FY25 was a landmark year for India’s capital markets. Record equity fundraising, strong retail appetite, and resilient SIP flows kept equities buoyant, even as foreign investors turned cautious. But as cracks begin to show in the domestic resilience narrative, the broader question emerges: where does the market go from here? In an exclusive conversation with Fortune India, Sanjeev Prasad, Director & Co-head of Kotak Institutional Equities, offers a candid take on what’s changed—and what hasn’t. From the fading relevance of traditional valuation frameworks to the rise of price-agnostic investing, Prasad explains the forces reshaping investor behaviour and market positioning.
FY25 has turned out to be a record year for equity fund raising. Promoters and early investors capitalised on strong retail appetite through IPOs and OFS, while FPIs found liquidity in the secondary markets. Interestingly, even as FPIs turned sellers, domestic mutual funds were able to absorb the supply, thanks to resilient SIP flows. But in hindsight, it appears that—other than retail and mutual fund investors—almost everyone else walked away with gains. Would you agree with that assessment? And what does this tell us about market positioning and expectations going forward?
Until recently, everyone benefited as markets climbed from the pandemic lows five years ago. Markets saw a steady rise with minor dips until mid-2024—foreign, institutional, and retail investors all made decent gains. The shift has come in the last 9-12 months, with markets flattening since October. FPIs sold consistently until days ago, countered by retail and domestic institutional buying. FPIs turned slightly positive briefly in the second half of March, possibly seeing value post-correction, while direct retail investors’ flows have become negative, though domestic institutional money holds firm.
FPIs have been cautious for the past 12-18 months and FPI started to sell aggressively from October 2024. Late September saw China’s economic revival talk, which resulted in an India-to-China pivot in terms of flows, followed by expectations of Trump’s likely US win in October, sparking an EM-to-US shift. Interest in EMs and India waned, and FPIs sold aggressively until February 2024. First, money flowed to China, then from EMs to the US until February, when US market turbulence and policy shifts, plus India’s correction, revived some FPI interest. Retail, with their investment philosophy tied to trailing returns, bought aggressively through June-September when gains were strong, reinforcing their belief in large profits, especially in mid- and small-caps. That worked well until recent months’ corrections cut returns, dimming future expectations. Retail investors sold directly in March—FPIs and domestics are positive, so retail’s the negative force interestingly.
How long does this continue?
It’s not as if there’s a lot of value in the market. In parts of the market, where there was some value—like BFSI (banking, financial services, and insurance)—we’ve seen a decent recovery in those stocks. There’s still some value there, but that’s about the only part of the market with any. value Otherwise, everything else is between expensive and super-expensive valuations. So, I’d assume foreigners aren’t going to put huge amounts of money into India.
For retail, the interesting thing is how they behave with their mutual fund investments. Over the past one and a half months, data shows they’re pulling money out of direct market investments, but they’re still putting it into mutual funds. Whether this sudden caution about the market and lower return expectations extends to mutual funds too—that’s something to watch. In this context, the next 1-2 months’ mutual fund data will be very interesting. February numbers were lower than January’s—roughly Rs 30,000 crore versus Rs 40,000 crore, for equity mutual funds only. But February’s a shorter month, so that might explain it. March numbers will be telling, though they get distorted by year-end tax planning. I don’t know how to interpret that yet. But if March is similar to February, despite the usual March bump, then we’ve got a challenge. It would show investors are getting more cautious about the market.
That brings us to the domestic resilience narrative. Back when FPIs were selling—twice as much as in 2008—we held the line and even celebrated the market’s strength. But now, that story seems to be wobbling. If March plays out as it’s shaping up, was the resilience overstated? And with FPIs trickling back, every rally now gives them a better exit—they can sell without denting prices because domestic flows are still strong. So are we in a phase where every meaningful uptick will be met with FPI selling?
Obviously, the future is always uncertain. It’ll depend on both domestic and global factors. Looking at India in isolation, the market isn’t cheap. The Nifty 50, on a one-year forward basis, trades at about 20x earnings—which may not seem expensive. But the issue is, the “E” in the P/E multiple. The index has a high earnings contribution from low P/E sectors like banks, metals & mining, oil & gas. These sectors typically trade at lower multiples but have a large profit share in the index. So, I don’t look at the Nifty 50 as a useful benchmark.
