Indian equities not in ‘bubble zone’ as earnings catch up, says Kotak's Shripal Shah

According to Shripal Shah, the market’s time-and-price correction through 2024 has helped normalise valuations. He pointed out that the indices spent several months in a tight range and absorbed the earlier run-up. “The setup is more balanced now,” he said.

Indian equities are not in overvalued territory, said Shripal Shah, Kotak Securities managing director and chief executive, at the company’s 2026 market outlook confetence on Wednesday.

“Valuations are becoming reasonable and earnings are catching up. This is not a bubble zone,” Shah said, adding that the gap between index levels and fundamentals has narrowed over the last few quarters.

According to Shah, the market’s time-and-price correction through 2024 has helped normalise valuations. He pointed out that the indices spent several months in a tight range and absorbed the earlier run-up. “The setup is more balanced now,” he said.

Kotak Securities expects a sharper earnings recovery in FY26 after six quarters of subdued growth. Its internal estimates peg FY26 earnings growth at around 17 percent, supported by lower inflation and a pick-up in domestic demand.

The brokerage has projected FY27 Nifty EPS at Rs 1,372, forming the basis of its index-level assumptions for the year.

Shah’s comments come at a time when sections of the market have raised concerns over stretched valuations in mid- and small-cap segments. While acknowledging the outperformance in broader indices, he said the earnings trajectory will be the more important driver through 2025. “If earnings deliver as expected, valuations will adjust accordingly,” he said.

The brokerage has retained a constructive view on the Nifty, with a base-case return profile of around 12 percent for 2025. This is built on the assumption that earnings growth will stabilise and broaden across sectors from the second half of the year.

Further, it’s projections factor in a pickup in corporate profitability after an extended period of single-digit earnings prints. The firm expects stronger traction in domestic-facing sectors, led by financials, select consumer categories, and parts of industrials, while export-linked segments may continue to face uneven demand conditions.

Shah noted that several macro indicators entering 2025 are more supportive than a year ago, including lower inflation prints and a gradual recovery in consumption. “The expectation is that earnings, not valuations, will drive most of the index performance,” he said.

Where the optimism narrative gets stretched is the bull case: Kotak assigns a 21x multiple, a 5% premium to historical valuations, arriving at 28,800 for December 2025. This scenario implicitly assumes that earnings accelerate without any derating despite geopolitical risk, two straight years of weak export prints, and still-rich forward valuations.

The bear case, however, is far closer to where markets traded during October–November: at a 17x multiple, the Nifty’s bear-case fair value is 23,300 — levels that the index had briefly tested just weeks ago during the 11% drawdown from September’s peak.

Their market outlook report acknowledges that (1) FY25 earnings growth drops to just 4.9 percent, (2) profit pools are dragged by OMCs normalising, and (3) rural demand has slowed again after a short-lived Q1 revival. At 23,350 (as of November 27), the Nifty already trades at 23.4x FY25E and 20.1x FY26E, leaving little margin for disappointment.