India is “nearing a fair value zone” after two years of muted returns, according to Harendra Kumar, Managing Director of Institutional Equities at Elara Capital, in an interview with Businessline. Kumar compared India favourably with South Korea and Taiwan on valuations within the MSCI index, noting that India and China are “better off” and that there is a “high possibility” of foreign institutional investors recognising this anomaly and making a course correction.
Valuations and Earnings Outlook
The index has held its level, suggesting “no further damage from hereon,” Kumar said. However, supply shocks have only moderated, not resolved, leading to some margin moderation that the market is already aware of. He ruled out a runaway rally, pointing to the lack of alternatives to the AI trade and unclear earnings visibility. Once earnings trends become visible, flows will return and markets will resume their uptrend.
Kumar acknowledged that earnings growth has been India's “Achilles heel,” contributing to overvaluation amid a domestic liquidity glut in mutual funds. Early signs of a good recovery are visible in Q4 FY26, but Q1 FY27 will have to factor in disruption. He is “sanguine on mid-teens earnings growth over the next two years.”
Two catalysts exist for foreign institutional investors, according to Kumar: India's weight in the MSCI index is at its lowest, around 10 per cent, and the rupee has bottomed out. He also expects a moderation in the AI trade, which bodes well for India.
Sectoral Flows
Domestic investors have been directing flows into mid-cap and small-cap funds, reflected in the recent outperformance of the SMID segment. Capital goods have seen a rebound with the power trade, which are cyclical stocks capturing future growth. Kumar advised being “discerning while chasing momentum.”
Geopolitical Risks and Market Resilience
Kumar observed that recent global crises—Covid, the Russia-Ukraine war, and the West Asia crisis—have not been debilitating to the world beyond the parties involved. Markets have developed an understanding that the world finds its feet within three to four months and supply disruptions resolve sooner rather than later. Emerging markets have underperformed developed markets due to growth risks from supply shocks and the technology/semiconductor trade. Developed markets, insulated better from energy shocks, command a premium.
IPO Pipeline and Valuation Realities
The first quarter of the current fiscal was quiet, but the second quarter looks better with big-ticket IPOs being announced. With geopolitical risks moderating, companies will accelerate growth and fund-raising plans. However, Kumar noted that “valuation expectations have moderated and there is a pushback from investors.” Companies must be reasonable in their valuation expectations to access public funds for growth.
| Metric / Theme | Kumar's View (Source: Businessline interview) |
|---|---|
| India valuation vs. MSCI peers | Better off than South Korea and Taiwan; fair value zone nearing |
| FII flow catalyst | MSCI India weight at ~10%; rupee bottomed out; AI trade moderation expected |
| Earnings growth outlook | Mid-teens over two years; Q4 FY26 showing early recovery; Q1 FY27 disruptive |
| Attractive sectors for domestic flows | SMID segment; capital goods (power trade) |
| Geopolitical risk impact | Supply shocks moderated; markets resilient; three-month adjustment pattern |
| IPO market | Q2 FY27 active; companies must price reasonably; pushback from investors |
Mutual Fund Buying and Deal Pricing
Domestic mutual funds continue to deploy cash as per their mandate. Kumar noted that foreign institutional investor selling has already created an opportunity for funds to buy, implying that pricing dynamics are influenced by this institutional flow imbalance.
As the market heads into the second half of the year, the key milestones to watch are the Q4 FY26 earnings season and the progress of Q1 FY27 results, which will test the durability of the earnings recovery and the sustainability of FII inflows.
Sources:
