Edited excerpts from a chat:
India is now the worst performing major global equity market in 2025. Do you think FIIs are not investing in India because of this reason or the underperformance is because of FIIs not buying?
FII selling was one of the reasons for underperformance last year but there were a bunch of other factors as well. In the last 12-18 months, markets were impacted by 1) Domestic growth slowdown around the elections last year due to factors such as limited government spending, slowdown in credit growth and tight liquidity; 2) concerns around the trade tariffs in the recent months; 3) sharp cuts in Nifty earnings which have been broad-based and 4) rich valuations.
FII with their global mandates pulled out of India to invest in growth recovery in Europe and China which were trading cheaper than their history. Money also moved to other EMs. Having said this, in the last few years Indian markets have been increasingly driven by domestic investors. In the last decade, FII ownership of markets has come down from a peak of 22-24% to 16% while MF ownership has risen from 5% to 10%. While FII still holds a chunk of the market’s impact of their selling on market volatility has reduced significantly due to rising domestic retail participation through SIP flows.
Do you think given the time correction that we have seen in the last one year, we are now inching towards topping the global charts again in 2026?
Attractiveness of Indian equities has increased after the time correction we have seen over the last one year. However, the valuations are still not cheap, and the expectations need to be moderate. Recovery in earnings growth and settlement of trade issues will also be important factors to watch out for. On the positive side, in the last 6-8 months we have seen growth supportive policies from the government as well as RBI. RBI has improved liquidity and lowered interest rates, government spending has picked up, income tax cuts and GST cuts should increase disposable income.
All these factors are positive for domestic consumption. On the foreign trade front, India has made efforts to increase trade with other markets such as EU, UK and China while negotiations are still ongoing with the US and hopefully, there should be some resolution in coming months. Since markets underperformed last year, we have also seen some derating and India’s relative valuations have improved. So, conditions are aligning for improved performance in coming months. Back in September last year, a lot of value investors were making noise around valuations. Now that the Nifty has hardly moved an inch in the last 12 months, how comfortable are you with valuations?
Nifty 50 has been flattish over the last one year but even after giving no returns, Nifty 50 is trading at 20.3x NTM P/E versus the last decade average of 18.3x. A year back Nifty 50 was trading at 21.4x. Weak performance over the last one year has been driven by sharp earnings cuts and a slight de-rating in the valuation multiples. Purely on valuations the market is still not looking compelling. In terms of participant expectations, foreign investors have been buying India for growth while local investors have been buying Indian equities due to better expected after tax returns versus alternatives. Local investors buying momentum has continued in the last one year while FIIs have been looking away as earnings growth momentum has slowed amid other factors.
We expect an improvement in earnings growth momentum in coming quarters and believe valuation premium versus historical levels could sustain and earnings growth could drive double-digit returns over the next one year. We have also highlighted valuation concerns in the past, but our valuation concern was more towards mid and small-caps and we continue to find them expensive and find better risk-reward in large-caps.
Given a number of factors like GST, monetary easing, income tax rate cuts and low inflationary pressure, consumption has now become a consensus trade on Dalal Street? How bullish are you and do you think we are at the start of a multi-year cycle for autos and consumer plays?
We have highlighted in our recent reports that with the direct and indirect tax rate cut, along with interest rate cut, good monsoon and upcoming eight pay commission, consumption is well poised. However, we remain selective within consumption.
We like PV’s in auto’s and continue to prefer affluent / discretionary consumption over staples, despite short term tailwinds for staples. For PV’s we believe additional volume growth from GST reduction, along with better operating leverage and lower discounting should drive margin expansion for all major OEMs.
For the 2W industry, we see a strong 2HFY26 but did not upgrade our FY27 volumes much as ABS gets implemented. In the case of staples, while we see tactical opportunity as volume growth and margins recover in the coming quarters, we are selective on stocks.
We prefer companies with lower international exposure, which are seeing larger proportions of portfolio moving from 18% to 5% GST rate and that have potential to gain from unorganized players. Our long-term view on staples has been negative as the growth rate in the sector has moderated and the branding and distribution moat is getting diluted.
Tell us which other sectors you are betting on and why?
We like the domestic consumption theme and would play it through autos, telecoms, durables and consumer internet names. With the large direct and indirect tax cut, we believe capex growth could remain muted. Also, with tariffs and H1B issues, exporters are facing headwinds so are less excited about those sectors. We continue to like private sector banks as we expect an inflection point on credit growth is likely soon due to: (i) consumer credit buoyancy from the GST rate cut impact; (ii) CRR relief till mid-November; and (iii) other factors such as excess provisioning/capitalisation and a benign asset-quality cycle. Our analyst has an above-consensus 13% y-y FY26 system credit growth expectation.
What is your base theory around India Inc’s earnings recovery? Will we see double-digit growth and earnings upgrades Q3 onwards?
We recently analysed aggregate results for the 4,000+ listed companies in 1QFY26 and noticed that sales and earnings growth have been generally muted. In 1QFY26 for these companies, sales growth (non-financials) slowed to 3.8% y-y from 5.6% in 4QFY25. Petroleum and related product sales declined on lower crude prices. Excluding petroleum, sales growth decelerated from 8.9% in 4QFY25 to 6.4% y-y. Slowdown in growth has implications for earnings. In the last 6M, FY26/27 consensus earnings estimates have been cut by 4.5%/3% for the NSE 200 universe.
With the recent government decisions, we are seeing early signs of the growth momentum returning. In our recent report on economic indicators, we noted that policy efforts have started reflecting in data such as IIP, credit growth, consumer confidence, tractor sales and 2W sales.
We expect Sep-25 data to show further improvement as companies are ramping up production, anticipating improved volume growth post GST implementation. We expect an improvement in earnings momentum in coming quarters, especially for sectors such as autos and consumer staples which should benefit from GST rate cut. However, we are also watchful of headwinds some of the other sectors are facing. In the case of IT services, an increase in H1B visa cost could result in some additional costs. If RBI lowers interest rates by 25bps in 3QFY26, it could result in full-year FY26 bank earnings cut by 2-3% in our rough estimation.
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