Indian equities: Investment opportunities in a market poised for growth

The Indian equity market is poised for significant growth over the coming years, and we believe performance will be supported by strong corporate earnings and GDP growth. It’s also benefitting from an evolving global landscape, as India’s economy has undergone a significant transformation and has experienced rapid economic growth from a low base.

Corporate earnings in India have been more stable and predictable than in other emerging markets. They have also kept pace with GDP in the past 10 years. That’s a rarity in emerging economies. See Figure 1.

Over the past four years, corporate earnings have risen annually by 15% thanks to solid revenue growth and margin improvement. The past 20 years has seen Indian companies deliver double-digit earnings growth in the mid-teens, despite periods of lacklustre growth during the global financial crisis or Covid-19.¹

As growth in the economy has started from a low base, there’s plenty of room for development and progress. Over the next few years, it’s expected India will have one of the highest GDP rates in the world. In 2023/FY2024 alone, India’s contribution to the world’s real GDP growth rate was the highest it’s been since 1980, standing at 18.5%.

How is corporate earnings growth impacting equity valuations?

Strong earnings growth has been supporting higher valuations, and the Indian stock market has been trading at historical highs.²

We believe valuation of stocks and indexes need to be looked at with a comprehensive approach and using different parameters, such as sustainability or earnings growth and return on equity (ROE).

Although we are enthusiastic about growth, it is crucial to also consider the price associated with it.

Looking at the financial parameters, Indian companies have reasonable debt levels, are not leveraged and will support sustainable earnings growth. Improving margins and better pricing power will likely support ROE.

P/E ratios are also coming down thanks to strong earnings performance, potentially making stocks an attractive opportunity for investors.

India’s importance within major world indexes is also changing. Its weighting and influence within the MSCI Emerging Markets Index has significantly increased from 7% in 2015 to 20% in 2024.³

Liquidity is also helping the stock market

Improved earnings as well as the stability of the earnings have given investors confidence, attracted investment flows and provided support for the market.

There’s been strong domestic inflows, with good local investor participation — over USD $30 billion from mutual funds.⁴

Taking a look at figures for the quarter ended September 2024, foreign portfolio investors (FPIs) pumped over Rs 87,000 crore (over USD $10 billion) into domestic equities, the highest inflow since the Q2 2023.⁵

Where is India’s future investment potential?

Moving forward we believe there’s been three structural changes driving the economy and long-term investment case: financial transformation, the consumer explosion and the manufacturing renaissance.

Financial transformation

The financial sector has undergone a transformation and has emerged as a global leader in digital payments. Digitalisation has meant products and services are more readily available in the market and are accessible to more people. 

An increase in financial inclusion has led to a substantial uptick in bank account openings, from 123 million in January 2015 to 530 million in August 2024.⁶

Consumption explosion

We expect a surge in discretionary consumption. The country has a large young population with rising disposable income, and people are spending more on consumer goods and services.  

Over the next few years, we also expect India to cross the crucial US$4,000 per capita GDP level, which will see an increase in people reaching middle class.⁷ This will likely create more employment opportunities in the country.

One area where consumption spending has been high is in the wedding industry, which has been growing at an annual rate of 7-8%. Every year there are 10 million wedding in India and couples spend on average of Rs 1-2 million per wedding.⁸ We believe there is long-term potential in the wedding business and a highly profitable market to tap into. 

Manufacturing renaissance

The manufacturing industry has received a boost and has been attracting foreign investing following policies like the Production Linked Incentives (PLI) schemes and the "Make in India" program. The country also offers a growing pool of skilled labour at competitive costs.

In the PLI scheme, the government provides incentives to domestic companies for increasing the production of goods and services. For the Make in India program, the government has been providing incentives for investments in manufacturing.

These schemes have positioned the country as an attractive alternative manufacturing hub for tech giants and multinational companies. As a result, there’s been an increase in investment in production facilities, with some companies doubling the amount they produce in the country.

These initiatives have strengthened the country’s exports, while reducing reliance on its imports.

Digital transformation, robust consumption and expanding exports are all helping to support growth in the economy. We believe this along with strong corporate earnings will support the Indian equity market going forward.