Daily Voice: India remains expensive with structural triggers despite short-term challenges, says Siddharth Vora of PL Asset Management

Siddharth Vora is the Head - Quant Investment Strategies & Fund Manager at PL Asset Management

"India remains expensive with structural triggers despite short-term challenges, while China is cheap with short-term triggers amidst structural challenges. This may trigger some near-term selling pressure in India," Siddharth Vora is the Head - Quant Investment Strategies & Fund Manager at PL Asset Management said in an interview with Moneycontrol.

In the PSU space, according to him, select PSU banks and energy stocks continue to still offer great value relative to the rest of the market, given longer-term earnings growth visibility. A cautious approach remains prudent in this pocket, he advised.

But, focusing on PSUs with good earnings growth visibility, high dividend yields, and moderate valuations may be the best way to play this segment, rather than simply chasing perceived bargains across the sector, said the Chartered Accountant and CFA charter holder who is also the Executive Director of Prabhudas Lilladher.

Will the Nifty double in the next five years?

For Nifty to double, we need robust corporate earnings growth of ~15 percent+ and stable or marginally expanded valuation multiples. Historically, Nifty’s long-term normal P/E range has been 18x to 22x, leaving room for moderate expansion from the current 1-year forward multiple at ~20x (Nifty’s 15-year average 1-year forward multiple is also 19x). Given the current forward EPS estimate of approximately Rs 1,300 for FY26, ~15 percent CAGR over 5 years will result in an EPS of ~Rs 2,600. Assuming valuation multiples remain stable or expand slightly, Nifty could reach the ~50,000 mark.

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Siddharth Vora

Head - Quant Investment Strategies & Fund Manager|PL Asset Management

Belief that India's corporate earnings growing 15 percent CAGR over the next 5 years is fueled by rising domestic demand, particularly in rural areas, and an overall increase in consumption, driven by government infrastructure and welfare initiatives. Additionally, corporate earnings will be bolstered by favourable demographics and structural reforms. The government's focus on the resurgence of the manufacturing sector, driven by the government's "Make in India" initiative, leading to large investments and job opportunities, combined with the global export opportunity, would further bolster economic growth. These factors create a solid foundation for sustained economic expansion and corporate profitability, leading to continued domestic flows amidst the megatrend of financialisation of assets and return of FII flows.

Do you see FII selling, driven by the China factor, slowing down?

Over the past decade, FIIs have been reallocating funds away from China due to its slowing economy, despite attractive valuations, as structural reforms remained limited. India, on the other hand, with consistent policy support and a pro-growth stance became an FII favourite. However, recently, China has implemented significant fiscal stimulus, including targeted measures such as key policy rate cuts, increased debt funding for infrastructure, policy measures to revive the distressed real estate sector and possible tax adjustments aimed at economic stabilization.

Now with a fresh set of triggers, China offers lucrative valuations and improved growth prospects in the near term, while India temporarily deals with rich valuations amidst a slowing pace of earnings and economic expansion, deteriorating the short-term growth outlook. In this context, a reallocation from India to China in the short term is only logical given the growth and valuation mix of both markets. China is perceived to be more attractive amongst global investors due to the valuation differential, especially when India trades at a 2-3x premium vs China, amidst a moderation in the pace of economic growth and a slowdown in corporate earnings.

India remains expensive with structural triggers despite short-term challenges, while China is cheap with short-term triggers amidst structural challenges. This may trigger some near-term selling pressure in India as FIIs rebalance, India’s structural growth runway, backed by stable macroeconomic policy, remains a compelling draw for investors over the medium to long term.

Are you certain that growth is moderating in urban India?

Yes, recent data does show that inflationary pressures have impacted the middle class, whose incomes, despite growth, are not keeping pace as inflation erodes purchasing power. Additionally, the recent festive season, which typically sees robust spending across consumer categories like electronics, apparel, and household goods, saw a lukewarm response this year. Companies across sectors have reported subdued sales, indicating that urban demand has not rebounded as expected, even with discounts and promotions.

Do you see more tailwinds than headwinds for equity markets in Samvat 2081?

In Samvat 2081, India’s equity markets face a mix of growth opportunities and risks. Headwinds include a slowdown in economic growth, raising concerns about corporate earnings amid global and domestic challenges, along with high valuations in smaller caps that could lead to corrections if expectations aren't met. Delayed US rate cuts and rising US bond yields may drive foreign institutional investors (FIIs) to seek safer returns, prompting reallocations to markets like China, which has recently attracted global interest through fiscal stimulus. Additionally, geopolitical uncertainties and the upcoming US elections could increase volatility and impact capital flows to emerging markets.

On the other hand, tailwinds include resilience in India’s domestic economy, with sustained domestic institutional investor (DII) flows providing stability against FII outflows. There’s potential for an earnings revival driven by both private and government-led capital expenditure, supporting infrastructure and industrial growth. Strong consumption, especially in rural areas, could help offset pressures on urban demand. If inflation stabilizes and economic fundamentals improve, FIIs may return, drawn by India's long-term growth potential and strategic position in the global supply chain. Overall, while challenges exist, there are grounds for cautious optimism, balancing risks with growth opportunities.

Are PSU stocks still looking expensive even after the recent correction?

On a broader basis, PSU stock P/B (price to book value) multiple had gone ~75 percent higher than their historical average 5-year multiples. While the recent correction has been sharp, PSUs continue to trade at premiums to their historical averages by ~50 percent. Further analysis reveals that select PSU banks and energy stocks though off their historical PE (price to earnings) and PB lows, continue to still offer great value relative to the rest of the market, given longer-term earnings growth visibility. Yet, a cautious approach remains prudent in this pocket - focusing on PSUs with good earnings growth visibility, high dividend yields, and moderate valuations may be the best way to play this segment, rather than simply chasing perceived bargains across the sector.

Do you anticipate further delays in interest rate cuts from the RBI?

The RBI is signalling that premature rate cuts aren’t likely, given the inflation trajectory. With inflation hovering above the 4 percent comfort zone, any easing would hinge on achieving price stability as RBI remains unambiguously focussed on the endurable alignment of inflation with growth. The focus remains on sustainable growth without overheating, and rate cuts may only come into play in the latter half of 2025 if inflation shows a clear downward trend.

Do you think the growth rate may fall below 6.5 percent in FY25?

The growth forecast remains optimistic, though maintaining above 6.5 percent will depend on factors such as ongoing structural reforms and export resilience. While rural consumption shows signs of recovery, urban demand remains subdued. India’s growth trajectory is bolstered by a balanced rural-urban consumption mix, but further revitalization in urban demand will be essential to meet growth expectations and sustain momentum above the 6.5 percent threshold.

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