If you compare sector and stock valuations over time, in most cases, multiples are significantly higher or at least similar to pre-pandemic levels. That’s a bit strange, considering three factors. One, global interest rates are much higher than they were before the pandemic. Back then, most developed markets had near-zero rates; now they’re meaningfully higher. In India, rates are similar, so that part’s been stable. Second, risk levels have gone up sharply—geopolitical risk, for instance. Logically, that should reflect in lower return expectations. The world feels more uncertain, so you’d want a higher return to offset the extra risk—your cost of equity or equity risk premium should be higher.
Third, we’re seeing major disruptions across sectors. The world is changing fast. What we took for granted a decade ago no longer holds. There’s a lot more competition now—driven by policy, regulation, or technology changes. More competition means incumbents will likely grow slower than previously assumed, and their profitability might also be lower. Logically, that should mean lower valuation multiples. But we’re not seeing that.
Coming back to the FPIs, it’s not as if they see a lot of value here. Frankly, there isn’t much—beyond banks and a few other names. Banks, financial services, and to some extent, pharmaceuticals. But even with pharma, we need to see how US tariffs on Indian exports play out. So yeah, things are expensive.
India’s growth story feels a bit like an oxymoron now—growth is bringing its own challenges. Traditional industrial houses are shifting into consumer-facing sectors given that these businesses are not just capex-light but also enjoy better valuations. But in doing so, they’re entering what used to be deep moats—strongholds of large incumbents. How do you see this playing out? Are we heading into a phase where the profitability pool gets splintered, rather than expanded, with both incumbents and new challengers chasing the same pie?
You’re absolutely right—several dynamics are at play here. First, even if overall growth remains the same, it’s now getting split among more players. Earlier, most consumer segments were fairly concentrated—two, three, maybe four key players. Now, we’re seeing two or three additional entrants in many of these spaces. The market is becoming more fragmented, and volume growth is being shared among a larger group.
The second, and more worrying point, is what this means for industry profitability. A two- or three-player market logically supports higher profitability. But as the market becomes more competitive, margins are bound to come under pressure. And I think this is where the market is missing something—the levels of profitability embedded in current valuations assume the good old days will continue. That companies will (a) keep growing at high rates, and (b) maintain, if not improve, the profitability they’ve historically enjoyed. I don’t think either of the assumptions will hold true.
We’re already seeing this play out. Take the paints industry, for instance. Two strong new players have entered the market. Depending on what happens with Akzo Nobel, which is up for sale, there could be a third. There’s talk that Pidilite might be interested. And Pidilite isn’t small—it’s a strong, established player in waterproofing. So now, growth is getting split among more players, and profitability will almost certainly be squeezed.
How does one play that?
The problem is people are still obsessed with doing things the way they’ve always done them. It’s worked in the past, so it must be right. Unfortunately, the analyst community and part of the investor community don’t seem able to reconcile with the changes—which are inherently uncertain. Nobody likes change. Nobody likes uncertainty. There’s enough research out there on this. So, the assumption is: whatever the old playbook was, it still applies. That’s what people are comfortable with. They just assume the same outcomes will play out again.
This extends to valuation frameworks too. The typical approach is: “What’s the last three- or five-year average multiple? Let’s use that to set the fair value.” But that multiple made sense in a certain context—when market structures were more favourable, industry growth was higher, and profits were stronger. Today, you’re in a very different environment. So why should the same multiples apply? That’s the core issue. People are reluctant to change until they’re forced to.
Take the paints industry, for example. It’s not as if Aditya Birla Group suddenly announced their entry and everything changed overnight. This was building for a long time. But there was a lot of resistance to the idea that a new player could make a real dent. Only when Birla Opus started showing real market share—5% plus, and now some analysts say they could be heading toward 10% in the decorative paints segment—did the market finally wake up. That’s when analysts started revisiting their financial models—factoring in slower growth and adjusting the valuation framework to reflect a lower multiple.
And I think we’ll see this happen across more industries. When it plays out in one or two other sectors, people will start accepting it more broadly. Cables and wires could be going down a similar path. Jewellery might be another interesting test case—not necessarily because of new competitors, but because of what lab-grown diamonds could do to the industry.
This is just my own thesis for now, but let’s see how it plays out. Traditionally, Indian households have preferred gold jewellery because it served two purposes. One, gold itself is a store of value. Two, the jewellery aspect—diamonds or otherwise—adds beauty and fashion. Now, can those two roles be separated? If you want gold as a store of value, you buy it separately—either physical or financial gold. And if you want fashion jewellery, there are plenty of options. A lab-grown diamond looks just as good as a mined one—the chemical composition is identical.
