Indian equities are unlikely to see a significant valuation re-rating in the near term, with Kotak AMC Managing Director Nilesh Shah cautioning investors against expecting multiple expansion even as corporate earnings continue to grow. He also sounded cautious on mid- and small-cap stocks, where earnings growth expectations are already reflected in prices.
“Undoubtedly, we have seen PE de-rating of India. Earnings have come, markets have fallen, PE has been depressed,” Shah said in an interview with NDTV Profit. However, he pointed out that Indian equities continue to trade at a premium to several emerging and developed markets.
“From this level, with rising interest rates globally, we do not expect PEs to be re-rated. In that scenario, earnings growth will deliver shareholder return,” Shah said.
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He expects high-single-digit to low-double-digit earnings growth in large caps to broadly translate into investor returns, while double-digit earnings growth could support similar returns in the mid- and small-cap segment.
However, he cautioned that investors should not assume such growth will automatically lead to outsized returns. “I will still caution on mid and small cap because this earnings growth is factored into market prices. It's not something which will be a surprise to the market,” he said.
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Shah described the current market structure as one where aggressive supply is meeting subdued demand. Relentless FPI selling, IPOs, OFS and QIPs have increased the supply of equities, while investors remain cautious amid US interest rates, oil prices and geopolitical uncertainty.
“Whenever supply is aggressive and more compared to demand, prices are likely to remain subdued,” Shah said. He noted a sharp divergence between segments, with large caps seeing significant correction while mid- and small-caps have remained relatively resilient.
On foreign capital flows, Shah said India should not interpret FPI outflows as a sign of weakness in the country's ability to attract global capital. India received almost $100 billion of FDI on a gross basis in FY26, he said, adding that investors are free to book profits and take money out.
“We are not like China, which can put artificial barriers. We are a free market. People can come in, people can go out,” Shah said.
Despite the challenging backdrop, Shah believes Indian businesses are better equipped to navigate the environment, with improved infrastructure, availability of capital, prudent regulation and a growing talent ecosystem.
On AI, he said Indian IT companies must move quickly to capture the opportunity. “We have to learn faster than other countries, and we should take the lead in implementing the same around the world,” he said.
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