CLSA maintains its underweight stance on Indian market, cites these five key concerns

The Indian equity market hit its record high on June 28, with the benchmark Nifty scaling above 19,000-mark for the first time. The index has surged sharply by nearly 12% in three months.

The rally in domestic equities was fuelled by robust inflows from foreign institutional investors (FIIs). The FIIs have infused over $10 billion in the Indian markets since April.

Global brokerage house CLSA, which had a 40% underweight stance on Indian equities in November 2022, has again retained its underweight stance.

“We remain cautious for now given exceedingly rich valuations, margin erosion depleting India’s relative profitability, consensus EPS growth expectations remaining too optimistic (certainly versus the delivered track record), the RBI likely lagging EM central banks in the timing and scale of policy easing, and our econometric model signalling the market is 14% overbought,” CLSA said in a report.

The brokerage firm has listed out five critical concerns which compels it to maintain a cautious stance on Indian equities for the time being.

Also Read: Nifty hits 19,000 for the first time; here's why market is rallying today

Unappealing valuations

Firstly, the brokerage believes Indian equities are trading on an 80% premium sector-adjusted 12-month forward consensus earnings multiple and 2.6x cyclically adjusted earnings relative to emerging markets (EM).

For the 16 years from 2004 through end-2019 Indian equities traded on an average 35% premium multiple versus overall emerging markets on 12-months forward consensus sector-adjusted earnings. Since 2020 that premium has averaged 80% which is where the market is currently trading, it noted.

“Although we have some sympathy for India’s relative valuation being more expensive since 2020 given the structural challenges faced by China and hence that market’s depleted valuation multiples, we struggle to justify the 80% average level,” CLSA said.

Moreover, Indian sell-side consensus 12-month forward EPS forecasts remain subject to negative revisions thus underpinning further PE multiple expansion.

Margin erosion

This ongoing relative margin depletion has further driven down India’s relative return on equity to just 1.1x that of EM (ROE of 13.4% versus 12.1%) while investors have to pay a 2.2x book premium for Indian assets generating not much more profitability. 

“Again, we struggle to justify the down trend in India’s relative ROE in conjunction with the re-rating of the market’s price book in the absence of structurally superior growth and/or lower cost of equity,” it said.

Also Read: Nifty hits fresh record high, rallies past 19,000-mark: What lies ahead?

EPS growth remains too optimistic versus delivered

CLSA highlighted that since 1996 aggregate consensus sell-side earnings growth projections for India have disappointed 82% of the time and on average over-promised by a factor of two versus what was actually delivered. 

At present, FY2025 (ending March 2026) EPS growth consensus forecasts are higher than the original estimate which, if maintained, would be the first year since at least 2010 that the actual posted higher than the first forecast, it added.

Policy easing

CLSA believes Brazil, Mexico, and Indonesia among other economies appear better placed to deliver policy easing ahead of India’s Reserve Bank of India (RBI).

Indian market is 14% overbought 

MSCI India is currently 14% higher than the level which prevailing macroeconomic conditions warrant given the two-decade relationship between the index (in US dollar terms) and four explanatory variables which in combination have explained 80% of the index’s monthly movements over the past couple of decades, the brokerage said. 

Moreover, 10% potential model-based 12-month ahead US dollar upside for Indian equities is insufficient in comparison to other regional market model upsides to justify an overweight stance for Indian equities, it added.