In a price-agnostic market there’s no real value: Kotak’s Sanjeev Prasad

For years, the capex revival has been positioned as the next big leg of India’s growth story. But that narrative is losing steam. As industrial giants pivot to asset-light consumer models, traditional sectors such as roads, power, and telecom no longer offer the investment scale or returns they once did. Renewables may be the new frontier—but they come with their own set of risks, valuation concerns, and limited differentiation. In this wide-ranging conversation with Fortune India, Sanjeev Prasad, Director & Co-head of Kotak Institutional Equities, breaks down what’s changed in the private investment cycle, how structural shifts are redefining defensives, and why even financials—the one relative bright spot—offer only modest expectations.

Is the context around private capex changing? We keep talking about a capex revival, but if you look at the larger players—they’re increasingly moving towards consumer-facing businesses, which are asset-light. So if traditional industrial houses aren’t spending, where is the next wave of heavy private capex going to come from?

The bigger issue is this: if you look at the 2004–2012 cycle, the private sector was investing heavily in five core infrastructure sectors. One was electricity generation—primarily coal-based thermal plants. Then you had metals and mining, driven by a strong global commodity cycle. You also had oil and gas, roads, and telecom.

Fast forward to 2025, and the landscape has changed. Today, the private sector really has only two big areas left for investment in the core sector. One is electricity generation again—but this time it’s renewables. That space is seeing a lot of activity and will likely continue to attract investment. The second is metals and mining, to some extent.

But beyond that? I don’t see the private sector investing much in new oil and gas exploration or refining capacity. Roads, as I mentioned earlier, are largely built out, and private players are hesitant to take on those risks—the government has taken on most of the heavy lifting. Telecom? That story’s played out. The big 5G capex cycle is over, and intensity is now tapering off.

So, the fundamental challenge is: where are the sectors that can absorb large-scale private investment?

Beyond infrastructure, you’d have to look at areas like the electronics value chain—semiconductors, for example—but even there, as in the case of full-fledged fabs, it’s still very early days.

And then there’s a second issue: how many serious risk-takers are there in the country today who are willing and able to commit large amounts of capital to long-gestation projects?

But why would they even want to invest now—especially if they’re getting high valuations without taking on the risk?

Exactly. That’s the thing. Today, there are really only five large industrial houses that even have the financial capacity to do large-scale capex. If you look back at the previous cycle, we had a far wider set of companies willing to take big risks—leveraging up and investing heavily. Of course, many of them went bankrupt.

But they were incentivised by the kind of valuations the market was assigning to infrastructure plays

Absolutely. Infrastructure was being valued aggressively. But it’s very different now. Today, when a company announces a big investment, the stock price often goes down—because the market is obsessed with free cash flows. That’s the shift.

But here’s the controversial question: should private sector investment be dictated by what the market wants?

Especially when the market seems enamoured with companies transforming into consumer plays. A traditional commodity player announcing a move into consumer segments gets re-rated almost instantly. And Indian promoters, at the end of the day, want to see value creation.

Of course. Whether you're a promoter or a shareholder, everyone wants to make money.

Should we assume India’s private capex cycle is over, and the government will now have to do the heavy lifting?

“Over” is too strong a word. I’d say it’s going to moderate. If anyone is expecting a big recovery in private capex—forget about it. That’s how I’d put it.

The bigger question is whether we’ll see a shift to new areas of investment. Because in the traditional sectors, it’s unlikely. Just to give you some numbers: in FY24, total private sector capex across five core sectors—electricity, metals and mining, oil and gas, roads, and telecom—was about ₹8 trillion. In 2012, that number was ₹26 trillion. So that’s a threefold increase over eight years back then, which clearly isn’t repeating now.

And if you look at private sector GFCF (gross fixed capital formation) as a percentage of GDP, during the Vajpayee government’s reforms from 2001 to 2003, it was around 6%. That rose to 14% by FY08. So you can imagine the kind of investment that was happening in the country at that time.

That kind of cycle? It’s not coming back. That much is clear.

