ETMarkets Smart Talk | India’s diverse earnings story could bring FIIs back: Bandhan Life’s Avinash Agarwal

India’s equity markets are showing signs of renewed resilience, with improving earnings, strong domestic liquidity and a cooling global AI trade creating a more favourable backdrop for investors.

While foreign institutional investors (FIIs) have remained net sellers over the past two years amid India’s premium valuations and an earnings slowdown, Avinash Agarwal, Senior Vice President & Head – Equity at Bandhan Life, believes the tide could turn as India offers a diverse pool of large companies with consistent growth and greater earnings visibility.

He expects India to retain its valuation premium over emerging-market peers, while seeing opportunities in large private banks, select consumption stocks and pockets of the mid- and small-cap space. Edited Excerpts –

Q) Thanks for taking the time out. The market is showing signs of stablisation after posting over 1% back-to-back returns in the June & July. How are you reading markets?

A) The Indian equity markets have been resilient after a strong move at the beginning of this financial year. This positive momentum persists despite geopolitical tensions in the Middle East and subsequent oil price volatility.

The AI story has cooled off globally, which has helped India, as India is seen as a net AI loser. In the last 18-24 months, India underperformed due to the AI theme doing well globally.

Also, the Q1 results have been better than expectations so far. With improving earnings growth, India has become a more attractive market.

Q) Most of the June quarter results are out. What do you make of Q1 numbers and management commentary?

A) On an average the results have been better than expectations, with management commentaries suggesting that the positive momentum should continue.

There was an expectation of margins being under pressure due to inflation as crude prices and several other input costs had gone up due to the war in West Asia.

However, we have seen good volume growth with margins largely maintained. Also, we have not seen any major impact on credit quality due to the war in West Asia. This provides us with a good base, and we expect the growth to continue going forward.

Q) Private sector capex announcements have remained subdued over the past 12–18 months. If this investment cycle continues to be delayed, could it push back the expected earnings growth for India Inc.? What are your views on the outlook for private capex and its impact on corporate earnings?

A) While private capex did slow down for the last one year due to tariff-related uncertainties, war in the Middle East and a spike in oil prices, we feel it’s a blip rather than a structural slowdown.

As per RBI data, the capacity utilisation in the system is at 77%. Usually, we see ordering start when the utilisation crosses 75%. Also, credit growth is picking up in the system, the balance sheets of the corporates are healthy, and the cash flow generation is strong. Therefore, we believe that the capex spends will pick up soon.

Q) FIIs inflows have remained largely positive so far in August – can we say that the smart money is slowly moving back to India?

A) FIIs have largely been sellers in India in the last two years. This was driven by high valuations in India relative to other peers globally in FY25, earnings slowdown in India, and a pickup in earnings growth in peer countries due to AI theme.

Now there are some questions being asked on the AI theme, given the large capex spends by players globally. Large companies that were generating significant cash flows are having to raise equity and debt to fund their AI capex.

This has made a section of investors cautious on the theme. India, on the other hand, offers FIIs a diverse set of large companies that are growing at a consistent rate and where the visibility of earnings is not based on any particular theme.

India offers them one of the highest numbers of companies that have over USD 10 billion of market capitalisation. This makes India a long-term story, and we feel that structurally it is one of the most important markets for the FIIs.

Q) After the recent correction seen in 1H2026. Has the premium corrected? If not, can India continue to command premium valuations compared to other emerging markets?

A) India should continue to command premium valuation relative to peers given our strong long-term growth visibility, the diverse nature of companies, strong positioning in some industries, and improving position in other industries.

Furthermore, we are experiencing robust demand growth within our domestic markets, which provides us with strong insulation against global market fluctuations.

Q) Are there pockets of froth in the market that investors should avoid?

A) At most times we will find some segments of the markets that are expensive. While there are some segments of the market that are expensive today, it would be wrong to call them frothy.

Moreover, the flattish markets in the last two years have removed the froth that was there in some pockets earlier. While the markets cannot be called cheap, we feel they are not frothy either.

There are pockets of opportunity across the markets which can be best captured by an investor through a multi-cap fund where they can benefit from large-cap strength and the growth and agility of mid- and small caps.

Q) Which sectors still offer reasonable valuations despite the market rally?

A) We feel that large banks and select consumption names offer reasonable valuations right now. Large private sector banks have underperformed the markets and have come to reasonable valuations while the credit growth is also picking up.

Some of these sectors had high FII holding and thus got impacted by their outflows. Also, we find some select stocks in mid and small caps to be reasonably valued given their growth prospects.

Q) How are you reading into new IPOs which have started to hit D-Street after few months of pause?

A) We expect the primary market to be quite active in the near future, barring any major global event. Liquidity has been strong, with domestic funds receiving good inflows consistently.

The FII flows are also turning positive now, and hence, there is sufficient liquidity in the markets to absorb primary issues. We are also expecting some large IPOs to hit the market, which will absorb some of this liquidity.

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