Insight

Indian equities - the fundamentals, trends and beyond (Part 3)

March 5, 2024
Chandrashekhar Sambhshivan
Chandrashekhar Sambhshivan
Investment Director
Mike Shiao
Mike Shiao
Chief Investment Officer, Asia ex Japan
Indian equities - the fundamentals, trends and beyond (3)
Explore the Invesco India Equity Fund

The Indian stock market has demonstrated robust growth, resulting in an above-average valuation.

It is worth noting that small-cap equities in India tend to have higher price-to-earnings (P/E) ratios compared to the MSCI India, approximately 1.3 times higher.1 We anticipate a larger upward trend for large-cap stocks in 2024, as they generally exhibit higher return on equity (ROE).2

When comparing India's equities to their own historical performance, they are currently trading close to the +1 standard deviation level of the past 10 years. Given the robust earnings visibility of Indian companies, we expect the P/E ratio to sustain.2

Figure 1: NIFTY 1 year forward P/E

Source: Bloomberg, Jefferies.

The valuation of the Indian market is expected to remain within the range of the longer-term trend.

When considering the price-to-earnings (P/E) ratio alongside growth, the Indian markets are found to be fairly valued and outperform other major economies. In fact, the MSCI India's PEG ratio of 1.3x is notably better than developed markets, Korea and Mexico.

We believe while maintaining a disciplined valuation approach, it is crucial to acknowledge the strong fundamentals and macro stability that underpin India's equity valuation, paving the way for further upside potential.

We believe that India's stock market valuation is supportive because of the following reasons:

1. Robust corporate earnings growth:

  • Strong demand in manufacturing and consumer discretionary sectors is leading to improved pricing power and driving earnings growth.
  • Corporate earnings across various sectors consistently demonstrate an upward trend, with return on equity (ROE) ratios reflecting positive growth.
  • India's companies are estimated to achieve a decadal high of ROE at 15% by FY 2024, with the potential for further upside with disciplined expansion.2
  • Earnings for Indian companies is growing strong, EPS growth in the last 5 years was 22% on average. The earnings are currently experiencing a significant cyclical uptrend.2
  • The EPS growth of Indian companies is much higher than that of most developed economies and emerging markets, anticipated to be around 17.0% in CY 2024.3
  • Historical trends confirm that India’s growth translates into substantial corporate earnings.4

2. Strong corporate fundamentals:

  • Indian companies have effectively managed their balance sheets over the last 10 years, maintaining underleveraged positions that support their participation in demand-led growth.
  • The debt/equity ratio of Indian corporates is at an all-time low of ~0.
Figure 2: Gross D/E ratio for large listed companies

Source: ACE Equity and Jefferies. *Sample of ~600 listed companies.

3. Positive macro factors:

  • Structural changes in India's economy over the past decade have contributed to market confidence.
  • India's upward growth cycle is expected to generate strong earnings for the next 3-4 years.
  • The expected falling interest rates will boost market confidence in India's future cash flows, while its strong relative growth further supports this positive outlook.
  • India is gaining share in global trade, reducing oil intensity of the economy and flexible inflation target have narrowed India's inflation differentials with the world, leading to lower interest rate differentials.
Figure 3: Falling relative interest rates

Source: Bloomberg and Morgan Stanley Research.

This is Part 3 of a three part series on Indian equities. Part 1 was published on 29 November, 2023 and Part 2 was published on 5 January, 2023

Invesco India Equity Fund

An active fund of around 70 companies featuring quality growth characteristics in the fastest growing large country in the world.

The investment concerns the acquisition of units in an actively managed fund and not in a given underlying asset. 

Explore the fund

Related articles

Footnotes

  • 1 Morgan Stanley, 24 January 2024

    2 Jefferies, February 2024

    3 ACE Equity and Jefferies, February 2024

    4 JP Morgan, December 2023

Investment risks

  • For complete information on risks, refer to the legal documents. The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

    As a large portion of the fund is invested in less developed countries, you should be prepared to accept significantly large fluctuations in the value of the fund. As this fund is invested in a particular country, you should be prepared to accept greater fluctuations in the value of the fund than for a fund with a broader investment mandate. The fund invests in a limited number of holdings and is less diversified. This may result in large fluctuations in the value of the fund.

Important information

  • Data as at March 5th 2024, unless otherwise stated. This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. Views and opinions are based on current market conditions and are subject to change.

    For information on our funds and the relevant risks, refer to the Key Information Documents/Key Investor Information Documents (local languages) and Prospectus (English, French, German, Spanish, Italian), and the financial reports, available from www.invesco.eu. A summary of investor rights is available in English from www.invescomanagementcompany.lu. The management company may terminate marketing arrangements. Not all share classes of this fund may be available for public sale in all jurisdictions and not all share classes are the same nor do they necessarily suit every investor.

    Invesco Asset Management (Schweiz) AG acts as representative for the funds distributed in Switzerland. Paying agent in Switzerland: BNP PARIBAS, Paris, Zurich Branch, Selnaustrasse 16 8002 Zürich. The Prospectus, Key Information Document, and financial reports may be obtained free of charge from the Representative. The funds are domiciled in Luxembourg.

    EMEA 3437287