India's attractiveness increased lately with recovery in GDP: Kunal Vora

With US trade tariffs adding complexity, India’s continued recovery in gross domestic product (GDP) growth and a recovery in earnings positions it favourably when compared with other global peers, says Kunal Vora, head of India Equity Research at BNP Paribas Bank. In an email interview with Sundar Sethuraman, Vora delves into the evolving landscape of foreign portfolio investor (FPI) flows into India, which until recently faced severe selling pressure due to high valuations and global uncertainties. Edited excerpts: 

FPI outflows have moderated. What’s the outlook for foreign flows? 

India has been a well-liked market by the FPIs. India has received net FPI inflows in seven of the last 10 years, among the highest within emerging markets. However, in recent years, we have seen FPI selling due to India’s relatively expensive valuation, rising US bond yields and large buying by the domestic investors. 

In the last six months, we had considerable FPI selling in India largely along with most emerging markets, as money moved to developed markets. For money to move back to India, we may need some clarity on the tariff situation globally and eventually some consensus that India is among the more insulated markets. Local factors such as continued recovery in GDP growth rate and a recovery in earnings would also help. 

What's your assessment of the US trade tariffs? Is India relatively insulated? How will it affect the Indian economy and markets in the long term? 

The situation on tariffs is still evolving, but India is relatively well placed due to its low merchandise export dependence. India is a domestic oriented economy and amongst the sectors that are represented in Nifty 50, most sectors derive less than 10 per cent of their revenue from exports to the US with the exception of IT services and pharmaceuticals. Outside Nifty 50, sectors such as electrical manufacturing services, cables and wires and gems and jewellery are other sectors that have some exposure to the US. The aggregate earnings impact on the largecap index stocks may not be meaningful.  

For now, the US has maintained high tariffs on China. If these tariffs continue, there could be a review of the supply chain and India could be one of the potential beneficiaries. However, for any large investment to come-in, there will need to be a visibility that the tariffs will continue for a prolonged period. 

On the negative side, we need to watch out for the impact on the US economy from the tariffs. For IT services, while service exports are exempted from tariffs, the sector could see a second derivative impact from a weaker US economy. 

Do you expect the risk premium for Indian equities to go up post-tariffs? 

India has a relatively lower exposure to global trade and while the risk premium does increase when there are large uncertainties such as US tariffs, the Indian market has been relatively resilient due to factors discussed above. Despite the volatility seen over the last few weeks, Nifty 50 returns have been positive over the last one month and the Nifty 50 is down only marginally YTD. 

India’s valuation premium to the Asia ex-Japan peer group has fallen from around 70 per cent a few months ago to closer to 40 per cent. This was because of the correction in India and renewed interest in China. Valuations in India in general are higher than the levels seen overseas, but can be justified by superior GDP and earnings growth and healthier return ratios. Therefore, we think that India’s attractiveness has increased recently. Our Asia Strategist likes both India and China among Asian markets, and does not see it as India or China. 

What are your expectations from the March quarter results? Is the earnings slowdown likely to continue? 

The fourth quarter of the financial year 2024-25 (Q4FY25) is set to be weak in terms of earnings. Year-on-year earnings growth is expected to see a marginal decline this quarter as banks, materials, IT and FMCG are expected to report weak numbers.  FY25 earnings expectations have declined from 15 per cent growth to 6-8 per cent. Though economic growth seems to have bottomed out in Q2FY25, credit growth and other indicators of urban consumption continue to suggest some weakness. Export-oriented sectors are impacted by declining global growth outlook. We see risk of earnings cuts continuing in FY26 as consensus estimates are currently building in earnings before interest, taxes, depreciation, and amortisation (Ebitda) margin expansion for all the sectors and a mid-teen earnings growth for FY26 which seems slightly optimistic considering the current domestic and global economic backdrop. 

Which are the sectors you are bullish and bearish on? Are domestic-facing sectors/stocks better bets now? 

On a relative basis, we prefer private sector banks, telecom and consumer discretionary space. We have had a negative view on staples, but amid the tariff concerns, investors saw consumer staples as a defensive sector and the sector outperformed. With the review of tariff decisions, some of the outperformance of consumer staples has already reversed. We like the IT sector valuations as the dividend yield has improved significantly post the correction, but US tariffs have created uncertainty on the sector’s growth outlook. 

How do valuations look now after the recent selloff? 

Our preferred metric is the gap between bond yield and earnings yield and in our report dated March 7, we mentioned that the indicators show that Indian largecap valuations are looking best since 2020. Nifty 50 has moved up since then, but we still see a positive risk-reward. On the mid and smallcaps, we maintain our negative view and expect them to underperform Nifty 50. 

What hygiene checks should investors do in the post-tariff era before picking stocks? 

Until the tariff issue is fully addressed, investors are likely to be slightly cautious about companies with large US exposure. Thus, US exposure will be one of the parameters while evaluating stocks in the near term while other factors such as earnings growth prospects, capital allocation, free cash flow generation and distribution and valuations still remain important while evaluating stocks.