Indian markets about 10% overvalued, limited upside for further re-rating: Prashant Jain of 3P Investment Managers

Prashant Jain, founder and CIO of 3P Investment Managers

Indian markets are may be around 10 percent overvalued with limited room for multiples to re-rate further, said Prashant Jain, founder and chief investment officer at 3P Investment Managers in a conversation with Moneycontrol.

"Over the time, market returns should be equal to earnings growth rate of 12-13 percent CAGR as India is currently a lower inflation country and there is little scope for margins to improve in any sector," Jain said.

Jain also said that Indian valuations are roughly 15-25 percent above their 10-15 year averages. But, India deserves a premium due to its growth potential and significantly lower cost of capital, he added. Another reason is that India's volatility has also come down due to strong domestic inflows, which supports the country's higher valuation multiples.

Watch full interview here

From a near-term perspective, growth in largecaps could be around 12 percent CAGR but it will be quite low in small- and mid-caps as they are relatively weaker companies when compared to the larger counterparts in the same sectors, he said.

On Nifty outlook

Downside in Nifty appears limited as it has not outperformed the economic growth. And key sectors within the Nifty, like banks, are still attractively valued and have already adjusted to current growth expectations.

Nifty components, including large banks, software, consumer goods, pharma, and auto companies, have seen minimal equity dilution, unlike sectors outside the Nifty, said Jain. So, the limited supply in Nifty stocks, paired with strong domestic mutual fund inflows, could support the Nifty’s valuation levels and help returns catch up with the broader market.

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