Are renewables today what infrastructure was in 2008? It feels like we’re hearing a similar narrative. But are we at risk of repeating the same cycle of over-enthusiasm, stretched valuations, and eventual disillusionment?

No, I think there are some big differences. First of all, electrification is for real—and it’s only going to accelerate. Over time, we’ll see a large part of the transportation sector shift to electric, which means a lot more investment is required across the value chain. That includes electricity generation—mainly through renewables—as well as the supporting equipment like solar modules, batteries, and so on. So, I’m actually very positive on the theme.

The real question, though, is: what multiple do you assign to these businesses? Because, at the end of the day, this is still a commodity sector. Electricity generation is inherently commoditized—there’s very little differentiation between projects. Sure, scale matters. An Adani-level player with >10 GW capacity is operating at a very different scale compared to someone with just 2 GW. But broadly, the returns across players in this space aren’t going to vary drastically.

The positive, apart from the sheer scale of opportunity, is that the risk profile is much lower than it was in the past. Earlier, if you wanted to set up a coal-based power plant, you needed a fuel supply agreement (FSA), a power purchase agreement (PPA), and most of the time, one or both would fall through. That led to a lot of pain—and a lot of bankruptcies.

In contrast, with renewables, there’s no FSA—the sun will shine for a long time. And the PPA side is mostly government-driven. More importantly, the cost of renewable electricity generation is now lower than thermal coal-based generation. So, it makes sense for everyone.

Plus, renewable projects are faster to complete—typically within 18 months. You’re not taking on the same long-gestation risks as with coal-based plants, which could take 8–10 years and face major regulatory and operational uncertainties.

So, I don't think the electricity theme is a problem. The only question is valuation. I'm seeing some of these companies being valued at 4x price-to-book—which is quite aggressive, given the nature of the business.

If the cost of renewable power is going to be cheaper than thermal, then what value do thermal plants offer today?

Well, the private sector is hardly putting up any new thermal plants anymore.

It’s more about a derating of PSU stocks, for instance, NTPC

Thermal will likely see a derating over time—yes. Even PSUs, despite pursuing thermal somewhat aggressively, aren’t adding capacity at the scale people think. If you look at the latest numbers from the CEA, the total thermal capacity under implementation right now is about 28 GW.

There’s been a lot of loose talk about India building 80 GW of thermal. But where is it? It seems to exist more in people’s imaginations than in actual project pipelines.

This disconnect shows up clearly in how some stocks are being valued. Take BHEL as a classic example. It doesn’t make much profit, yet it trades at a high multiple. Its market cap is around ₹75,000 crore. I find that very hard to justify based on the market realities.

Let’s just do the math: even if you assume 80 GW of thermal capacity gets built—and that BHEL gets 100% of the boiler-turbine-generator (BTG) orders, which is unrealistic—the order amount works out to about ₹60 billion per GW. So, 80 GW × ₹60 billion = ₹4.8 trillion of total business.

Now assume a 5% PAT margin—which is quite generous—that gives you a profit pool of ₹24,000 crore. That’s total profit, not annual. So how do you justify a ₹75,000 crore market cap for a company where the entire lifetime profit from this business is ₹24,000 crore?

Some people want to assign a valuation multiple to that as well. But my question is: how can you assign a multiple to a business opportunity that may not even exist at that scale in the future?

So that’s where we are right now. The way people are looking at some of these stocks—it’s a bit disconnected from reality.

Does that mean the investing framework in the Indian context is limited by design?

It has to be logical. You can’t just throw a high multiple at something because you feel like it and have to justify the current market price. The market opportunity has to justify the number. There’s no point assigning a rich multiple to an earnings stream that isn’t going to be recurring or if the market opportunity is small. That’s just not sustainable.

How do you see this playing out? If there’s redemption pressure from mutual fund retail investors and funds are forced to sell, then maybe we’ll see some semblance of valuation come back. But if that doesn’t happen, are we in bubble territory?

Look, the market is a mix of everything right now. You’ve got stocks that are fairly valued, some that are undervalued—banks might fall into that camp—and others that are clearly in bubble territory.

But even with banks, the unsecured lending cycle was working because the corporate capex book was clean and low-risk. Now that narrative is shifting too. So where do the risks lie?

