ETMarkets Smart Talk | India could start looking attractive on FY28 earnings in six months: Nitin Raheja, Julius Baer India

Indian equities may be trading at a premium to most emerging markets, but improving corporate earnings could gradually change the valuation narrative.

While the Nifty 50 is currently trading around its long-term historical averages, sustained earnings growth and continued domestic inflows could make the market increasingly attractive from a forward-looking perspective.

Nitin Raheja, Head – Discretionary Mandates at Julius Baer India, believes the correction witnessed over the past two years has largely been a “time correction” rather than a sharp price correction, supported by resilient domestic mutual fund flows.


If earnings continue to outperform expectations, valuations could begin to look attractive on FY28 earnings over the next six months, he says.

In an interview with Kshitij Anand of ETMarkets, Raheja also discusses whether Q1 earnings growth has been genuinely broad-based, the sustainability of domestic flows, the return of foreign investors, risks from elevated US bond yields and crude prices, and why the current market remains a bottom-up stock-picker's market rather than a broad-based bull run. Edited Excerpts –

Q) Thanks for taking the time. Most experts say valuations and earnings offer a reasonable starting point. But India is still trading at a premium to most emerging markets. What exactly is “reasonable” here—and what would make you admit that Indian equities are still expensive?

A) When we look at the Indian markets on a 10-year average basis, particularly the Nifty 50 stocks, we see that valuations are currently in line with their long-term averages. In fact, on a five-year basis, the Nifty 50 is trading below its average. Further, the Nifty Next 50 Index is now trading below its 10-year average.

Hence, from the perspective of historical valuation multiples, the market can be considered to be reasonably valued and broadly in line with its averages.

However, on a relative basis, India continues to trade at a premium to most emerging markets (EMs). This is because the supernormal growth witnessed in emerging markets, led by Korea & Taiwan, has made these markets appear cheaper relative to India.

Any slowdown in earnings growth in India would make the market look expensive. Therefore, earnings remain the key variable when assigning multiples.

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Q) If earnings are genuinely improving, why haven't valuations corrected more aggressively? Are investors already pricing in the recovery?

A) When we entered Q1, earnings expectations were muted, with the broader expectation being that earnings would be downgraded. However, the strong resilience of the economy was reflected in earnings, which surprised the markets positively.

If this trend of outperformance continues, earnings could see upgrades, which in turn could make market valuations look cheaper.

The correction we have seen in the markets over the last two years has been more of a time correction rather than a price correction. This has been primarily driven by strong inflows into the domestic markets from retail investors through mutual funds.

That being said, we are approaching a stage where, if the positive trend in earnings and domestic flows continues, markets could start looking attractive on FY 2028 earnings six months from now.

Q) What is the biggest assumption embedded in today's market valuations that you think investors are taking for granted?

A) The last two years have seen equities deliver flat to subpar returns as an asset class. Despite this, investors have continued to invest in mutual funds on the assumption that equities, which have historically outperformed, will eventually come back and deliver historical-type returns.

In our view, the biggest assumption investors are factoring in is that current equity returns will catch up with long-term equity returns. For that to happen, earnings growth will need to remain strong and broadly in line with long-term historical growth rates.

Q) Everyone is calling Q1 earnings encouraging. But how much of that growth is actually broad-based, and how much is being driven by a handful of sectors or companies?

A) Q1 earnings have actually pleasantly surprised everyone. When we look at the earnings of the BSE 500 stocks, excluding PSU OMCs, we see overall growth of 23%. Within this, large caps and mid caps grew 23%, while small caps delivered a strong 28% growth.

So clearly, the earnings growth has been quite broad-based.

Q) DIIs have been relentless buyers. But are domestic flows actually reflecting investor conviction, or are SIPs simply creating an automatic bid regardless of valuations?

A) I believe the markets saw an inflection point post-COVID-19. The lockdown led to the entry of a whole new cohort of investors into the markets, as equities became one of the most easily accessible investment avenues.

Anyone who put money to work as an investor during 2020-22 has seen good appreciation in their portfolio and, hence, I believe, has become convinced about equity as an asset class.

With the tax advantage that equity provides, even if equities deliver debt-type returns, the post-tax returns still look better.

I believe we have seen equity emerge as a more widely accepted asset class. Mutual funds have also contributed by consistently reinforcing the message that equities are a superior asset class over the longer term.

Hence, while these flows might fluctuate up and down in the short term, I believe they are more structural in nature over the longer term.

Q) We are seeing early signs of FII buying. But, can we call this as a turnaround after just a couple of months of modest flows?

A) According to us, while FII buying has turned around, it is still too early to say whether the trend has changed completely. However, with valuations correcting gradually and economic fundamentals improving, we do believe that FPI interest in India could revive.

Also, as time passes and earnings improve, the overvaluation gap between India and emerging markets is gradually reducing. This could act as a trigger for more sustainable FPI inflows.

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Q) If US bond yields remain elevated, crude moves higher and the rupee weakens simultaneously, does the current bullish thesis break?

A) All three factors together could most definitely act as dampeners if they continue to persist. That said, I wouldn’t say we are in any sort of a bull market yet.

We may continue to trade in a range even in the near future, as we have seen over the past two years. For us to break out of this time-correction range, earnings need to continue showing a robust trend.

This should bring valuations to a level where the markets become sufficiently attractive for investors to increase flows simply because of the attractive valuations.

Q) Large-, mid- and small-caps have all performed well. But isn't that exactly what makes you nervous? Where are valuations most disconnected from fundamentals?

A) On the contrary, the performance across large-, mid- and small-caps has actually been quite uneven. If you look at the Nifty 100 large-cap index, 42 stocks, accounting for 46% of the index's capitalisation, have underperformed the Nifty 100 index. This means that the returns have been pretty unevenly distributed across the index.

Similarly, in the Midcap 150 index, 97 stocks, accounting for 54% of the index's market capitalisation, have underperformed the index itself. So, even here, the performance is fairly unevenly divided in terms of market capitalization with almost two-thirds of the stocks having underperformed.

The reason the markets continue to look positive is that they have also provided opportunities to make money. Hence, this is essentially a bottom-up stock-pickers' market. In the absence of a clear direction in the broader markets, it is still possible to generate returns by identifying stocks that are delivering strong earnings growth.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)