Indian Stock Market In Focus: Indian equities have corrected after months of volatility and foreign selling, but India still trades at a clear premium to most emerging markets. At the same time, renewed momentum in US technology and AI stocks has raised questions about valuations, AI spending and the implications for Indian IT.
Dheeraj Gaur, Chief Investment Strategy Officer at Choice Wealth, in an exclusive email interview with NDTV Profit, says the correction has improved the risk-reward equation, particularly in large caps, but believes future returns will need to come from earnings growth rather than valuations expanding again.
He also sees the possibility that a correction in the US AI trade could ease concerns around AI-led disruption for Indian IT and redirect global allocations towards broader markets such as India. Edited Excerpts:
Q: After the recent volatility, how do you assess Indian equity valuations relative to other major emerging markets and developed-market peers? Has the correction meaningfully improved the risk-reward equation, or does India still command a premium that needs to be justified by earnings growth?
Dheeraj Gaur: Indian equities have corrected, but India still trades at a clear premium to most emerging markets. After months of FPI selling and volatility, valuations have cooled.
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The Nifty now trades at about 17.5 times one-year forward earnings, below its 15-year average of around 19.6 times. India's premium over other emerging markets has also narrowed to a 10-year low. So, the market is certainly cheaper than it was.
However, “cheaper” does not mean “cheap.” Compared with its peers, India remains one of the most expensive emerging markets. In simple terms, investors are still paying more for every rupee of Indian earnings than for the average emerging market.
But is this premium justified? Absolutely! India offers what few markets can: strong growth and earnings visibility. GDP grew 7.8% in the April-June quarter, and Q1 FY27 corporate profits grew 17% excluding oil and gas.
Having said that, the premium has to be earned every quarter. If earnings slow, the premium can shrink.
Our view is that the correction has improved the risk-reward, especially in large caps. Future returns will come from earnings growth, not so much from valuations expanding again.
Investors should use market dips to build positions gradually in quality large caps and stay selective in small caps, where valuations still run ahead of fundamentals. However, the strong MF retail inflows into mid- and small-caps are likely to keep valuations ahead of fundamentals for some more time.
Q: US technology and AI-linked stocks have regained momentum, with investors again focusing on AI-led earnings and infrastructure spending. How do you assess current valuations in the US tech/AI space, and what could a sharper correction there mean for Indian equities, particularly IT and other technology-linked stocks?
US technology is in a phase where the fundamentals are real but expectations are very full. The Nasdaq rose to 27,244.28 on September 22, its first record close since June, led by AI names. The spending behind this is unprecedented.
The five largest US cloud providers are on track to spend $650-$690 billion on capex in 2026, close to double the previous year.
My concern is the financing and the return on that spending. AI capex has gone from 33% of hyperscalers' operating cash flow in 2023 to an estimated 93% in 2026. When capex absorbs almost all internal cash, any disappointment in monetisation can trigger a sharp de-rating.
That risk is higher in a rising-rate environment, now that the Fed has lifted its policy rate to a 3.75%-4.00% range.
The medium-term picture could be quite different. Indian IT has been the “non-AI trade” of 2026 (“anti-AI trade” would be a much stronger word at this time!). The sector has lost around 24% year-to-date as investors feared AI would outsource revenue.
More broadly, capital had been draining out of Asia and into the US AI boom. A correction that cools AI euphoria could reverse both trends, easing disruption fears and redirecting global allocations toward consumption-led broader markets like India.
We saw a preview on September 15, when the Nifty IT index surged 4.02% after leading AI executives called for a slower pace of development.
Indian IT valuations have already reset significantly and a depreciating rupee supports margins. The swing factors are US discretionary tech spending and how fast Indian firms convert AI into billable services.
We prefer companies with visible AI-led deal wins and differentiated mid-tier players.
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