ETMarkets Smart Talk | Nifty at 20.5x is not expensive; smallcaps are where valuations worry us: Pradeep Gupta

Indian equities may still command a premium over most emerging markets, but the debate around valuations needs to go beyond a simple price-to-earnings comparison, according to Pradeep Gupta, Chairman & MD of Anand Rathi Share and Stock Brokers Limited.

With the Nifty trading at around 20.5 times earnings — nearly 12% below its 10-year average — Gupta argues that the broader market is not expensive, especially at a time when corporate earnings are accelerating and upgrades are outpacing downgrades.

However, he sees a clear divergence across market-cap segments, with mid- and small-cap stocks trading at significant premiums to largecaps and pricing in sustained high earnings growth.


In an interaction with Kshitij Anand for the ETMarkets Smart Talk segment, Gupta discusses why India's valuation premium over emerging markets (EMs) may be overstated, whether the recent improvement in earnings could trigger a market re-rating, the growing resilience of domestic institutional flows amid FII selling, and why largecaps currently offer greater valuation comfort than smallcaps. Edited Excerpts –

Q) 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) Every conversation about Indian equities eventually lands on the same complaint: valuations are too high. It's worth asking what that actually means, because the number everyone reaches for — a raw PE comparison against other emerging markets — flatters the argument and ignores the business.

India's listed universe carries structurally higher return ratios than most EM peers. RoE has moved from roughly 7% in FY20 to 14–15% by FY24-25. The index is tilted towards financials, consumption and technology — sectors that command higher multiples everywhere in the world — and free float is lower than most EM peers because of high promoter holding. Comparing PE-to-PE without adjusting for any of that overstates the gap. On price-to-book
and EV/EBITDA, the premium over Korea, Taiwan or China looks very different.

More to the point: the premium has already compressed hard since October 2024. At various points this year, India has actually traded at a discount to some peers. The Nifty's own PE today, at about 20.5x, sits roughly 12% below its ten-year average of 23x. That's not the profile of an expensive market. What would change that view is simple — a stretch where multiples re-rate higher even as earnings disappoint, growth and profitability offering no cover for the re-rating. Right now we have the opposite: earnings accelerating, multiples still below history.

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

A) If earnings are genuinely improving, the obvious question is why valuations haven't re-rated to reflect it. Flip that around: valuations have actually corrected, and meaningfully. Nifty's forward and trailing PE both trade at a 10–12% discount to their five- and ten-year averages, even as earnings growth has been running in the teens.

What makes this unusual is timing. That discount has persisted through two straight quarters — March and June 2026 — where earnings beat expectations, the upgrade-to-downgrade ratio turned strongly positive at about 1.5x, and growth broadened across sectors instead of narrowing.

Nifty adjusted PAT grew 18% year-on-year in June, the fastest pace in ten quarters. So the market isn't pricing in a recovery — if anything, it's still discounting for risks (bond yields, oil, currency, geopolitics) that haven't materially worsened, while underweighting two quarters of real delivery.

My own read is that this catches up: a re-rating toward historical averages, even without a fresh earnings surprise, would itself be a meaningful source of returns from here.

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

A) A market sitting 10–12% below its long-term PE is pricing in more bad news than good. Unpack that, and investors seem to be underwriting a lot of pessimism at once: that the global AI rally runs forever and India, IT services especially — stays a structural loser from it; that the last two quarters of earnings beats were a blip, not a trend; that crude and global yields stay elevated indefinitely; that geopolitical risk doesn't ease; and, more fundamentally, that India doesn't deserve a valuation premium at all, despite being the best-performing large equity market globally over two decades.

Some of those assumptions are already being tested — oil fell nearly 9% in a single week in August as West Asia tensions eased.

The mirror image sits in mid- and small-caps, where the opposite assumption is baked in: that above-20% earnings growth continues indefinitely and justifies a 50–70% premium over large caps. Small- and midcap indices trade at roughly 34x and 30x earnings against the Nifty's 20x.

