The Valuation Illusion - Time for Indian Markets to Get Real

The Indian equity markets, after brushing against fresh highs, appear to be losing momentum once again. This despite encouraging macroeconomic signals - consumer inflation at a 6.5-year low and a steady unemployment rate for June. Yet, as we trace the market’s journey from the April lows, the mood seems far from gloomy. Is this resilience warranted, or are we merely ignoring the red flags in our pursuit of perpetual returns?[EasyDNNnews:PaidContentStart]

In recent months, valuations have continued to surge and currently Indian equities are still among the priciest globally, with a PE ratio of 23.3 times, exceeding historical averages even as earnings growth across sectors has started to taper. While most companies are yet to report their quarterly numbers, early disclosures from index heavyweights suggest all is not well. Two major sectors - IT and Oil & Gas - have fallen short of expectations, with Reliance Industries playing a significant role in this underperformance. Meanwhile, marquee consumer-facing companies, once lauded for brand strength and distribution muscle, are now grappling with declining brand equity, intensifying competition, and sluggish revenue growth. Yet, many of these names continue to command lofty P/E multiples - some north of 50.

This disconnect raises an uncomfortable question: If growth is slowing and margins are under pressure, can such premium valuations still be justified? The answer lies not just in fundamentals, but in investor psychology. Post-Covid gains have cultivated a belief among retail investors that equities will deliver - no matter the price. Record-breaking SIP flows into mutual funds reflect this sentiment. But not all inflows are grounded in reason. Much of what we see is momentum cloaked as confidence. Let’s also not forget, markets don’t rise on inflows alone. Every buyer needs a seller. What truly drives prices is expectation - and increasingly, those expectations seem divorced from economic reality. Midcaps, smallcaps, and thematic bets like defence and quick commerce are enjoying frenzied buying, even as private capex stagnates and government infrastructure spends begin to plateau.

To be clear, growth isn’t absent. Segments like healthcare services, premium consumption, and electronics manufacturing show promise. Banks and NBFCs, supported by stable ROEs and reasonable valuations, also remain fundamentally strong. The latest results from India’s top two private lenders reinforce this view. But applying a blanket optimism across the board is a flawed strategy. Handing out 50x P/Es to companies growing at 2-3 per cent isn’t optimism - it’s denial. Structural risks remain. India’s job creation engine hasn’t fired at the required pace, and private investment appetite remains subdued. Traditional capex-heavy sectors, once led by bold entrepreneurs, are now marked by hesitation and caution. If growth continues to moderate and earnings fail to rebound, the current rally may run out of steam.

It’s time to recalibrate. The investing playbook is changing. Brand loyalty, pricing power, and traditional moats are eroding across sectors. Long-term investing today demands agility, discernment, and an honest view of fundamentals. Markets may run on narratives in the short term, but in the long term, they bow to mathematics - and math doesn’t lie.

This month’s cover story takes a closer look at the IT sector - where legacy giants have underwhelmed, but the broader industry is undergoing a generational shift. We decode what this means for investors and how to approach the sector with a fresh lens. We also bring you an early pulse check on June quarter earnings and what they reveal about corporate India’s trajectory. We hope this edition helps sharpen your investment thinking and guides you towards more profitable decisions.

RAJESH V PADODE
Managing Director & Editor

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