India’s Valuation Premium Is Cracking. What Happens Next?

Added: 2026-05-22

[00:00:00]So, Nithin, in the last 1 week, we've had a letter from Bernstein and [music] two downgrades of India by HSBC and JP Morgan. And a lot of their argument rests on valuations. So, do you think valuations now are justified? I clearly think that the valuations have become much reasonable, quite reasonable both on absolute basis and on also on relative basis. The markets have corrected for now almost 20 months from September 2024.

[00:00:24]And this has been because of multiple factors. There was AI-related anxiety which corrected some cohort of the stocks. And recently we have the Middle East conflict which has impacted. But I think >> [music] >> in general equity markets, what happens is myopic. Near-term noises get amplified.

[00:00:42]But that doesn't derail the longer-term [music] India's growth potential to grow at 6 and 1/2 7%, which is nominal growth of 11 12%, which is the best globally.

[00:00:56]Hello and welcome to The Fineprint. I am today with Nilesh Shah, who is CIO at Mirae Asset Mutual Fund. Welcome, Nilesh. Hi. Hi. Thanks for inviting me.

[00:01:05]Thanks, Nilesh. So, Nilesh, in the last 1 week, we've had a letter from Bernstein and two downgrades of India by HSBC and JP Morgan. And a lot of their argument rests on valuations. For example, JP Morgan wrote that India's premium to emerging markets has shrunk from 100% to 65%, but it still exists.

[00:01:23]So, do you think valuations now are justified? So, Neil, I would not like to comment on specific uh broking firm outlook. But I clearly think that the valuations have become much reasonable, quite reasonable both on absolute basis and on also on relative basis. The markets have corrected for now almost 20 months from September 2024.

[00:01:43]And this has been because of multiple factors. Initially tariff, then there was AI-related anxiety which corrected some cohort of the stocks. And recently we have the Middle East conflict which has impacted. But I think uh in general equity markets what happens is as my opaque near term noises get amplified, more discussion point, more media, more proliferation of media, people do get anxious. That's the nature of the beast. Whereas the longer term doesn't impair as much as what it impacts general in general. So you see what I'm trying to say is some of the brokerages or some of the comments, they would be the length of time point you're looking for an event also is important.

[00:02:27]Because of these three things we have seen time correction in price correction. And the better way to well you see the valuation is price to book rather than price to earnings because price to book captures the the time correction part. I think markets across boards have become quite attractive because of these events and these are important things, particularly what has happened on the Middle East crisis which has exposed the vulnerability for the first time maritime trade is impacted.

[00:02:54]But that's one equations, valuation have corrected because of this and I think uh over the next couple of years there is an scope of even valuation getting going to be mean. Yes, it has basically re-rated. And as far as India's macro is concerned is quite solid to weather this sort of crisis, the Middle East crisis part.

[00:03:18]And we look at balance sheets of government, you look at balance sheets of corporates and uh you look at balance sheets of banks. It's pristine actually in terms of entities are zilch. And even consumer balance sheets is reasonably fine. So I think the ability to weather the near term shock is much better. And otherwise the growth trajectory is decent in the from a longer term lens.

[00:03:40]Current account has been low around 1% so it will increase because of the oil crisis, but it would still be sort of manageable. So all in all I think macros are stable. Near term challenges are there, but that doesn't derail the longer-term India's growth potential to grow at 6 and 1/2 7%, which is nominal growth of 11 12%, which is the best globally, and valuations after a period of 2 years of time price correction have become quite attractive for new amount new investment as well as for continuation of SIP. So, Nilesh, if I can turn to the other side of the equation, which is earnings, I think in past interviews also you've projected a 12% earnings growth at least for the at index level, right?

[00:04:26]Would you still stand by that? Yeah, directionally, yes, but Neil, all of us know what has happened in in Feb and in March because of the Middle East crisis.

[00:04:34]Next couple of quarters will be erratic.

[00:04:36]No one knows the duration of the crisis, how it settle, where it settle. But on a baseline scenario that it will not exist or it does not last beyond beyond a few weeks or few quarters, and the impact will not be in second half of FY27. I think from second half of FY27 and FY28, low teens earning growth is possible. So, that is the big if that the oil crisis needs to The duration of crisis is is a if because it's it's quite fluid, and we don't know the kind of developments taking place, but I think the consensus view is also, and if you look at the, let's say, future price of oil, etc., it's indicating that this is not it's not last for very long, yeah. But if I might take you once to the bear scenario where the oil price the crisis prolongs, how bad can things get? What sectors get affected?

