India Strategy : 1 year, US$90 bn and 0% return later by Kotak Institutional Equities
1 year, US$90 bn and 0% return later
The weak performance of the Indian market over the past year may seem surprising, given (1) the large euphoria among retail investors, (2) several narratives that drove certain sectors and themes periodically, (3) large fiscal and monetary support and (4) weak INR (positive for earnings). However, it is less surprising when viewed against earnings and valuations.
Weak returns in the Indian market for a year now
The Indian market has been flat over the past 12 months (see Exhibits 1-2), despite (1) the large euphoria among retail investors, as seen from the continued large investment by retail investors through DIIs into the market (see Exhibits 3-4), (2) several popular narratives emerging periodically (see Exhibit 5), (3) fiscal (income tax and GST rate cuts) and monetary stimulus (100 bps rate cut in 1HCY25); see Exhibits 6-8 and (4) the sharp (5%) INR depreciation (see Exhibit 9)—a positive for the market’s earnings. The market’s performance would have been even worse with a stronger INR. The Indian market’s performance has been understandably worse in USD terms (see Exhibit 10).
Retail inflows are only half the story
The fact that DIIs have invested US$90 bn in the secondary market over the past 12 months and the market has been largely flat should (1) disprove the market’s belief in ‘flows’ as a driver of markets (see Exhibit 11 for flows by the broad type of investors over the past few years and months), (2) dissuade institutional investors from focusing wholly or largely on retail flows into MFs as a driver of markets and (3) drive investors (institutional and retail) to focus more on fundamentals (earnings and valuations).
Fundamentals have been the real drag on the market
We attribute the weak market performance over the past 12 months to (1) expensive valuations for most sectors and stocks (see Exhibits 12-17); valuations have stayed at high levels, despite several stocks being flat or down over this period due to constant earnings downgrades and (2) earnings downgrades in several sectors and stocks (see Exhibits 18-20) over the past 12 months, which have kept valuations high.
Stabilizing fundamentals, but much more needed for the market to perform
We expect a gradual earnings improvement over the next few quarters and strong earnings growth in FY2027. However, valuations are rich, despite our strong expected earnings recovery (see Exhibits 21-22). We model (1) a recovery in earnings of banks and NBFCs after a weak 1HFY26 due to a pick-up in loan growth and NIMs and a decline in credit costs and (2) a rebound in earnings of certain consumption sectors (automobiles) due to GST cut-led volumes, offset by (3) a moderate increase in earnings of the investment sector, given continued weak capex and investment demand and (4) a modest rise in earnings of the IT services sector, given the continued weak demand environment.
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