MUMBAI: Foreign investors could begin returning to Indian equities as valuations in the broader market turn more reasonable and earnings growth stabilizes, but a sustained surge in inflows will likely hinge on easing capital gains tax rules for foreign institutional investors (FIIs), said Dinshaw Irani, managing director and chief executive officer at Helios Capital Asset Management (India) Pvt. Ltd.
In an interview with Mint, Irani said pockets of the market continue to offer value despite headline premiums. Even though smallcaps are quoting at a slight premium to largecaps, on a price-to-earnings-growth (PEG) basis, the ratio is almost half that of largecaps. Thus, valuations are looking attractive, he added.
Helios India, part of Singapore-headquartered asset manager Helios Capital Management Pte. Ltd, manages an estimated ₹13,000 crore in assets across mutual funds and alternatives.
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India’s valuations have corrected to align more closely with global peers, yet the broader narrative continues to favour buying at lower levels. However, with Nifty Q4 earnings growth estimated at 6%, do lower valuations alone justify fresh buying, or does the muted earnings outlook limit their appeal?
Nifty 50 constituents have not seen as much of a downturn in profits as the broader market, represented by the Nifty 500. Looking at the Nifty 50 alone to gauge growth is therefore not justified. The Nifty 500, however, has seen a healthy upturn in profits in recent quarters, with Q2FY26 and Q3FY26 clocking earnings growth of 15% and 18%, respectively.
Growth in Q4 is also expected to remain in double digits, albeit lower than in the previous two quarters. It could have been stronger but for the impact of the war.
FIIs pulled back largely due to elevated Indian valuations relative to global peers. Now that valuations have corrected, do you see a case for their return?
It was not only elevated valuations but also earnings growth falling off for the broader markets that made them pull back. Now, with growth rates coming back and valuations becoming reasonable, we can expect FIIs to start trickling back.
To see a deluge of inflows, the government has to relax capital gains norms for FIIs, as we are probably the only country that charges capital gains tax on foreign inflows.
What strategy will work in such a market now—growth, value, or quality?
Our strategy is dictated by our Elimination Investment philosophy, where two factors—negative medium-term triggers (in most cases projected financial performance) and unreasonably high valuations, which are short- to medium-term in nature—keep refreshing our portfolio depending on what is working best at a given point in time. Invariably, we have realized that this philosophy highlights stocks that offer growth at a value.
A two-week ceasefire is in place in the Iran war, but Washington and Tehran have yet to reach a broader agreement. Do you expect any near-term impact on market sentiment, or is it still too early to draw conclusions?
We believe this ceasefire will be permanent, and the chances of it failing are very slim. We believe our markets have seen the worst, and the scenario can only improve from here on.
Even with strikes on hold, has the impact of higher crude oil prices and inflation already begun to feed through?
There seems to have been structural damage to crude prices, as production and supply chains will take time to normalize. We expect crude prices to stabilize $20-30 per barrel above pre-war levels. This will have a telling impact on India, as we import a bulk of our crude requirements.
The impact on domestic inflation has yet to be felt, as rising prices have not yet been passed on to consumers.
A couple of funds that had stopped lump-sum investments in small-cap funds have started again. What does that mean? Are things looking good for smallcaps?
Even though smallcaps are quoting at a slight premium to largecaps, on a price-to-earnings-growth (PEG) basis, the ratio is almost half that of large caps. Thus, the valuations are looking attractive.
In the post-war scenario, India does not have direct artificial intelligence (AI) plays. Is that a concern, given FIIs may prefer markets with clearer AI exposure?
The concern on AI plays stems from the fact that valuations have increased exponentially while revenue models remain in a fluid state. Of late, the likes of Anthropic and OpenAI have released modules that can generate revenues, but still not on a scale sufficient to justify the valuations.
India may gain if AI valuations come under scrutiny, as it is likely the only large emerging market without direct AI plays.
Do you have a contrarian view on any sector now?
We continue to remain negative on IT services, as we believe AI will be a major disruptor. The Indian IT services industry will have to evolve to counter the threat from AI, which is expected to be a very painful transition.