Nearly 50% of market cap is at reasonable valuation: DSP MFs Sahil Kapoor

After nearly two years of maintaining a cautious stance, DSP Mutual Fund has turned constructive on equities as valuations across segments, especially large caps, have corrected meaningfully, according to Sahil Kapoor, Head of Products and Market Strategist as DSP Mutual Fund.

In conversation with Moneycontrol, Kapoor explained that the earlier caution was driven by elevated valuations, with small- and mid-cap stocks trading above 40 times earnings and peaking at around 46x. Large-cap benchmarks were also expensive, with the Nifty trading in the 22–24x range. That environment, he noted, offered limited margin of safety. Now, the fund house is giving a call to "buy stocks".

Opportunities across the market

Kapoor explained that valuations have now eased with the Nifty closer to around 19x, even as earnings remain subdued and expectations are muted. This combination of lower valuations and weak sentiment, he said, creates a more favourable entry point for investors.

“What gives comfort is that a large part of the market is now trading below long-term average valuations,” Kapoor said, adding that nearly half of India’s market capitalisation offers reasonable pricing. Sectors such as banking and financial services, IT, insurance, FMCG, chemicals and parts of the energy space are seeing pockets of value.

The fund house is therefore increasing its allocation in equities, with a clear preference for large caps. Kapoor explained that this is not a macro-driven call but a valuation-driven one. “We don’t know how the future will unfold, but we can control the price at which we buy,” he said.

The fund house’s strategy, he said, is to increase equity allocation by reallocating from cash and short-term instruments, while maintaining exposure to long-term bonds to preserve diversification.

Finding opportunities

Explaining how one can approach the opportunities, Kapoor gave the example of banking stocks. He explained that large private banks generate about 2% return on assets and operate with leverage of 7–8x, translating into potential return on equity of 15–17%. Even assuming a more conservative 14–15% return on equity, and with stocks currently trading at around or below 2x book value (near multi-year lows) investors can expect stock prices to broadly track underlying book value growth, even without any re-rating.

Still time for gold?

While gold and silver have corrected from earlier elevated levels, they are not yet compelling enough for aggressive buying. Investors may consider maintaining a strategic allocation but should wait for more attractive entry points before increasing exposure, he noted.

Kapoor also pointed to the Indian rupee’s undervaluation based on real effective exchange rate measures, suggesting that both currency and equity valuations are becoming attractive for foreign investors. This could support flows into Indian markets over time. In fixed income, long-duration bonds remain attractive due to favourable yields and a significant term premium.

On risks

He acknowledged that concerns around oil prices and geopolitics remain elevated. However, he noted that such uncertainties are largely unpredictable and already reflected in current market prices. “Stocks become cheap when fear is high. When prices are low, the actual risk of owning equities is lower,” he said.

A sharp and sustained spike in oil could negatively impact markets, he added while corporate earnings are expected to remain soft in the near term. However, he believes that much of this downside is already priced in.

On how to approach volatility in oil prices, Kapoor said investors should be guided by data. He noted that in past cycles like 2008 and 2022, it “just stayed there for about 4–5 months and then declined,” unlike in the past. He said the current situation is different, calling it “a supply chain, not supply” issue. While it may take time for adjustments, he pointed out that prices have not reached the extremes seen in earlier shocks. More importantly, he highlighted how markets respond ahead of reality. “If the market gets even a whiff of resolution, it will price it in. It will not wait for actual numbers to flow in. It will just price it in and forget about it. Although the on-ground trouble will continue to get resolved over months, the market will not care about it,” he said.

Drawing a parallel with the pandemic, he added, “If you go back to COVID, the market bottomed out in March 2020. And all of us were not even clear even one year after that, whether this is going away or not.” He said this reflects how “the ground reality and how market prices are in are two very different things,” adding that this is how investors should think about the current crisis.

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