So, instead of buying one piece, you could have five sets of jewellery for the same price—I don’t know the exact numbers, but you get the point. The dual functions of gold jewellery could get split between gold and fashion, creating a lot more competition for incumbents like Titan.
So yes, a lot of change is underway—across sectors. But the market and the industry still seem reluctant to fully accept it.
So why is that? Is it a case of too few quality alternatives, forcing capital into the same pockets? And if not consumption, then where else does the market go?
No, I think there’s a bigger issue here. Even if you spot the risk, how do you plan for it? Or more importantly—when do you plan for it? Should you act early, while the market is still cruising at a high? Say you’re the first to spot a problem in a sector—you sell everything and sit on the sidelines. But the market doesn’t see it yet. Then you end up looking like the loser. So, it becomes your problem. That’s one challenge—timing. Nobody gets that right. One day, everyone wakes up to the same realization, and the stock corrects. But until then, it’s tricky.
Second—and probably more relevant—is how the flow situation has evolved, especially over the last four years. You’ve seen a flood of new investors entering the market.
Who’ve never even seen a proper correction.
Exactly. But more than that, these are investors who only look at returns over the last 12 or 18 months—or whatever their personal reference period is. I call them price-agnostic buyers. That’s essentially what they’ve become. Because for a while, no matter what price you bought at, you were still making money. That became the default mindset. So, you stop caring about price. You stop caring about valuations. You may not even know the company’s earnings. You’re just throwing money at the market, expecting strong returns. So, when you have that much price-agnostic buying, do fundamentals even matter anymore?
So, structurally, are we in that phase now?
We’ve been in it for the last two years, maybe. We were already there before the correction, and we’re still in it now. Just look at the multiples in many sectors—some are actually higher than pre-pandemic levels. Take any consumer staples company. The kind of growth they’re delivering today is low single-digit volumes at best, and even that comes with margin risks.
Now, what was the big moat for consumer staples? It was their control over distribution. Historically, there was one dominant channel: general trade. Your ability to reach those 12 million retail outlets across India—that’s what gave you an edge.
But that’s changed. Today, households aren’t just buying through general trade anymore. So many new distribution channels have emerged. That old moat has become shallower. On top of that, you have modern retail players like DMart and Reliance Retail, e-commerce platforms like Amazon and Flipkart, and quick-commerce players like Swiggy, Zomato, Zepto—all launching their own private-label brands.
So, the volume opportunity is getting split among more players, and profitability will inevitably take a hit. Which brings us to the core question: why are we still assigning the same valuation multiples as before?
Those high multiples were justified when you had the certainty of strong earnings growth—say, 10–12% top-line growth and mid-teens earnings growth. In that context, you could just about justify a 40–50 P/E multiple. But now, how do you justify a 50 P/E when earnings growth is down to 5%?
But here’s the thing—incumbents are expensive, and so are the so-called challengers and disruptors. So where does one really invest? If you’re a fund manager running a large-cap fund, as per mandates, you’re almost caught in a self-fulfilling, vicious cycle. You’re forced to keep allocating to the same over-owned names. How sustainable is that?
Exactly. You keep buying until it stops working! That’s what I call the ultimate price-agnostic market. It’s all driven by expectations. If the entire market is bullish, prices will keep going up. Fundamentals don’t really matter. But if there’s a shift in sentiment—if the view becomes that the market has priced in too much good news and now needs a flood of positives just to stay where it is—then it starts to crack. And I think we hit that point sometime around mid-last year.
As I’ve been saying, it’s this price-agnostic buying behaviour that’s been driving the market. But that also raises a question—what’s the role of financial intermediaries in such a market? If there’s no room for active judgment, and you’re simply acting as a conduit, then what are you really doing?
If you’re an institutional money manager, retail investors give you money, and you deploy it. But are you actually making any calls? Not really. You’re almost functioning like a passive fund. Unfortunately, that’s what the market has turned into. I’ve written about this before: it’s price-agnostic retail buying combined with forced institutional buying that’s been pushing the market up.
Is this the phase we’re entering now? Like you said—past performance is no guarantee, and past multiples don’t really hold—but the bigger issue is that the opportunity basket feels narrower. Does that make the market more of a more tactical opportunity going forward? Small and mid-caps have their own issues, but what about large caps—how do you define value there in this kind of market?
Let’s be clear—there’s no real value in the market today. Whether it’s consumption, investment, or outsourcing, there’s no genuine value to be found. Sure, you might find the odd pocket here and there, but broadly speaking, most sectors are either fairly valued, fully valued, or even frothy.
