 "India's 'high' premium valuations can come with upsides: Market gurus")
India's premium valuations, relative to other emerging markets, are not only justified but can also present upsides, according to experts in a panel discussion with A K Bhattacharya, Business Standard, during India’s biggest banking, financial services, and insurance (BFSI) event on Thursday. Speaking at the Business Standard BFSI Insight Summit, Prashant Jain, founder and chief investment officer of 3P Investment Managers; Vikas Khemani, founder of Carnelian Asset Management; and Sunil Singhania, founder of Abakkus Asset Manager, shared insights into the Indian equity market's high valuations, growth prospects, and potential investment returns.
India's P/E multiples exceed other emerging markets: Prashant Jain
Prashant Jain highlighted that India’s price-to-earnings (P/E) multiples currently exceed long-term averages by 20-30 per cent, expanding the market premium over other emerging economies.
"India’s return on equity is meaningfully higher than other emerging markets. At the same time, there is limited room for P/E multiples, so that expectation has to be more moderate," Jain explained.
He attributed this rise to two key factors: a stronger economic growth outlook and a reduced cost of capital.
According to Jain, the next 5-10 years are expected to see slightly better growth prospects than the past decade, supported by increased offshoring of services, manufacturing expansion, and recent economic reforms. Additionally, the reduction in inflation over recent years has narrowed the yield gap between Indian and US 10-year bonds, reaching historically low levels.
“Given India’s consistently high return on equity (ROE) compared to other markets, the potential for further P/E expansion may be limited. The bulk of returns, therefore, should come from earnings growth,” Jain said, estimating corporate profit growth at an annualised rate of around 12 per cent.
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India's ROE among the best globally: Vikas Khemani
Vikas Khemani echoed Jain's perspective, suggesting that India stands out as a reliable long-term growth market. He explained that the valuations of asset classes, including equities, rely on three factors: yield (for equities, ROE), earnings growth, and the discount rate (used to calculate the present value of future earnings).
“India’s ROE, at around 15-16 per cent, is among the best globally. Even a conservative projection places earnings growth between 15 and 20 per cent,” Khemani said, reflecting the confidence that investors have in India’s sustained growth over the coming decades.
He added that India’s discount rate has also declined, driven by a lower risk-free rate—another factor in expanding equity valuations.
According to Khemani, a 2 per cent drop in this rate can increase equity valuations by 30-35 per cent. He emphasised that as India continues to implement structural reforms, corporate earnings and valuation premiums are likely to rise further.
“Over time, corporate profits as a percentage of GDP should continue to expand,” Khemani said, noting that India remains one of the few markets offering sustainable long-term growth.
What is good will be expensive: Sunil Singhania
Sunil Singhania remarked that the P/E ratio alone does not determine whether a market is expensive or attractive.
He stressed the importance of broader economic indicators, sharing a lesson from his career: “One of my biggest investment mistakes was avoiding stocks that seemed expensive in the short term, only to see them perform well over time... I think what is good will be expensive.”
Singhania pointed to India’s economic journey—from a virtually zero-dollar GDP at independence in 1947, to reaching $1 trillion in 2007, $2 trillion in 2014, and a projected $4 trillion by FY25—as evidence of its resilience and growth potential.
“I think at this point, India is at a good position in a world where nothing else is closer to good. To not invest because P/E is high does not make sense,” he said, advising investors to moderate their return expectations.
“The 30-40 per cent annual returns seen in past market phases are unlikely to persist indefinitely, but reasonable returns aligned with corporate profit growth should still make Indian equities an attractive option,” he added.
Singhania also commented on current economic conditions, noting the unique challenges of this election year, which has included an exceptionally hot summer and a prolonged monsoon season. The December quarter, he suggested, will be a clearer indicator of consumer-driven growth and whether spending patterns are shifting.