Expect India stocks to underperform due to high valuations, says Arpit Jain, Arihant Capital

Expect India stocks to underperform due to high valuations, says Arpit Jain, Arihant Capital

What are the factors affecting India’s share markets at present? Arpit Jain, Joint MD, Arihant Capital delved into the concerns regarding India’s premium valuations, Nifty’s poor performance and the current rout in the market as a result of the Adani-Hindenburg face-off. He also shared his opinion on India’s growth story, offering a contrary view that India is set to underperform. Here are the excerpts from Arpit Jain’s interview with FinancialExpress.com.What is the current long-term and short-term outlook for Nifty and Bank Nifty?

February is seasonally the worst month for the index, we can anticipate a near-term downside towards 17,200 levels. The upside is capped at 18,000-18,200 levels. From a valuation perspective, Nifty is currently trading at a P/E of 21 at the current 17,800 levels against its FY’23 earnings. On a forward basis, it trades at 18 P/E of FY’24 earnings estimates & 16 P/E of FY’25 earnings estimates. Valuations are looking reasonable at the current levels. However, robust earnings growth is required for enjoying higher valuations. On a long-term basis, Nifty has an upside potential of up to 22,000 levels on a P/E of 20 based on FY’25 earnings. For Bank Nifty, we have a positive outlook. Currently, FII flows are negative for the banking sector. However, for most banks, credit growth is picking up at a strong level. We have also seen an expansion in margins and an improvement in asset quality.

FIIs have turned net sellers in January, with the figure crossing Rs 40,000 crore. What is the reason FPIs are leaving, what are the concerns and what can be done to bring them back?

FIIs have offloaded more than Rs 40,000 crores in Jan. The primary reason is India’s expensive valuations and FIIs shifting their money to China. At this point in time, FII participation is expected to be on the lower side. We are expecting India to relatively underperform because of elections and higher valuations in some pockets. Robust earnings growth should bring participation back.

SIP closures hit a new high in December. The market was being supported by domestic investors, are there fresh concerns regarding DIIs? What is happening with domestic investors?

Debt is becoming a lucrative asset class due to the recent interest rate hikes, and gold prices have also risen recently. Since domestic investors need to see returns to keep a continued interest in the markets, it seems they may be looking at building a diversified and resilient portfolio. Having said that, DII flows are generally slow in March, so we can still see that trend continuing.

What long-term impact, if at all, will the Adani rout have on the markets? What about short-term impacts?

For Adani stocks, the short-term impact has already been discounted. But one should avoid these noises and focus on the fundamentals of the companies. The long-term impact of the rout on Adani stocks may not be significant. One of the more long-term effects is that it will make the system more prudent.

Among Adani companies, the valuations have been expensive, but some of its businesses are fundamentally lucrative like Adani Ports, ACC and Ambuja Cements. As long as there is no significant impact coming from the regulatory front, they can still command higher valuations if they give robust earnings. Most of the Adani businesses are long-term, higher gestation businesses and only time can tell if Adani can continue to claim higher valuations by continuing to outperform on their expansion plans through solid execution. Just like in project management, one needs to continually monitor the company’s performance against its plans.