Valuation of Indian Stocks Becomes More Reasonable, Says Equirus' Sahil Shah

As investors look beyond the current market volatility, managing director and chief investment officer at Equirus, Sahil Shah, believes that sectors such as financials, chemicals, and IT stocks are more reasonable in valuation.

Shah stated that with most of the themes having played out and trailing multiples being at 60-80x, the competitive landscape has worsened for certain sectors like paint. According to him, investors should be cautious about this segment from a medium-term standpoint, citing the worsening competitive dynamics as a challenge.

In contrast, Shah sees an opportunity in the defense sector, with spending on defense and indigenization offering a lucrative chance. However, he notes that despite the recent correction, stocks in this sector remain expensive due to valuation challenges and execution risks.

Regarding solar energy, Shah sees some signs of overvaluation, particularly for segments like wind and solar ancillary. He emphasizes that while opportunities are vast, current valuations fail to capture the execution risk, making them less favorable from a risk-reward perspective.

Despite the 10 percent correction at the broader market level, Shah does not foresee a significant gain in benchmark indices by year-end. Instead, he observes that despite some parts of excesses being cleared, markets remain in an expensive zone, particularly in the context of growth seen in H1FY25.

Moreover, Shah expresses concerns about returns on investment and margins in the paint sector, which has witnessed one of its worst volume declines and gross margin erosion due to increased competition. He advocates for caution from a medium-term standpoint.

In terms of IPO flows, Shah suggests that despite corrections, market participants may not be deterred, especially if there is no significant further decline. However, if meaningful falls occur, flow impacts are likely to arise.

Lastly, regarding the China enthusiasm, Sahil Shah believes it might abate as money moves from India to the US and due to tepid earnings seasons in India, valuations become less attractive compared to China.