Not so much with the larger banks. Even PSU banks don’t have significant exposure to unsecured personal loans. The real concerns lie in segments like microfinance and parts of the personal unsecured loan book.

That said, the big structural change in banking over the past decade is the diversification of the loan book. Today, it's spread across a much wider base—more borrowers, more asset types, and different income groups. So, unless there’s a systemic shock—like a pandemic that affects everyone—the risk of a major default wave is much lower.

That’s a big change from 10 years ago, when banks were exposed to a handful of large industrial houses. If even one of those went under, it would blow a hole in the books. That’s not the case anymore.

So, you're saying the dispersion of the borrower book now acts as a kind of safety net for banks?

Absolutely. You will, of course, have periodic issues—especially in segments like microfinance, where a natural disaster in a particular state, for example, could trigger defaults. But if you’re an MFI lender with a geographically diversified book, you’re still in a relatively safe position.

So yes, banks are in a far better place today. Of course, the NIMs may not be as high, and the ROAs won’t be what they used to be.

Is the peak ROA cycle over—for banks, and maybe even for India Inc more broadly?

I’d say yes. We’re likely to see some softening. NIMs have probably peaked, especially for private banks that have a higher share of loans linked to external benchmark rates. As policy rates come down, you’ll naturally see pressure on NIMs.

How well each bank manages the mix of assets and liabilities will matter. But yes, loan loss provisions might also inch up. So, overall, ROAs could come off a bit.

FY24 was a bit of a Goldilocks year—strong NIMs, low credit costs. That combination isn’t likely to repeat. But this current setup is more “normal,” and banks are reasonably valued in that context. So, I’d say we’re okay.

Now, the bigger problem is with the rest of the market. Most sectors are either fully valued—or in some cases, overvalued. Take IT, for instance. Many companies in the space look fully priced. Some argue they’re fairly valued now, but that entirely depends on the growth outlook—which is highly uncertain at the moment.

Clients of IT companies are just not making decisions. Everything seems to be on pause. And with all the global policy shifts, tariffs, and supply chain disruptions, clients are focused on fixing current issues—not on ramping up discretionary IT spending.

So, until that stabilizes, I wouldn’t expect much of a growth uptick in IT.

Traditionally, IT and pharma were considered defensive sectors. How do you see that narrative evolving now? Is the rise of GCCs going to structurally impact legacy IT services as they could gradually pull talent and business away. If global clients are building capabilities directly in India, doesn’t that start to undercut the traditional outsourcing model?

That’s the issue—people are still relying on traditional heuristics. It's what I call heuristic-based investing. The thinking goes: “This was defensive in the past, so it must still be defensive now.” But a lot has changed, and not everyone has fully internalized that.

Take consumer staples, for example. Without naming names, you had companies trading at 50x P/E for 15% growth in what was then a relatively concentrated and favorable market structure. Now, the same companies are still trading at 50x, but growth is down to 5% in a far more fragmented and competitive environment. So how does that still qualify as defensive? In my view, it doesn’t.

Things have changed, but parts of the market haven’t caught up to that reality.

As for GCCs—yes, they’re a growing theme, but let’s keep perspective. They’re still a small part of the overall economy. GCCs employ around half a million people, while the entire IT sector employs about 4 million. Of course, the purchasing power of that GCC segment is much higher, and there are secondary benefits from that. But even then, it’s not a massive part of the macro picture just yet.

That said, the numbers are quite impressive. The RBI classifies this under “professional management consulting” services. In 2019, before the pandemic, that segment was around $11.4 billion. By March 2024, it had jumped to $45 billion. So yes, there’s been massive growth, driven by a surge in global outsourcing—whether it’s architecture, accounting, audit, banking, or legal services.

Are you’re saying that GCCs aren’t necessarily eating into the incremental market share of traditional IT services players?

Yes, it’s a different space. There will be some overlap—especially where clients set up their own captive IT services centers—but that’s not the core issue. The bigger concern is whether GCC revenues are sustainable over time. They’ve been a significant driver of both growth and our current account. But with AI coming in, a lot of low-level tasks could be automated away.

