After Dalal Street recovered from its April correction, equity benchmarks have rallied over 13 percent from their lows in just a few months. While many have flagged valuation concerns amid slowing earnings growth for India Inc., 3P Investment Managers’ Chief Investment Officer Prashant Jain remains an outlier.
Currently, the Nifty 50 is trading at 22x FY26 earnings, which is 29 percent higher than the 15-year average. However, in a newsletter to investors, Jain said the significantly above-average multiples should not worry long-term investors.
“Should long-term investors worry about these elevated multiples? In our opinion, no,” the newsletter noted.
A sustained decline in inflation, a sharply narrower current account deficit, and a reduced yield gap between Indian and US 10-year bonds have brought down the cost of capital meaningfully, Jain explained. “The consequent sharp fall in cost of capital is the key reason for our optimism about the markets over the medium to long term despite higher multiples.”
Jain also pointed out that the bond yield and earnings yield (BY-EY) gap remains low even at current valuations, which suggests that equity valuations are still reasonable when adjusted for interest rates.
That said, there isn’t much room left for further re-rating. Accordingly, long-term return expectations must be recalibrated. “Return expectations should therefore be reset to low double digits in line with nominal GDP growth over the long term,” the note concluded.
A key risk to 3P’s thesis is the possibility of a sudden, sharp rise in the cost of capital. While the likelihood of this is debatable, Jain believes the near-term impact of such a shift would be negative for markets globally. Instead, he said the focus should be on rising yields and high fiscal deficits in developed markets such as the US, Europe, and Japan.
India, however, may be more insulated due to its sharply lower CAD and waning dependence on foreign capital. According to the note, the domestic capital markets may not see a major or sustained impact. In such a scenario, though, valuations could reset, especially in overvalued pockets.
Taking a page from Charlie Munger’s playbook: “Invert, always invert” - Jain offered a counterview to his own thesis. While he believes that multiples may not expand much from here, he reminded readers that “no bull market in India has ended below a P/E of 25x. So why should this one?”
He also said that capital markets thrive on contradictions: “Each trade represents the coming together of diametrically opposite views on a stock at the same time for the same fundamentals and valuations.”
If cost of capital does rise, near-term returns may moderate, but long-term returns, driven by earnings growth, should still compound at low double-digit CAGRs. Alternatively, if markets rally further from here, we may see high near-term returns followed by a long period of tepid returns, still averaging out to low double-digit CAGRs.
“The destination is the same; the paths are different. Which path the markets take, that only time will tell,” Jain said.
In this kind of market, Jain believes the best strategy is to buy the dips and invest in phases. Even a modest correction of 3-5 percent can lift IRRs by 1-2 percentage points over the medium term.
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