Prashant Jain, Founder & CIO of 3P Investment Managers, expects a broad-based rally in the Indian equity market, driven by a broadly undervalued Nifty with leading private banks offering deep value.
Barring a few specific retail names, the benchmark index shows no signs of overvaluation. The extent of undervaluation ranges from 10% to 30%, setting the stage for widespread market participation.
Attractive opportunities exist across banks, insurance, utilities, oil and gas, pharmaceuticals, automobiles and fast-moving consumer goods. Leading private banks, in particular, fit the description of being deeply undervalued.
Consumer stocks are also trading at sensible valuations for the first time in nearly a decade. Previously commanding price-to-earnings multiples of 70 to 100, most of these businesses are now trading between 30 and 40 times.
Jain said these valuations are reasonable because businesses in the sector exhibits low cyclicality and volatility, and can deliver 8% to 10% growth without requiring incremental capital. However, he cautioned that investors may not make a lot of money at these valuations.
On the macroeconomic front, manufacturing and capital expenditure are expected to outpace broader economic growth. The alignment of skilled labour, supportive government policies, capable entrepreneurs and buyers looking to de-risk has created a strong environment for the sector.
Capital markets are playing a supportive role, allowing businesses to raise large amounts of capital quickly at attractive prices. However, manufacturing stocks are currently very expensive.
“So, one has to be careful while there is a long runway for growth. One needs to do good amount of work and to make sure that you are not buying a great business but at wrong prices,” Jain noted.
The broader small and mid-cap categories remain expensive. A historical mapping of returns shows that smallcaps have only outperformed large caps in the extreme category of gains exceeding 1,000%. This outperformance was driven by a narrow set of turnaround cases, including companies that were making losses of ₹50 crore to ₹100 crore three years ago but had since turned profitable with earnings reaching around ₹100 crore. Some of these stocks rose 10 to 20 times.
Power equipment, transformer oil and conductor companies have benefited positively from artificial intelligence demand. Other isolated themes like contract development and manufacturing organisations (CDMO) and electronic manufacturing services (EMS) also performed well, making a broad category-wise approach to small caps risky.
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Prashant Jain’s top bets: Where to invest now
Meanwhile, the information technology (IT) sector is trading at fair valuations. Despite fears of disruption from artificial intelligence, IT businesses have not contracted. Large companies continue to grow at 1% to 3%, while mid-sized and smaller firms are expanding at 4% to 8%. The sector remains globally competitive, cash-generating and efficient in capital allocation.
“It would be interesting to see as non-tech enterprises adopt AI, whether it leads to incremental business opportunities for these companies,” Jain said, adding that if this occurs, growth rates could improve over the next one to two years and reignite market excitement.
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