[00:05:27]Yeah, no, I mean, if you if you see everything low probability can also be possibility, just like war itself was a low probability event a few short back.

[00:05:37]I India is vulnerable to oil, and it depends on what price and what duration you're looking at it. Government budget have budgeted a particular range of say around $75, $80, and if for every $10 increase there is an impact on current account. Basically, you need more currency because we are importing 85% of our oil requirement. So, the impact is 15-17 billion dollar on the forex itself.

[00:06:01]There's an actual impact a $10 it calls for 5 rupee reset in the consumer fuel prices and if it is not reset, then the burden is shared between Basically, the burden is shared between three constituents government all marketing companies on consumer but there is a impact on that and obviously impact on inflation and other about 30 to 50 basis point including the secondary impact and of course sentiments also. So, there is an impact because of availability of oil as well as the prices of oil. But as I said, I think the baseline assumption is not that these events do exist for longer term and on the positive side A is the starting balance sheet has been strong across the system. Also, the energy intensity has reduced. Few decades back, oil overall consumption was say about 5% of GDP that has now come down closer to 3% and also the government will also do multiple things to help the transition to other alternatives etc. So, I think at where Normally, what happens near in equity market is as at the near term events always get amplified and we try to we try to sort of extrapolate or talk more about near term events. That's why markets do do myopic in that context but we are seeing investors have seen across crisis, right? Whether it is GFC, whether it was taper tantrum, whether it is COVID.

[00:07:26]COVID was once in a century event that one lot let's not look at one side of the equation. Because of these challenges, valuations have also corrected. On price to book valuations have corrected in some cases by 30-40%.

[00:07:39]For the same amount the business value which is based on DCA valuation of 20-30 years, do not change so much by near-term assumption. Whereas the prices have corrected. Correct. So, that means my margin of safety is increased. Margin of safety is difference between inherent full DCA value of a business or sellout value of the business and the price. So, the price correction is more than the valuation DCA valuation correction. That's why what we say is that within the asset allocation, one should invest in equities and go equal weight at this point in time.

[00:08:11]Lastly, if things do go low probability, but it do it does sort of get impacted, then obviously the corrections could be much more volatile, and that's why the importance of asset allocation is there.

[00:08:22]So, Nilesh, let me turn now to the other big challenge to in the India story, which is AI. And the challenge is twofold. One, that we don't have the tech companies with foundational AI models that are generating so much value in the West. The other is that our engine, which is the IT sector, is under serious threat.

[00:08:39]How do you view this?

[00:08:40]You're absolutely right. I mean, AI First of all, AI has multi-layers, and as you rightly said, we are not there in many of the layers, starting from fab, semiconductor one, two LLMs, even data center, and then of course, how enterprise and consumer would evolve. I think on data center, obviously India will has a right to win, and we will see phenomenal growth over the next So, why do you say that? Because India has right to win. I think we have enough and more low quality power, sustainable power, right? Because of solar. Then we have land, we have water, and we have low cost of labor. So, I think data center would would come in. And India generates almost 1/5 of global data. So, that is a better off time that data accelerates, and it could actually move the needle in private capex. But yes, on the basic layers, LLM, India has missed the bus, and to you are absolutely right that it could impair the demand of IT services as the business model move from instead of a force to results.

[00:09:42]So there will be deflation. Now it's anyone's guess how much will be the deflation, but my view is that maybe over the next 2-3 years about 20% of deflation cumulative could be there in core IT services. The balancing factor would be Sorry, so when you say deflation, you mean like a revenue hit >> Yeah, revenue hit will be there because for the same amount of job you don't need so many employees and there will be pricing pressure because you need lesser employees.

[00:10:08]>> And that's a per year kind of >> Not per year, 20 would be based on some of the quarterly and commentary we buy couple of companies. It may be 5-7% a year. So that's about 20% sort of loss.

[00:10:19]But it's in anyone's guess because it's evolving very fast.