If the cost of capital stays structurally higher in the US—which seems to be the trend—that makes hiring local talent there more expensive. That, in turn, will fuel a surge in GCC expansion in India. If that trend continues, we could keep seeing more GCCs being set up here, right?

Possibly, yes. But the real question is: what kind of work are these GCCs doing? Some of it is high-end work. But a lot of it is still, frankly, grunt work.

But the broader narrative is that GCCs are now doing more complex, high-value work—not just back-office operations.

That’s the narrative, yes. But it’s essentially a race—between GCCs upgrading the sophistication of their work, and AI upgrading its capabilities. If you’re still doing repetitive, low-level tasks, AI will eventually take over. And this isn’t limited to GCCs—it’s a broader issue across many job categories. So, yes, it’s a real challenge.

When you look at it from every angle, there seems to be disruption everywhere. How does one even begin to ascribe value in this environment?

It’s very tough right now. Investors need to do a lot more work, and analysts really have to think through these issues more deeply. We’re living in an incredibly uncertain world, so the least we can do is start from a place of lower multiples. You have to factor in the risk of both known unknowns and unknown unknowns. Truthfully, we have no idea what’s coming.

Take retailing, for example. Just five years ago, it was mostly general trade. Then came modern trade, which was largely physical retail. That transitioned to physical + e-commerce. And now, you have quick commerce. So, in just three years, the disruptors—modern trade—are being disrupted by quick commerce players. Who would’ve predicted that a few years ago?

With technology evolving the way it is, I honestly don’t know what’s next. That’s why, as investors, the least we can do is assume a higher cost of equity, which naturally means applying lower valuation multiples. Because the certainty that once existed is gone.

That’s the point I keep making—if you’re still using the same valuation framework you were using five or ten years ago, when there was a lot more predictability in business models and earnings, that approach just doesn’t work anymore. The world has changed.

If the world is going to be very uncertain and disruptive, should investors—like central banks—start hoarding gold until things stabilise?

That’s already happening, but I think that has more to do with the fact that gold has delivered very strong returns recently. People often chase performance, especially across asset classes. When I speak of investors here, I’m specifically talking about equity investors. For them, this isn’t about chasing what’s going up—it’s about rethinking how you value businesses in a far more volatile and uncertain environment.

In all these years, macro and geopolitical narrative was never central to investing frameworks. But now, it suddenly feels mainstream. How do you factor in that variable in your valuation framework?

It’s very hard. What do you even factor in? Do I live in perpetual fear of a major geopolitical event? Do I stay invested in gold, and then only buy equities once the crisis is over? How do you any of that?

So, the answer is: you stay invested, but with your eyes open. You try to factor that uncertainty into your cost of equity—somehow. But yes, this is a big shift.

About two and a half years ago, I wrote a report titled The Great Reversal. One of the key enablers of the massive global wealth creation between 1990 and 2020 was a relatively peaceful world, which seems to have changed now. That geopolitical stability allowed companies to invest, households to consume, and risk-takers to take bold bets. But if you're living in a world filled with constant fear, the natural tendency is to pull back—to hunker down. And that affects everything.

Where do you see value today?

Honestly, just in a few pockets of financial services. That’s about it.

And that’s mostly because they didn’t really participate in the rally, so now they seem relatively attractive?

Yes. On a relative basis, they look reasonable compared to their pre-pandemic valuations. As I said earlier, their risk profiles are also far better than they were a decade ago. Sure, growth is slower now, and we might see some uptick in credit costs. But most of them are delivering 12% to 16% ROEs.

Even if there’s no rerating from here—say, for private banks—you can still expect mid-teen returns. If a private bank is delivering 14%–16% ROE, and the multiple stays where it is, that’s still a decent return.

Look at PSU banks—excluding SBI—most are trading at 0.8x price-to-book. Yes, credit costs might inch up, but even then, many of them are delivering 11%–12% ROE. So either there’s a modest rerating—from 0.8x to, say, 0.9x or 1x—or even if that doesn’t happen, you’re still making returns roughly in line with ROE. That’s not bad.

