The surprising reason India's most expensive stocks often keep rising

Indian equities are confronting a stark paradox that routinely defies conventional market logic: the country’s most expensive stocks, trading at seemingly exorbitant valuations, frequently continue to deliver massive outperformance. As the economy navigates twin macro disruptions from artificial intelligence adoption and structural shifts in domestic capital, financial markets are proving to be intensely pro-cyclical by triggering self-reinforcing virtuous loops that lift premium-priced sectors to even higher heights.

A study of the past 15 years shows that the Indian market has seen at least 8 investment themes where valuations surged to seemingly expensive levels and still provided extraordinary gains over the subsequent 2-3 years. According to the study by Jefferies, such themes like defence and retail have looked dangerously overpriced by trading 28% to 78% above their 10-year average valuations but kept rallying, beating the Nifty50 by anywhere from 40 to 290 percentage points over the following two to three years.

"One of the most fascinating characteristics of financial markets is that they are inherently pro-cyclical," says N. ArunaGiri, Chief Executive Officer of TrustLine Holdings. "Markets have a tendency to amplify prevailing trends... When sentiment turns positive, markets enter a virtuous cycle. This is exactly what India might experience going forward."


A stock's high valuation is rarely a barrier to future gains if it is backed by powerful, emerging structural shifts. Over the last 15 years, when a distinct macroeconomic theme takes off (such as digital formalisation, post-pandemic premiumisation, or energy transitions), capital aggressively flows toward it regardless of starting price premiums. High valuations are often justified or sustained where companies deliver explosive earnings per share (EPS) compounded annual growth rates (CAGR).

However, investors must remain vigilant; history also warns that when structural tailwinds fade or earnings growth falls short of lofty expectations, the tide can turn swiftly, leaving heavily premium-priced stocks vulnerable to sharp corrections as the virtuous cycle reverses.

The pattern: expensive doesn't mean done

According to Jefferies analyst Mahesh Nandurkar, the last decade and a half has thrown up repeated instances of investment themes where valuations surged to seemingly expensive levels yet stocks kept delivering strong returns over the subsequent two to three years. The brokerage's data is stark:

• Hotels (Dec'21–Dec'24): traded 20% above their 10-year average EV/EBITDA, yet outperformed the Nifty by 290 percentage points, on the back of post-COVID demand recovery, premiumisation and strong expansion visibility.
  
• Retail (Dec'19–Sep'24): 41% above average, still delivered 159 percentage points of outperformance, driven by formalisation, premiumisation and rising discretionary spend, with EPS compounding at 20%.
• NBFCs (Oct'21–Feb'26): re-rated to 78% above their 10-year average — the most expensive starting point of the eight — yet still outperformed by 40 percentage points, powered by rising credit penetration and a 23% EPS CAGR.
• Defence (Sep'22–Jul'24): started 41% above average and delivered 229 percentage points of outperformance on a 33% EPS CAGR.
• Cap goods (Sep'22–Jun'24): 28% premium, 90 percentage points of outperformance, 26% EPS CAGR.
  
• Hospitals (Dec'21–Oct'25): 44% premium, 85 percentage points of outperformance, 23% EPS CAGR.
• FMCG ex-ITC (Dec'14–Dec'19): 44% premium, 96 percentage points of outperformance, 12% EPS CAGR.
  
• Cement (Jun'14–May'17): 74% premium, 47 percentage points of outperformance, though EPS growth was comparatively modest at 7%.

The common thread, per Jefferies, is that strong order visibility, import substitution and rapid earnings growth justified sustained premium valuations in cases like defence, while improved asset quality and scalable digital models did the same for NBFCs.

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Power is the next name on the list

Jefferies' central call is that private power companies have now entered this same thematic stage, with an El-Nino-led year-on-year demand surge likely to be the near-term positive, and their top picks in the space are JSW Energy, Adani Energy Solutions, Premier Energies and Siemens Energy. The brokerage frames this as part of its broader "hard asset" theme.

The valuation math already looks stretched by historical standards: Jefferies notes power utilities stocks were trading 46% above their 10-year average PE as of June 2026, while power equipment stocks were 65% above their 10-year average.

Why Jefferies thinks power can follow the same script

The brokerage points to a rare alignment of supply and demand drivers. Core power demand growth has strong visibility at around 6% CAGR, with upside potential from rising data centre demand and renewed government focus on energy security and electrification. On the supply side, select private sector companies are leading capex with capacity growth of 11-29% CAGR, compared to just 4% for the government sector, which Jefferies says ensures viability. Technological innovations such as battery energy storage systems (BESS) are also lowering renewable power costs, while improved balance sheets of private power generators are further enhancing capex visibility.

On the ground, Jefferies expects private sector power generation to rise at a 9% CAGR over FY26-30E, more than double the 4% CAGR expected for the public sector, pushing the private sector's share of overall generation from 39% in FY26 to 43% by FY30. Within that, Adani Green, Torrent Power, Adani Power and JSW Energy are expected to grow generation two to five times faster than the overall industry.

Earnings visibility also looks strong across the pack: Jefferies projects FY26-30E EBITDA CAGRs ranging from 7% to 56% across large private utilities and equipment makers, with Siemens Energy and Hitachi Energy expected to see the strongest growth on operating leverage-driven margin expansion. On the balance sheet side, net debt-to-EBITDA ratios are trending downwards for most large utilities through FY26-30E, while state discoms turned profitable in FY25, driven by the private sector, with private discom profit per unit rising 3.3 times year-on-year even as state discom losses per unit fell sharply by 70%.

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The macro backdrop

The power thesis lands against a broader market undergoing structural change. DBS Bank frames it as a twin disruption: Indian equities are navigating a major transition as the economy faces twin disruptions from AI and higher energy prices, and while India remains one of the fastest-growing large economies globally, these forces are reshaping earnings expectations, sector leadership and market valuations.

On the energy side, DBS warns the impact cuts both ways for India given its import dependence: higher energy prices pose macroeconomic challenges for India given its reliance on imported oil, with rising crude prices pressuring inflation, widening the current account deficit and reducing household purchasing power, particularly affecting consumption-linked sectors. Higher fuel and logistics costs also compress margins across transport, manufacturing, aviation and consumer industries, while persistent energy inflation could limit monetary easing flexibility and keep bond yields elevated.

Yet DBS sees this as fuelling exactly the kind of sector rotation Jefferies is betting on: financials, industrials, defence, utilities and renewable energy sectors may benefit from ongoing capital expenditure and energy transition policies, while AI adoption is set to enhance productivity across banking, healthcare and telecom over time. For investors, Indian equities are likely to see greater sector divergence, with traditional IT outsourcing models facing disruption while beneficiaries linked to AI infrastructure, domestic capex, energy transition and productivity enhancement attract capital.

Currency cycle may be turning

N. ArunaGiri, CEO of TrustLine Holdings, argues a second, currency-driven cycle could reinforce the equity story. He describes markets as inherently pro-cyclical: one of the most fascinating characteristics of financial markets is that they amplify prevailing trends — when sentiment is negative it sets off a vicious feedback loop where weaker prices fuel more pessimism and further selling, and the reverse is equally true when sentiment turns positive, which is exactly what India might experience going forward.

ArunaGiri traces the recent weakness to a self-reinforcing chain: as geopolitical uncertainty intensified and FII outflows accelerated — already weak on India's conspicuous AI absence — the Rupee came under pressure, which pushed bond yields higher, which further discouraged foreign investors, leading to persistent FII selling that weighed negatively on equity markets, with each variable reinforcing the next in a classic vicious cycle.

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