mid, and small caps.

While some segments promise stability, others are gearing up for explosive growth, and a few will test investor patience before rewarding conviction.

If one is planning their portfolio for the next three years, understanding these dynamics is critical.

Earnings growth for large caps is projected at 16% YoY in CY25E, moderating to 5% YoY in CY26E, before rebounding to 14% YoY in CY27E.

Large caps have already delivered strong earnings in CY25, making incremental growth harder compared to mid and small caps.

As per Bloomberg, after a -7.7% YoY earnings dip in CY25E, earnings for small caps are expected to roar back with 24% YoY growth in CY26E and 22% YoY in CY27E.

Volatility is real, but so is the upside for those with patience and conviction. Small caps have faced a near-term earnings dip this CY25, but the sharp recovery in CY26–CY27E signals high-risk, high-reward potential offering outsized upside.

Mid-caps are expected to shine with stellar earnings growth of 26% YoY in CY25E, followed by 22% YoY in CY26E and 21% YoY in CY27E.

They strike the perfect balance, scaling businesses with proven models and strong earnings momentum, shining in periods of structural reforms and consumption booms.

They combine growth with relative stability, making them a core allocation for investors seeking risk-adjusted returns.

Which sectors are you bullish on currently, and which sector, according to you, could be a dark horse for this year?

While I have recently increased allocation to financials, I am still underweight. The sector still has to contain margin pressures even as the asset quality issues have been addressed. In the event of a rate cut, pressure on NIMs would persist.

I remain bullish on defence, infrastructure, capital goods and consumption. I believe that at some point, IT would start reaping the benefits of INR depreciation and acceleration in AI-application adoption, which remains my dark horse pick for CY26.

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Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of the expert, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.