So, it’s a tough environment. Will there be a big market correction? Honestly, I don’t forecast prices—I keep saying that. But it’s entirely possible we could be entering a phase where the market moves sideways for a while. You need earnings to grow into the price—that’s what we’re waiting for.
We might not see a sharp fall, but rather a time correction, where prices don’t move much but fundamentals gradually catch up.
If India Inc has already pulled most of the operational efficiency levers, and if incremental growth is proving elusive, can we really expect a meaningful earnings rerating from here?
It’s going to be slow either way. If you look at the Nifty 50 as an index, a significant chunk of earnings still comes from banks, metals, mining, oil and gas—these have their own drivers, not necessarily linked to the Indian economy. But if you look at the parts of the market more closely tied to the economy—like consumer sectors or investment-led sectors—you should be prepared for a slowdown in both.
In consumption, you’ve already seen a massive volume slowdown. Earnings have also slowed down considerably, so there’s nothing new there. Unfortunately, that trend could persist for some more time. I don’t see any major signs of an acceleration in the broader economy that would drive a meaningful recovery in consumption.
The more immediate concern—though it’s still early—is whether we start to see a slowdown even among high-income households. That segment has been one of the biggest drivers of consumption. The top 10% of households—roughly 35 to 40 million—have done relatively well. There’s been decent job growth, solid income gains, and a wealth effect at play since they’re also the ones heavily invested in the stock market.
But the question is: how much more can that same set of households consume? A lot of their spending is non-recurring. If you’ve bought a car, you’re not going to buy another one the next month. And we’re already seeing that in the numbers—passenger vehicle sales have slowed. I think for the first 11 months, growth was just around 2%, which isn’t a good sign.
What we really need is upward mobility—more households moving from upper-middle to upper class, from middle to upper-middle, from lower-middle to middle, and so on from an income perspective. That pace isn’t very strong at the moment. For a sustainable consumption story, you need a new wave of consumers with significantly higher purchasing power. And that will only come if household incomes see strong, broad-based growth.
And that itself is in question?
It comes down to jobs. India needs to create a large number of better-quality jobs. Yes, jobs are being created—but not necessarily of the quality required to drive sustained income growth and consumption.
So far, investment activity has been relatively strong, and it’s been driven by two of the three major legs. First, there’s been aggressive government spending—especially in railways, roads, and infrastructure. Second, we’ve seen a very strong household investment cycle, particularly in residential real estate. The third leg—private sector capex—has remained somewhat muted.
Now, the concern is this: if you look at the government’s budget for FY25–26, central government allocations suggest a sharp slowdown in railways and roads. Even for FY24–25, those numbers are more or less flat. Defense is budgeted to grow at 13%, but whether that will materialize in a changing global environment is anyone’s guess.
At the state level, the budget numbers may look promising, but in reality, there’s usually a significant slippage. States consistently undershoot their capex targets, and actual numbers tend to be on the lower side.
In the short term, that’s the challenge. But even in the medium term, you hit structural constraints. Can India continue investing heavily in railways without a complete revamp? The low-hanging fruit—like electrification, ordering more wagons, and running more passenger trains—has already been largely addressed. Electrification, for instance, is now over 95% complete. What’s needed next is entirely new railway lines or high-speed networks—which take time to build.
As for roads, we’ve had a strong 20-year run on inter-city highways. The network is now quite robust, so that pace is expected to slow down. Yes, you can keep building roads indefinitely, but the marginal returns and utility may reduce over time.
At the same time, there’s a peculiar paradox. The central government may have the financial capacity to invest, but not the avenues—because key areas like railways and roads are reaching saturation. The states, on the other hand, have many pressing infrastructure needs—urban mobility, housing, water—but lack the fiscal room to spend, with many already running deficits above 3% of their GDP.
So, in both the short and medium term, government spending could face challenges.
Now, if you shift to household investment—especially in housing—we’ve had a fantastic four-year run. It was driven by a sharp improvement in affordability between 2014 and 2022, when prices remained flat. But since 2022, prices have risen sharply—particularly in markets like Bengaluru and Gurgaon. Project-wise, prices have jumped even for the same units. Combine that with the stock market correction, and affordability might start to reverse. So, we could see a short-term slowdown in housing demand.
That said, the longer-term story for housing remains very positive—no issues there.
Coming to private sector capex—there’s a lot of hope and chatter, but not much is actually happening on the ground.
Source:https://www.fortuneindia.com/markets/the-markets-not-broken-but-the-investing-framework-is-kotaks-sanjeev-prasad/121630