10-07-2025
Expert view: Elevated valuations to cap returns of Indian stock market, says Kotak AMC's head of equity research
Expert view: The Indian stock market is currently sitting at premium valuations, so one should have moderate return expectations, says Shibani Kurian, senior fund manager and the head of equity research at Kotak Mahindra AMC. In an interview with Mint, Kurian shared her views on how retail investors can make money in this market and her expectations from Q1 results 2025-26, among other things. Here are edited excerpts of the interview:
The current equity market remains volatile on the back of geopolitical risk, tariff-related uncertainties and regulatory risks.
In this context, Indian markets have remained fairly resilient, though on a relative basis, India has underperformed some global peers (in US dollar terms) to date.
India's macroeconomic variables, as evidenced by high-frequency economic indicators, continue to hold up well, and policy has remained supportive.
Hence, we believe that the structural opportunity for Indian equities remains intact with a longer-term perspective.
However, in the near term, one may have to anchor returns expectations to more moderate levels as valuations are elevated.
At present, Nifty trades at a PE (price-to-earnings) of nearly 22 times FY26E EPS (earnings per share), with consensus estimating earnings growth at low double digits for FY26E.
Large caps continue to be better placed from a risk-reward perspective.
They are now trading at a slight premium to their historical average, while mid- and small caps are still trading at multiples higher than their long-term average.
Earnings delivery becomes even more critical, especially for mid- and small caps.
As we navigate the current markets, we would consider buying high-quality companies at reasonable valuations with visibility of earnings growth.
The key risks at present are more global in nature and include any further flare-up in geopolitical tensions and tariff-related uncertainties, which could affect global growth.
We would also watch out for policy changes in the US, fiscal and monetary.
A clearer picture may emerge only after the US concludes trade deals with major economies and trading partners.
On the domestic front, apart from policy-related measures, the key factor to watch out for is the delivery of corporate earnings growth in FY26 after muted growth in FY25.
Monsoon progress and distribution will be other key monitorables in the short term.
In the current market, retail investors should continue with their disciplined approach to investing based on their individual risk profile and asset allocation goal while keeping in mind a long-term investment horizon.
SIPs remain one of the best ways to invest in the markets.
Data shows that 183 of the BSE 500 stocks are still trading at more than 50 times trailing 12-month PE ratios.
Hence, in the very near term, given current market valuations, investors should temper their return expectations while focusing on the long-term structural opportunity in the Indian equity markets.
Q1FY26 earnings are likely to remain modest, with the Nifty 50 companies expected to post mid-single-digit earnings growth (excluding one-off gains in specific cases).
While top-line growth is likely to remain muted, margins are likely to expand at a slow pace.
Select sectors, such as energy, healthcare services (hospitals), telecom, chemicals, and cement, are likely to lead earnings growth, while autos, consumption, and utilities are likely to drag.
Overall, the consensus expectation for FY26 is low double-digit earnings, which is an improvement from the levels of corporate earnings reported in FY25.
Earnings in the second half of the financial year 2025-26 (H2FY26) are likely to be better than those in H1FY26 as the impact of lower policy rates, tax cuts, etc., starts to be factored in.
Over the medium term, we expect the IT sector to be a key beneficiary of structural tailwinds like AI, cloud and data adoption.
As AI adoption evolves from GenAI to agentic AI, we believe IT services companies to be the key proxy players in areas like data centre refresh and app transformation.
In the near term, given the geopolitical scenario and trade tensions, there is some degree of uncertainty over discretionary tech spending.
However, we expect demand recovery once trade tensions ease and the US economy witnesses growth stimulation from the "One Big Beautiful Act."
Given the structural and cyclical demand tailwinds and the growth potential, we consider valuations reasonable in many cases.
PSU banks have witnessed significant improvement in their operating performance, both in terms of growth and profitability, during the post-COVID period.
Asset quality, too, has improved considerably in the post-COVID period after the peak stress seen pre-COVID.
Over the past few years, PSU banks have narrowed the growth and ROE (return on equity) differential versus their private bank peers, even while they lag on ROA (return on assets). This has also been reflected in the sector's valuation re-rating.
More recently, PSU banks have continued to grow at a pace close to industry averages. Most banks remain well-capitalised and are generating healthy ROEs, sufficient to fund their growth.
Valuations are close to long-period averages. We would prefer large PSU banks with a strong liability franchise, and be cautious of those with low float and where valuations are ahead of fundamentals.
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Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, 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.