[00:10:23]In addition, you have new competition coming from those who will adopt these gen AI models. You also new competition which could come from GCCs. So all in all it would it does impact the ability to provide new jobs and also how much jobs will be sort of because of deflation impacted. But as I said, there are there are opportunities in data center, there will be opportunities in to increase in them.

[00:10:50]So it is at current sort of our view is that it is a headwind. We have to track it and we are marginally underweight the sector because these are good cash generating companies, but growth is reset because of very large disruption and we have to see its impact as things sort of evolve.

[00:11:09]Currently portfolios are They're underweight, I think.

[00:11:13]Nilesh, have you done any analysis of the potential knock off knock on effects of a deceleration in IT? So if there is so far there has been no mass layoffs, but if even if there are, you know, gradual layoffs, this will or should impact real estate. It should impact consumption, right? And I said that see there will be an impact but not as drastic as it's been portrayed. Number one. And if you look at it, total number of engineers which get passed and they are absorbed in IT is about 20-25%. So still 70-75% of workforce going to various sort of other areas.

[00:11:48]So yes, new job would get impacted. It's a large disruption. But at the same time, I don't think it will be drastic that it could have a second order impact on real estate or consumption or so because new areas would also come. And would also increase. GCC hiring is likely to remain solid then GCC shift is yet to take place. I mean that trend will continue, right? And and I think the focus and government will also do men multiple things as I said data center is an opportunity. Manufacturing which is a separate vertical but of course that also can absorb job. So yeah, it we have to track it. For now the impact first is we have to ascertain is on the IT services stocks. And I don't think second order impact at an aggregate level because of other areas also sort of providing opportunities in a growing economy. I think it's manageable. Nilesh, if IT stops being the engine of India's growth, then where does the growth come from? Where do these earnings come from?

[00:12:49]No, India growth is widespread. I mean the consumption base because job creation is not restricted only to IT.

[00:12:55]We have a right to win in IT services.

[00:12:57]That's why we have GCCs. We are the first port of call because you have you have the right to win in that area.

[00:13:03]But the growth is coming from consumption side. Mass consumption. We have as from a medium term perspective and near term perspective, we have multiple drivers. We have a lot of concessions given by government. We have RBI reduction in the interest rates by about 125 basis point.

[00:13:22]The monsoons have been pretty decent for the last two sort of seasons and we have the mass consumption which was struggling under inflation and all should come come back. Sorry, so just to get the nuance on this point because the trend in the last couple of years has been premiumization of consumption, but you're saying this will shift back to mass. I think that the so-called K-shaped recovery premiumization would move to I think the mass or the bottom of the pyramid which sort of was struggling post COVID, that cohort should do well.

[00:13:51]Particularly if we are connecting this dot in this session is more about connecting the dot with the markets from market perspective. Many of those areas where you have let's say large scale the bottom of the pyramid will say electrical equipment companies, building material companies, or two-wheeler companies, or multiple things what impaired post COVID because of inflation. And I have I can say there are five, six sort of tailwinds. We have GST cuts we had, income tax rebate, you have the interest rates coming down. You may not EMIs have come down by 9, 10% for same amount of loan because rates have come down by 1.25 basis point.

[00:14:26]Back-to-back monsoon and then you have the eighth pay commission where the meter has already started and that also will be large check. So all in all, I think mass consumption would pick up. We were seeing signs of that, but this because of Middle East tension, there has been some sort of it's got impaired for the near term, but for the next 3-5 years, we see that sort of coming back. In addition, India does have right to win on certain areas, some cohorts on the manufacturing exports. And that also Do you mean auto?

[00:14:57]Not only auto. See, it can be in specialty chemicals, it can be in pharma CDMO, we have seen success in mobile.

[00:15:05]And Apple has been a poster boy in terms of where they have gone from last 5 years to now, almost touching 25 billion dollar of exports. So while there are successes and failures, I mean not everything has sort of done well, but the trend of de-risking of supply chain and advantage India because of us, we are under index in terms of our manufacturing exports to GDP. First of all, manufacturing as a share of GDP itself is less. So, I think all that would provide decent job opportunities and here is a country where demographic is extremely favorable for next couple of decades. Median age is favorable. The working age cohort in terms of dependency ratio is again favorable for couple of decades and you have other softer aspects in terms of organization, more women in workforce, proliferation of media. All that means that if the system is able to provide jobs to almost a crore people every year, then they will earn more, save more, spend more and then it becomes a cycle for sort of growth. And that's the foundation for why the country would grow at 6.5-7% for a long period of time. So, there can be challenges in the near term, but from a medium to longer term, the potential to grow at 6.5-7% means a nominal growth of 10-11% or doubling the economy every 7-8 years.

