Speaking to ET Now, Tyagi said the aim was not to try to predict the direction of the market in the coming months. Instead, he urged investors to keep the current environment in perspective.”It is difficult to predict where the markets will be in the coming months; that is certainly not our intention. But to put things in perspective, valuations for the Indian markets are higher than long-term averages, and this has been happening since 2024,” he said.
Tyagi noted that markets peaked around August 2024 and have been consolidating for almost a year and a half since then. This consolidation, he explained, was largely driven by weaker-than-expected earnings growth.
“While trend growth is around 12%, very close to nominal GDP growth, earnings growth in FY25 and FY26 is below trend, somewhere around 6% to 7%,” he said. “Markets built stronger than trend earnings growth and were disappointed.”
Despite the prolonged consolidation, Tyagi pointed out that large-cap stocks still trade at a 15% to 20% premium to long-term averages, while mid- and small-caps command even higher valuations. “Our forecast is that markets may continue to hold within a certain range for a while, perhaps a year or so. Comparatively, our comfort is more with large caps,” he added.
The growth expectations for the 27 financial year have already been priced in
On earnings prospects, Tyagi acknowledged that growth is expected to accelerate in FY27, aided by policy measures aimed at boosting consumption.
“We are looking at an acceleration in earnings in FY27. Quite a few measures have been taken to boost consumption and consumption-related sectors,” he said, referring to the previously announced income tax benefits and GST rationalization.
According to him, these measures could result in household savings of almost $35 billion, which would provide a meaningful boost to the economy. However, he cautioned that markets have already absorbed much of this optimism.
“Consensus estimates for FY27 are already around 16% earnings growth over FY26. To some extent, all these positive measures are already built in, and yet valuations remain elevated,” Tyagi said.
“So yes, we may see better growth in corporate India, but whether the markets will rise substantially based on these numbers is questionable.”
Valuation comfort in selected sectors
Tyagi said valuation comfort has started to emerge in a few parts of the market, especially in private sector banks, IT and auto sectors.
“Private sector banks have not really participated in the rally in recent years, and valuations here are trading at a discount to long-term averages,” he said.
He added that improved credit growth, encouraged by the central bank, could translate into stronger advances and net interest income growth in FY27.
The IT sector, which has underperformed over the past two to three years, is another area of relative value.
“The disruption in AI has been exaggerated. While there may be some deflation in budgets due to AI, history shows that when a new technology comes to market, Indian IT companies make gains in the medium term,” Tyagi said, adding that valuations are now close to the long-term average.
Automobiles are the third of his favorite sectors, supported by rising discretionary spending and VAT rationalization.
“Auto sector valuations are also very close to long-term averages, hence the comfort,” he said.
Preference for automotive OEMs over accessories
Within the automotive sector, Tyagi expressed a clear preference for Original Equipment Manufacturers (OEMs) over related companies.
“If I had to break down OEMs versus suppliers, we are more bullish on OEMs. Three, five and 10 years from now, OEMs have had better results, yet they trade at significantly lower multiples than suppliers,” he said.
He called this valuation gap “inexplicable” and said OEMs have stronger balance sheets, superior return ratios and better visibility into growth.
Among OEMs, Tyagi believes that passenger vehicles, including commercial vehicles, offer the most attractive structural growth opportunities.
“The four-wheeler segment will continue to see structural growth due to under-penetration. As per capita income and purchasing power rise, more households will be able to afford passenger cars,” he said.
#Markets #remain #range #valuations #remain #elevated #Ajay #Tyagi