Re-Entering Indian Equities: Selectively, Gradually, With Valuation Discipline
WHAT MADE US STAY OUT?
For much of the past two years, patience itself was an investment decision for us.
At a time when valuations across large parts of the market appeared disconnected from underlying fundamentals, we chose not to remain invested merely because prices continued to rise.
That caution served us well. But the environment today is becoming more nuanced.
Today, that picture is beginning to change – but selectively, not uniformly
WHAT CHANGED ENOUGH FOR US TO RE-ENTER?
Q1 FY27 earnings have been encouraging. Nifty 50 companies reported average year-on-year revenue growth of 24% and profit growth of 23%. Yet, despite stronger earnings, the index has remained broadly range-bound.
The last two years illustrate this distinction well (refer to the chart below).
The Nifty 50 has broadly remained within a range even as its valuation multiple corrected, quoting at close to 20 times**. In other words, earnings have been catching up while valuations have been correcting, without an equally dramatic correction in index levels. The process may not be complete. A period of time-based correction could therefore continue even as underlying businesses continue to grow leading to more frustration for Indian investors.
Recent economic and corporate data have been stronger than we expected. At the same time, the passage of time and correction in valuations have begun creating greater dispersion across businesses and sectors. Let’s understand this better…
The correction has improved the opportunity set, but expensive pockets remain.
Strong GDP growth does not automatically translate into attractive equity returns. GDP talks about the economy. Earnings tell about the business.
For investors, two questions matter:
- How much of the growth opportunity is already reflected in prices?
- And how durable is the present growth trajectory?
Valuation tells us about how much we should pay for them. Investment growth has been strong, but government capital expenditure continues to play a substantial role in supporting the cycle. Private-sector capex is improving in certain industries. However, we would like to see that improvement become broader and more sustained before concluding that India has entered a self-sustaining investment cycle.
Over the past two years, the economy has remained resilient despite external shocks, including tariffs and war-related pressure on oil prices. Yet broad-market returns have remained relatively muted in several pockets. That distinction between a good economy and a good entry price remains central to our approach.
Government measures including PLI incentives, infrastructure spending, tax measures and household transfers have supported manufacturing & consumption.
The question is what comes next.
For growth to become increasingly self-sustaining, policy support should eventually translate into higher productivity, stronger private investment, employment and household income growth.
The INR has remained under pressure over the past two years. Recent policy measures may help moderate near-term volatility, although the currency will continue to be influenced by global capital flows, interest-rate differentials and broader macro conditions.
India is growing rapidly, but generating sufficiently broad-based, high-quality employment for its large young population remains one of the economy’s most important medium-term challenges. This matters because the durability of consumption ultimately depends not only on policy support or credit, but on sustained growth in household incomes.
The correction is doing something that relentlessly rising markets rarely do: creating dispersion. Companies and sectors that were previously priced for perfection are increasingly differentiated on fundamentals again.
Foreign capital is also beginning to reassess India. FPIs returned as net buyers in July and August 2026, investing approximately ₹309 bn in August, the strongest monthly inflow in almost two years. But context matters: foreign investors remain sizeable net sellers for calendar 2026. We therefore view the recent flows as an early reversal, not evidence of exuberance returning.
WHY ARE WE STILL CAUTIOUS, NOT BULLISH?
Our response remains measured. We are not turning bullish on the Indian market as a whole, for reasons:
· Valuations are better, but not everything is cheap
- Strong GDP ≠ attractive equity returns at any price
- Private capex needs to become broader and more durable
- Employment & income growth need to support consumption
- Currency, rates, capital flows & geopolitics remain risks
WHAT ARE WE DOING?
After a prolonged period of valuation correction and underperformance across several pockets of the market, we are beginning to find individual businesses where price and long-term fundamentals are once again coming closer together.
Consequently, we have begun redeploying capital into Indian equities.
This is not an attempt to call the bottom. It is a response to improving valuation-comfort in specific businesses where:
- balance sheets remain strong
- business economics remain attractive
- earnings expectations look achievable, not euphoric
- long-term industry opportunities remain intact
Our investment horizon remains five years and beyond – not the next quarter, and not the next market rally.
The market correcting is not enough. The business still must qualify.
Volatility may well continue. Geopolitical risks, energy prices, global interest rates and the sustainability of domestic consumption remain important variables. We therefore approach the present environment with neither pessimism nor exuberance, but selectivity.
CONCLUSION
For the past two years, patience itself was an investment decision. Today, we believe that patience should increasingly accompanied by disciplined, gradual capital deployment.
Disclaimer: The above content is for knowledge purpose only and under no circumstances is the information therein to be used or considered as constituting an offer to buy or sell, or solicitation of any offer to buy or sell or recommendation to acquire or dispose of any security, commodity or investment or to engage in any other transaction.
