Indian Markets Still Way Cheaper Than Japan's 1989 Valuation Peak, Says Vikas Khemani

India stocks are not as expensive as they seem, according to Vikas Khemani, founder of Carnelian Asset Management. He encouraged investors to continue their investments in Indian equities, stressing that the long-term prospects remain promising.

Khemani's comments came as the benchmark equity indices surged to record highs on Monday after exit polls showed return of the incumbent government for a third term, indicating policy continuity.

"From a long-term asset allocation perspective, I don’t think Indian markets are expensive, and investors should continue to remain invested in Indian equities," Khemani told NDTV Profit in an interaction.

Khemani draws a comparison to the bull run in Japan that peaked in 1989, when the market's price-to-earnings ratio was 60 times, and Japan held 40% of the global market capitalisation. At present, India's equity benchmark NSE Nifty 50 is trading at a PE ratio of 22.7.

In contrast, India's PE ratio was 17 in 2008, the year of the Lehman crisis, indicating higher valuations compared to the US, where the PE ratio was 14. This disparity suggests that investors had priced Indian companies more optimistically, reflecting expectations of higher growth potential in the Indian market.

Khemani underscored that India is entering one of the best wealth-creation cycles for the next 10 to 20 years. "For anybody to lose government, you have to mess up very significantly or your opposition has to present a very significant value proposition," he explains, predicting continuity in governance and sustained economic growth.

He acknowledges the short-term market fluctuations due to sentiment and news but emphasises the importance of focusing on the long-term economic direction. "The Indian economic miracle continues on its journey with strong earnings cycles and liquidity support."

On the sectors poised for growth, Khemani identifies five broad buckets: banking, financial services, manufacturing, services, consumption, and infrastructure. Each of these sectors, he said, offered substantial opportunities, with new segments and sub-segments emerging as the economy transforms.

Khemani also pointed out that mid and small-cap stocks tend to outperform during transformative economic phases due to their lower base effect. “We are seeing many mid and small caps growing fast, becoming the future large caps," he notes, pointing out that this trend would continue as new industries and sectors expand.

Amid concerns, Khemani explained that the perceived high valuations of Indian markets are justified by factors like yield, growth in earnings and discounting rates.

"India's yield is one of the best in the world, and earnings growth is robust," he said. With risk premiums coming down and a strong economic outlook, he argues that the Indian markets could sustain and even increase their current valuations.

Disclaimer: The views and opinions expressed by the investment advisers on NDTV Profit are of their own and not of NDTV Profit. NDTV Profit advises users to consult with their own financial or investment adviser before taking any investment decision.