Sunil Tirumalai, EM Strategist at UBS Global Research, expects earnings of MSCI India companies to grow at a compounded annual growth rate of 10-12% in dollar terms over the next two years . He added that the Nifty 50's earnings growth is unlikely to be significantly different, although it could be a couple of percentage points higher because of differences in index composition.
He said, “India has derated. When I say derated, I am referring to the relative valuations. If we if we take September 2024, the previous big peak as the starting point, at that point the premium on our numbers, premium to emerging markets, was about 110%.
It's now down to about 65%. So that's a serious, de-rating that has happened.”He attributed part of this change to improving earnings growth prospects in other emerging markets, particularly South Korea and Taiwan, where a strong earnings upgrade cycle has gained momentum.
He added that despite the correction, Indian equities continue to trade at a premium to their emerging market peers. India's current valuation premium is nearly double the 30-40% level seen before the COVID-19 pandemic, indicating that while valuations have moderated considerably, the market is still not trading at a discount.
On investment opportunities in India, Tirumalai identified banking as one of the sectors that currently offers attractive valuations. He said, “Banks make a lot of sense to us. It is a sector which is probably one of the few which are at a big discount to their own history.
There has been a lot of corporate and managerial moves here and there, but if we assume that it's all settled, that's what our teams are also assuming them to be that these are settled, and we can now focus purely on fundamentals there is a lot of value, to be made in in the banking stocks.”Apart from banks, he sees opportunities in companies supplying the power and data center ecosystems, citing power shortage and opportunities in these areas.
He also pointed to select consumption companies with strong competitive advantages and clear growth visibility as potential investment opportunities. On whether a possible reduction in long-term capital gains tax could attract foreign investors back to Indian equities, Tirumalai said such a move could improve sentiment in the near term.
However, he cautioned against viewing a tax reduction as the main trigger for a sustained return of foreign money. He said foreign investors also look at the strength of underlying fundamentals, including earnings growth and relative market performance.
While India's earnings performance remains healthy, other emerging markets are also reporting improvements, making the investment decision more competitive. He added that current foreign fund flows appear to be influenced more by global liquidity conditions than company fundamentals.
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