Moneycontrol Pro Panorama | Can India’s premium valuations withstand economic uncertainty?

India still remains the fastest growing major economy, warranting premium valuations.

Dear Reader,

As foreign institutional investors pare their holdings and the US imposes punishing tariffs, the moot question is: Will India continue to trade at premium valuations? To some extent, it depends on the level of interest from local investors, which continues to remain strong.

Even otherwise, market experts are not unsettled by the recent turn of events. Even in today’s uncertain times, India still remains the fastest growing major economy, warranting premium valuations, argues Ananya Roy in her column. As the government takes steps to mitigate the impact of US tariffs, exports are expected to recover eventually.

Experts at HSBC point to low penetration of discretionary products and scope for sustained long-term growth for companies in the consumer sectors. This growth potential provides earnings certainty and adds heft to valuations.

Notably, return ratios of Indian companies are higher than those of major countries across the globe. “This is true across sectors like automobiles, consumer staples, insurance, hospitals and even banks,” add analysts at HSBC. Automobile companies are seen to have benefited from relatively lower re-investment rates or capital expenditure, working capital till now. Distribution strength and pricing power helps companies in the consumer sector.

Some of these competitive advantages can lose strength as industry dynamics undergoes changes – competition, rise in capex, change in consumer preferences. Still, the case for India’s premium valuations remains strong.

Even so, one should not underestimate the current slowdown in corporate earnings and near-term risks to exports. The recent exits by foreign institutional investors is largely attributed to soft corporate earnings.

Analysts continue to pare down earnings estimates of companies. At the aggregate level, Nifty 50 index is expected to see subdued earnings growth for the second consecutive year in FY26. While analysts remain wary of the current uncertain global environment, improvement in corporate earnings remains vital to stocks.

Hopes are pinned on goods and services tax (GST) reforms, lower inflation and monetary policy easing by the Reserve Bank of India, and growth stimulus measures by the government. “We believe that discretionary consumption is likely to be the bigger beneficiary of the tax cut, which includes automobiles and consumer durables. In the near term, demand could come under pressure as consumers delay purchases,” said Nirmal Bang Institutional Equities in a note.

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R Sree Ram
Moneycontrol Pro