Market turmoil: Large caps offer valuation comfort; banks, tech look promising, say experts

Indian equities may still be facing uncertainty, but the recent correction has started throwing up pockets of valuation comfort, according to leading money managers.

In the latest episode of Fortune India Boardroom, DSP Mutual Fund’s Kalpen Parekh, HDFC AMC’s Navneet Munot and ASK Private Wealth’s Vinay Jaising share their views on Indian equities, valuations, FPI flows, earnings and the impact of oil prices, while discussing what investors should watch going ahead.

Watch the full podcast here:

Navneet Munot said large-cap stocks are looking relatively attractive, while Kalpen Parekh pointed to banks and technology stocks as areas where valuations have become more reasonable after sharp declines. Vinay Jaising, meanwhile, said India’s earnings momentum remains supportive, even as global investors continue to favour AI-led markets such as the US, Taiwan and Korea.

The comments come after a prolonged period of weakness in the broader market, with investors grappling with elevated oil prices, global interest rates, foreign outflows and concerns over earnings.

Munot said investors should look beyond the short-term performance of the benchmark indices and focus on the opportunities created by the correction.

Large caps offer valuation comfort

Asked whether Indian equities are attractively placed after the correction, Munot said the combination of macro conditions, valuations, liquidity and sentiment is now looking more favourable for investors with a longer horizon.

“Purely from, if I put like macro, valuations, liquidity, sentiments, I think all of these put together in our framework, equities are looking attractively placed if you are investing from at least three, five years perspective,” he said.

He added that equities should ideally be held for a much longer period, but even from a three-year perspective, valuations have become more reasonable.

“They are reasonably valued now, particularly on the large-cap side,” Munot said.

His comments come against the backdrop of a sharp market correction that has brought valuations of several large-cap stocks closer to historical averages. Recent market analysis has also pointed to improving valuation comfort in large caps after the sell-off.

Munot said the two-year period of muted index returns should not necessarily be viewed negatively. According to him, the correction has happened through both falling prices and a period of consolidation, making parts of the market more attractive.

“Two years back, valuations were on the higher side. I think narratives were running ahead of the numbers, prices were running ahead of the fundamentals,” he said.

“A correction had to happen, which has happened in two forms, one is a price correction... a time correction, as you mentioned, that index hasn't gone anywhere for two years.”

Banks, tech emerge as beaten-down pockets

Parekh offered a more granular view of the market, pointing out that the correction has not been uniform across sectors.

“The same market today has two parts,” Parekh said. “One half is banks and tech stocks which are at a five-year low with 30-40% drawdowns, and there is one half which is at an all-time high.”

His larger point was that investors should stop looking at Indian equities as one homogenous market.

“So, it's not one single market. There are opportunities in some pockets and there are risks in some pockets,” Parekh said.

According to him, the decline in prices has started creating value in parts of the market, even though the overall market cannot yet be described as cheap.

“When prices are down 8-10% in a year, when many solid companies in India for five years have given zero returns or even negative returns, there is a pocket in the market where, irrespective of what the future holds, there is some value which is emerging,” he said.

Parekh added that valuations are now moving closer to fair value after being expensive three to five years ago.

“Broadly valuations are somewhere in the middle. They were expensive three-five years back, they are not cheap, they are coming closer to intrinsic value, fair value,” he said.

The view on banks also comes as financial stocks have recently emerged as one of the stronger parts of the market recovery, with investors focusing on credit growth and September-quarter business updates.

Parekh flags bubbles in defence, engineering

While Parekh sees opportunities in beaten-down areas, he is far more cautious about some of the sectors that have delivered strong returns.

He specifically flagged engineering, defence and industrial companies where stock prices have risen sharply without a commensurate increase in earnings.

“If there are pockets where without earnings, stocks have run off 50-100%, there are, again, engineering companies, defence, industrials,” Parekh said.

His concern is that investors may be extrapolating a short period of strong earnings growth far into the future.

“They are showing higher growth for a quarter or two or a year. But you can't extrapolate one year high growth number,” he said.

Parekh said some stocks in these segments are trading at 40-70 times earnings, despite the possibility that the current pace of growth may not persist.

“The growth may continue for a year or two. But it's not growth for the next 20 years,” he said. “The challenge is when we look for one-year earnings and celebrate that and pay high multiples.”

He also highlighted the difference in earnings margins between large caps and smaller companies. Large-cap profit margins, he said, have historically fluctuated within a relatively narrow range of 10-12%, while small- and mid-cap margins have a wider range of around 4-10%.

“So, when they are at 12, you have to be more worried because they won't go and end at 10. They could go below also,” Parekh said.

“And if they are closer to 12 and multiples are at 35, 40 times, that is a pocket not to worry about,” he added, stressing the need for investors to be more discerning.

Earnings backdrop improves

Despite the concerns over valuations in some pockets, Parekh said the underlying economy is showing signs of improvement.

“More than the narrative, the numbers are speaking,” he said, pointing to double-digit earnings growth across several segments over the last one or two quarters.

He cited rising power demand, cement demand and sales, auto sales and homebuilding as indicators of economic activity.

“Are we worried about the economy? No. The economy is chugging along,” Parekh said. “Earnings likely to be better than last 2-3 years,” he added.

Munot similarly argued that investors should not allow short-term macro developments or foreign portfolio flows to dominate their investment decisions.

India's rising domestic ownership has reduced the market's dependence on foreign investors, he said, as sustained SIP flows have increased domestic participation.

“We are seeing the lesser impact of that on Indian markets, which is structurally very positive,” Munot said.

For investors, the message from the two fund managers is therefore not one of indiscriminate buying. Large caps and select beaten-down sectors may offer greater valuation comfort, but the sharp run-up in some defence, engineering and industrial stocks means stock selection and price paid remain critical.

As Parekh put it: “If you invest closer to fair value and give reasonable time horizon, you will get superior returns.”