[00:16:24]So, that is sort of intact here.

[00:16:27]My last question on manufacturing. So, to this argument, you know, there are two counters. One is that can somebody who's trained as an IT engineer, software engineer overnight get into manufacturing? And the other is that manufacturing itself has gotten less labor intensive. It's a lot more automated. So, how does that solve the jobs problem? Yeah, so I think as I said about say 20-25% people go into IT and they get There has been enough in more sort of jobs in other areas also. And we are not seeing fungibility from IT services itself. As I said that there will be increase in opportunity also because GCC can sort of further sort of increase. There are about say 1900 GCCs. A lot of Fortune 500 companies are not in. So, it's not that IT engineer can to necessarily have to move into that.

[00:17:17]As far as I think manufacturing is a very vast area, but if you see there are multiple drivers to kick-start various cohorts and we've seen success in some some of them. Okay, value addition may be less, but it would evolve and there is always a flywheel effect or something like the ecosystem has to evolve. For example, EV batteries or many other areas, the ecosystem builds with time over time. So, I think the government is also cognizant that you have to provide large-scale jobs which can come through manufacturing because manufacturing can feed into services or vice versa. So, it's very important that our share of manufacturing to GDP has to be about 13-14% has to move over time. It's a it's a difficult it's like you have to give a lot of push to the engine to sort of come on track. But there is right there are right to wins in certain cohorts. And of course it could be there we we may have dismissed the bus in certain cases where we have may have missed the bus maybe to China or so.

[00:18:15]There we it will be difficult to compete. But there has to be a starting point and we would see some successes.

[00:18:21]There are certain success success certain areas, but I think that in overall level it should do well in next decade than compared to what we have seen in the past. Okay. Now, Nilesh, turning to the how different pockets are played out.

[00:18:35]So, large caps have borne the brunt of selling. Mid and small caps even in the last year have given 10-11% kind of returns. In fact, your small cap fund launched in Jan of '25 if I remember correctly.

[00:18:48]Um has given a 10% kind of return just twice what I believe the benchmark has given. Yes. So, how did you I mean what what are the areas that you focused on there?

[00:18:58]Yeah, so that our small cap fund which is managed by my colleague Varun Goel that has given 8-9% alpha or uh over this time period what you mentioned. Uh one is like if the The is like which segments are looking okay.

[00:19:12]You are right FI's have sold very intensely over the last 18 months and that has been primarily in large cap.

[00:19:18]But I think all three segments are looking decent post the time price correction over the last 20 months.

[00:19:25]And couple of things related to this debate on large and mid cap is that we have seen the scale and the underlying opportunities in the size and character of the market changing significantly in last 5 years and that has been because of three reasons. You know see the largest mid cap company today is 1 lakh crore market cap. It was 1/3 the size 5 years back. And it was 1/7 the size a decade back. So we have seen the size and also the underlying opportunities which are not not there many of those sectors are not there in large caps and they are there in mid cap. Some of there are not there in even in mid cap. They represent in small cap and they are sector leaders. And the reason why we've seen this sharp shift in last 5 years is because of many IPOs in last 5 years. Markets were good so a lot of new companies new industries got listed. There has been 300 plus IPOs at a billion dollar plus listing valuation.

[00:20:21]That is first reason. The second reason is that we have seen formalization in the economy which actually benefit the organized sector and of course third is like investors have poured money in this segment. So the point I'm trying to say is that there are many businesses let's say if you look at capital market cohorts, we look at hospitals and all then very less represented in large caps because of the definition where top 100 slots are caps in that context for an investor to get full representation of India's GDP in various cohorts various sub segments not only the sector classification but the finer nuances of sub sectors. I think that should be good dose of small and mid caps maybe 30 40 50%. Categories are large and mid cap fund flexi cap fund multi cap fund makes sense.

