FIIs under-own India; consumption next rally driver: LKP Sec's Ashwin Patil

Primary market activity may moderate with persistent secondary market volatility, said Ashwin Patil, head of fundamental research at LKP Securities in an email interview to Sirali Gupta. However, well-priced IPOs from high-quality, consumption-facing, or sector-leading companies, he believes, will still draw demand. Edited excerpts:

What are the next sets of triggers for Indian equities in the coming quarters? Compared with other emerging markets, how attractive is India for FIIs at this stage?

In the near-term, there are three catalysts: a) earnings momentum — with corporate PAT (profit after tax) needing to move decisively into sustained double-digit growth, (b) normalisation in USD/INR and 10-year yield spreads to stabilise FII sentiment, and (c) US inflation and monetary cues shaping FII risk appetite. Domestic cushions — record DII inflows and rising SIPs — blunt FII volatility.

 

 

India remains under-owned: FIIs hold 19 per cent of equities, lagging emerging market averages and FIIs have broadened exposure into small-and mid-caps, leaving a sizable runway if macro and earnings align. In essence, a positive earnings surprise coupled with stable currency and bond yields could trigger renewed FII buying, particularly in quality mid-caps and cyclicals linked to the capex and consumption cycle.

What impact could the renewed US tariff actions have on Indian corporates and earnings?

Tariffs are a real headwind for export-linked pockets — garments, some electronics/EMS, and select auto parts — and can raise input costs across supply chains. At the GDP (gross domestic product) level, the hit is modest (PM-EAC estimates Indian GDP drag of 0.1–0.5 per cent), but sectoral pain can be acute and uneven: margin pressure for exporters, potential displacement opportunities for import-substituting domestic suppliers, and modest pass-through into consumer inflation. In short, manageable at the macro level, but idiosyncratic and sectoral for earnings.

With the recent GST reforms, how much weightage would you assign to consumption as a driver for market rally?

GST 2.0 is structurally pro-consumption, with rate cuts on packaged foods, staples, stationery, and personal-care items boosting affordability ahead of the festive season. We view GST as a medium-term growth accelerator, driving volumes, formalisation, and potentially enhancing margins if companies retain some tax benefits.

 

We assign ‘high weight’ to consumption as a rally driver, especially in FMCG, staples, select discretionary, and quick-commerce. However, the extent to which companies pass on benefits versus retaining margins will dictate earnings growth. Category leaders should see clear earnings and re-rating potential once volumes pick up.

How do you assess valuations in the current market? From an investor’s perspective, how do you view the balance between value and growth stocks?

Valuations have eased from peaks but remain stretched in mid- and small-caps, while large-caps trade closer to historical averages. Nifty50 is at 22x FY26 forward PE (price-to-earnings). Two-thirds of sectors still trade above long-term averages, though value pockets exist in private banks, select autos, and industrials/cyclicals with earnings recovery potential.

 

Strategy: rotate into quality value plays benefiting from domestic recovery while retaining exposure to secular growth (tech, consumer, healthcare). Maintain a barbell of earnings visibility and optionality, with selective mid-cap overweights but tight risk controls.

What is your advice to retail investors in the current market in terms of allocation between equity, debt, and precious metals?

Stay strategic, not tactical. For investors with a medium horizon (3–5 years):

 

-Equity 55–65 per cent (core large-caps and selective midcap growth/value mix).

 

-Debt 25–35 per cent (short- to medium-duration to guard against yield curve volatility).

 

-Precious metals 5–10 per cent as an inflation/FX hedge.

 

For conservative profiles, reduce equity to 35–45 per cent and raise debt. Use systematic investment plans (SIPs) and staggered fresh inflows to avoid market-timing risk; prefer quality dividend-paying and high-ROE franchises within equities.

Do you see the primary market activity slow down amid range-bound secondary markets? Issues of which sectors are more likely to be lapped up by investors?

Primary market activity may moderate with persistent secondary market volatility, but well-priced IPOs from high-quality, consumption-facing, or sector-leading companies will still draw demand. With GST tailwinds and FII interest in growth, IPOs from FMCG, consumer durables, speciality chemicals, and select fintech/insurance are expected to be well-received, supported by strong domestic institutional depth.