Read more: Coinbase's India return: How a bespoke rupee on-ramp changes the game for foreign exchanges

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) In the June quarter, small-cap earnings growth actually outpaced mid-cap, which outpaced large-cap. Strip out oil marketing and refining — where a 29% revenue increase still produced a 51% profit decline because of squeezed marketing margins — and the picture sharpens: Nifty ex-oil earnings grew about 11%, NSE500 around 21%, midcaps 36%, small caps 42%.

Nineteen sectors beat expectations, roughly half the companies beat PAT estimates, and the upgrade-to-downgrade ratio moved to 1.5x.

So it's closer to the reverse of the usual framing — a handful of companies concentrated in oil marketing are the drag holding back even stronger headline numbers, not a narrow pocket propping the number up.

Financials, metals, technology and telecom all pulled their weight. Once oil margins normalise, the already-strong 18% Nifty PAT growth should look better still.

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) DIIs have been relentless buyers, and the fair question is whether that reflects conviction or just SIPs creating an automatic bid regardless of price. Both things are true, and they don't contradict each other.

At the base, Indian household savings are going through a structural shift — away from physical assets and deposits, toward long-term wealth creation through equities, and toward systematic investing over speculation.

Even after this multi-year run, Indian households remain markedly underexposed to equities relative to their own history and to peers like the US or China — historically under 5% of household financial assets.

On the automatic bid question, the granular numbers don't support blind, unconditional continuation. There's a real start-stop cycle: in July 2026 alone, about 50 lakh SIPs matured or were discontinued even as 61 lakh new ones were registered.

What matters is the balance — more people starting than stopping, consistently, which is why the stoppage ratio fell from around 91% in June to under 82% in July, and the SIP book keeps growing past 10.6 crore accounts.

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

A) Two months of modest FII inflows after a historic stretch of outflows doesn't amount to a turnaround — that word is too strong for what's still tentative stabilisation.

FII outflows in the first five months of 2026 alone, at roughly ₹2.3 lakh crore, already exceeded the full-year 2025 total of about ₹1.7 lakh crore. Against that base, calling two months a trend is premature.

What's fair to say with more confidence: the worst of the outflow phase is probably behind us. But the bigger story isn't about foreign flows at all — it's that India has come through its largest-ever FPI outflow phase with a domestic investor base that's broader, deeper and more resilient than ever, with DII inflows running at record levels — over ₹4 lakh crore in H1 2026 — comfortably absorbing the foreign selling.

Foreign flows still add depth and price discovery, but India's dependence on them to sustain the market is structurally lower than it used to be.

Read more: Why FIIs could continue moving out of largecaps and into mid and smallcaps: Motilal's Rajat Rajgarhia

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

A) There isn't really a bullish thesis priced into Indian equities to begin with. The Nifty is still roughly 8% below its September 2024 high, nearly two years on, despite a strong domestic macro backdrop — GDP growth confirmed at 7.7% for FY26, a private capex revival, robust services exports, forex reserves near record highs, and back-to-back earnings beats.

That's not the price action of a market pricing in optimism.

All three variables — US bond yields, crude, the rupee — have been volatile this year, but none has been in a sustained uptrend; each has reversed sharply at points, including crude's near-9% single-week fall in late August.

What's actually happened is that persistent anxiety about these factors — more than their sustained worsening — has kept valuations at a discount to history even as fundamentals strengthened.

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) Large-, mid- and small-caps have all done reasonably well recently, but ‘performed well’ needs a caveat: the Nifty is still nearly 10% below its September 2024 level, and two years of going essentially nowhere isn't a strong run, even with a recent bounce. Mid- and small-caps have done relatively better, but from an equally depressed base.

In aggregate, Indian equity valuations aren't stretched against fundamentals, if anything the opposite, with the Nifty at roughly a 12% discount to its own ten-year average PE even as earnings growth hits a ten-quarter high.

The genuine disconnect is across market-cap segments. The Nifty trades at about 20x earnings; midcaps at roughly 30x; small caps at roughly 34x, premiums of 50% and 70% over large caps that assume uninterrupted small-cap-style growth.

Large-caps look most comfortable today, midcaps reasonably so given genuinely stronger earnings delivery, and small-caps are where the valuation premium is running ahead of what even strong recent growth can justify indefinitely.

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