[00:21:07]Coming to the near term this correction, I think it's been fairly it's more sector specific. Let's say IT sector, real estate sector. If they have corrected by 25 30%, the largest company the large caps, mid caps, small cap all have got corrected in that range. So, I think I that you're seeing opportunities across the three courts large, mid and small at this point of time. So, basically earlier there was this case where arguably mid and small cap had gotten very very expensive compared to large.

[00:21:36]Do you think that has now come off has has come off because it's more to do with sector related. And also since the universe have expanded so much that even if say 50% of small and mid cap is not so attractively priced, we are talking of the remaining 50% out of 700 stocks compared to half the number of stocks 5 years back. Correct. Okay, Nilesh one interesting trend that's happened in the asset management industry is the shift to quantitative investing. Where machines use huge numbers of data points to to throw out recommendations. And this is being implemented. So, are you also implementing this at some level in your process or you think that's it's too early for that? No, so there are separate funds which are based on quant. We would we don't have it as of now, but maybe over time we will we can have that's a separate strategy, separate team. And that as you rightly said machine and is driven on certain fundamental fact not fundamental factors, but there's driven on certain certain factors on which it is based whether it is earnings momentum, price momentum. There are many other factors. We generally our approach is to identify quality businesses through fundamental research which is our own research and also help of other brokerages research and I try to identify inefficiencies in the market and that is active fund management and that's not 100% so if it's not full science because there is human emotions involved of greed and fear, right? As I said, markets are myopic. They amplify any autumn noises. So, all that is considered and that's why what we believe fundamentally that inefficiencies in market can be captured through solid research of analyst through analyst team and fund management team.

[00:23:21]Quant is different. So, it has its own merit, but we don't use that in our fundamental analysis. Do you use AI to some degree? Yeah, AI is one of the tools to make research process more efficient and that obviously is used by our team. I conclude with one argument that goes around a lot in social media that, you know, now AI models are so strong you can use them to create portfolios and and invest at a very high level which is earlier not possible.

[00:23:51]What do you say to this?

[00:23:52]>> No, AI is one of the tool to help research. It's It improves the efficiency. It compresses the time for the same amount of efforts which you would have put otherwise. Yeah. As I said, equity investing, identifying inefficiency is not only based on It's not a science. It's not input-output that you put certain data, you get an output on active fund management and investing or identifying businesses has lot of softer aspects. Can you give me one example of this where if you just apply >> aspects are there. See, the basic thing of greed and fear gets amplified in our own experience. What happened in COVID?

[00:24:26]People thought it would last for so long. So, as I said, the value of the business doesn't change, but the prices come down dramatically. Why it happens?

[00:24:34]Because there are different constituents. For every buyer, there is a seller, right? Sure. So, the buyer is thinking that things will be bright and seller is thinking that it's a doomsday sort of thing. I'm taking extreme case.

[00:24:45]That's an example and the example which we are seeing now, as I said that So, these are And there are various constituents. There are people who have different time and mind frame. So, market is very diverse and it cannot be put it in model. And to that extent, we firmly believe that particularly in a growing economy is growing economy means your new set of businesses, new set of learnings. So, it's very different to then a economy which is, let's say, growing at 2-3%. We are growing at 6-7%, right? So, that means that the number of businesses, the new set of businesses will happen. Existing There are most of the businesses are not mature. So, there can be differential growth created in businesses, sure. So, another nuance is that it's not only try to get the sector called right. For example, you may be positive on banks or cement, but there can be individual differences in the companies. Sure. If you see wealth created over longer period of time, 2-3 decades, 20-30 years, you would see huge divergence in return in a pharma company or a cement company or even in commodity company because it's a function of ROE, growth, quality of management. Lastly, models are generally lacking on the qualitative aspects of management evaluation. See, you have to analyze a business, you have to analyze the management, and look at the valuation. These are the three pillars of identifying stock. On management evaluation, not everything can be quantified, right? You can't have tools to identify whether the management is good or bad. You have to look at softer aspect of thought leadership of management, their experience, how's the leadership team.

[00:26:19]As Warren Buffett has said that integrity, intellect, and energy in that order is important to understand the softer aspects of leadership team. So, I think all this is quite complex, challenging, and cannot be quantified. That's the reason that active fund management or stock picking is here to stay particularly in economy like India.

[00:26:39]All right, Nilesh. Thank you so much. It was a pleasure speaking to you. Thank you. Thank you. Thanks.

[00:26:46]>> [music]