The broader point is: work with lower expectations. This is not the environment for aggressive return assumptions. Keep it realistic.

How low is “low”?

For banks, you’re probably looking at low double-digit returns—maybe high single-digit to low double-digit at best. For the rest of the sectors, I’d budget for flat outcomes in a good scenario and significant downside in a bad scenario. Many are already fully priced, some overvalued.

From a market cap view, how are you assessing large caps versus small- and mid-caps?

Large caps seem more reasonably valued in comparison. You might find some specific names in mid- and small-caps that are interesting—especially those in the right sectors, with strong management—but broadly speaking, mid- and small-caps are more expensive than large-caps.

You buy mid- and small-caps for faster growth, and yes, a few do justify that premium. But you can’t extend that logic to the whole basket. There are plenty of lower-quality companies in that space. And the problem is, as you move down the quality curve, the risk curve, and the market cap curve, valuations actually go up. That’s counterintuitive—and concerning.

How do you see FY26 playing out for India Inc and the markets?

I think it’s going to be a very slow period.

Painful?

That depends. For some segments, potentially yes—especially depending on what happens with global tariffs and trade issues. But let’s wait and see. I don’t want to sound like a doom-monger, but the best-case scenario looks like a slow and low year. That’s probably the term for FY26: slow and low.

Will FPIs come back very aggressively?

Very hard to say. A lot depends on relative value. It’s not like emerging markets have been drawing huge inflows over the past decade. In fact, EM performance has been quite poor.

Over the past 10 years, it’s been a no-contest between the US and emerging markets. The MSCI Emerging Markets Index is up just 18% cumulatively. Compare that with the MSCI World Index, which is up 115%. The S&P 500 is up 180%, and the Nasdaq is up 275%. There’s no comparison.

This trend has only started shifting very recently. You’ve seen some correction in the US, and a bit of a rebound in China and emerging markets. But the US still dominates—it accounts for 60% of global market capitalization. If the US continues doing things the market doesn’t like, you could see money shift into EMs. But if they course-correct, then it’ll be tough for EMs to attract significant flows again.

India’s long been seen as the natural beneficiary as the China story loses steam—strong fundamentals, solid growth drivers, and a compelling demographic edge. The expectation was that we’d see more dedicated India allocations, with global capital waiting on the sidelines. But that narrative hasn’t quite played out. Why do you think that is? What’s holding back the dedicated flows, despite the macro tailwinds?

The whole “money on the sidelines” idea just doesn’t make sense. India isn’t yet a large enough asset class in global terms. Just look at the number of companies with a market cap over $10 billion—we’re nowhere the scale of the US, or even China, Europe, or Japan. India ranks fifth. So why should it become a standalone global asset class right now?

The natural tendency for global investors is to focus on their home markets. And when those markets—especially the US—are delivering, whether for retail investors or institutional allocators, why bother looking elsewhere?

Until recently, the US narrative was working extremely well. So there hasn’t been any strong reason for asset allocators to shift in a big way toward India.

For that incremental 2–3% return?

Which hasn’t even materialized, by the way. That’s just the hope—that it might come.

Let’s look at the numbers. India currently has around 40 companies with market caps over $20 billion. China has over 100. Europe has 190. Japan has 70. The US? More than 400.

And valuations? India and the US are trading at similar multiples, but China is much cheaper.

Now consider liquidity. If you take the tenth stock by market cap, India’s average daily traded value is about $80 million. China’s tenth has $840 million. The US? $2.9 billion. For Europe, it is around $180 million.

Even if you expand to the top 100 stocks, India’s daily traded value of the 100^th is just $23 million. China is at $60 million, Europe at $100 million, and the US at over $700 million.

So in terms of breadth, depth, and liquidity—whether it’s number of large-cap names or actual trading volumes—India simply isn’t there yet. We’re talking about the top 100 stocks here. It’s still very early days for India to become a standalone global asset class.

How many more years of waiting, then?

Well, we’re a $4 trillion economy now, but our per capita income is still on the lower side. And that’s really the hope—that everything grows from here.