Markets have seen intermittent gains over the past week, but overall sentiment has remained cautious amid sustained foreign institutional investor (FII) selling. Domestic institutional investors (DIIs), however, have continued to provide support, matching last year’s buying levels and lending stability to the market.
Speaking to ET Now, Tyagi said attempting to predict market direction over the next few months was not the objective. Instead, he urged investors to view the current environment in perspective.
“It is difficult to forecast where the markets would be in the next few months; that is certainly not our endeavour. But just to put things into perspective, valuations for Indian markets have been at a premium to long-term averages, and this has been happening since 2024,” he said.
Tyagi noted that markets peaked around August 2024 and have since been consolidating for nearly a year and a half. This consolidation, he explained, has been driven largely by weaker-than-expected earnings growth.
“While trend growth is around 12%, very close to nominal GDP growth, earnings growth in FY25 and FY26 has been below trend, somewhere around 6% to 7%,” he said. “Markets were building in stronger-than-trend earnings growth and were disappointed.”
Despite the prolonged consolidation, Tyagi pointed out that large-cap stocks continue to 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 could remain range-bound for some more time, maybe about a year or so. Relatively speaking, our comfort is more in large-caps,” he added.
FY27 Growth Expectations Already Priced In
On the outlook for earnings, Tyagi acknowledged that FY27 is expected to see an acceleration in growth, helped by policy measures aimed at boosting consumption.
“We are looking at acceleration in earnings in FY27. There have been quite a few measures taken to push consumption and consumption-related sectors,” he said, referring to income-tax benefits and GST rationalisation announced earlier.
According to him, these measures could result in household savings of nearly $35 billion, providing a meaningful boost to the economy. However, he cautioned that markets have already factored in much of this optimism.
“FY27 consensus estimates are already at about 16% earnings growth over FY26. To some extent, all of these positive measures are already built in, and despite that, valuations remain elevated,” Tyagi said.
“So yes, we may see better growth from corporate India, but whether markets move up substantially on the back of those numbers is doubtful.”
Valuation Comfort in Select Sectors
Tyagi said valuation comfort has begun to emerge in a few pockets of the market, particularly in private sector banks, IT, and automobiles.
“Private sector banks have not really participated in the rally over the last few 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 for the past two to three years, is another area of relative value.
“The AI disruption is overblown. While there may be some deflation in budgets due to AI, history shows that whenever a new technology comes in, Indian IT companies gain over the medium term,” Tyagi said, adding that valuations are now close to long-term averages.
Autos form the third leg of his preferred sectors, supported by rising discretionary spending and GST rationalisation.
“Auto sector valuations are also very close to long-term averages, hence the comfort,” he said.
Preference for Auto OEMs Over Ancillaries
Within autos, Tyagi expressed a clear preference for original equipment manufacturers (OEMs) over ancillary companies.
“If I have to break up OEMs versus ancillaries, we are more bullish on OEMs. Over three, five and ten years, OEMs have delivered better outcomes, yet they trade at significantly lower multiples than ancillaries,” he said.
Calling this valuation gap “inexplicable,” he said OEMs have stronger balance sheets, superior return ratios and better growth visibility.
Among OEMs, Tyagi believes passenger vehicles, including utility vehicles, offer the most compelling structural growth opportunity.
“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.
