India: A structural growth story. But have valuations run ahead?

Over the past decade, the investability of India’s equity markets have improved significantly. The market cap of FTSE India Index has grown over 6 times over the past 10 years (Exhibit 2). The equity market has experienced rapid growth since 2020. India accounted for only 4% of the broader APAC equity market in 2014, but the share increased to 12% by 2024.

One main driver for a strong performance and growing market size in recent years has been robust foreign equity inflows. As shown in Exhibit 3, it is true that in 4Q24, foreign investors reduced their positions in Indian equities, due to a high valuation. A temporary strong rebound in Chinese equities also attracted some foreign flows rotating out from India to China, of which the valuation is cheap, in 4Q24. However, from a longer-term perspective, foreign investors have been net buyers since 2022, given the solid fundamental growth outlook.

Compared to other APAC markets, India stock market is relatively well-balanced across industry (Exhibit 4). As of Dec 2024, the top four weighted industries are Financials (25%), Technology (14%), Industrials (13%) and Consumer Discretionary (12%). The India equity market has less concentration risks than markets such as Taiwan and Korea, which have higher weights in Technology. The Tech industry accounted for 76% of Taiwan’s equity market and 42% for Korea’s[1]. Korea and Taiwan are the two APAC markets with the highest correlation with global tech stocks (Exhibit 3 of this article). Additionally, some other APAC markets are highly exposed to Financials stocks. Financials accounted for 58%, 56% and 37% of the Singaporen, Indonesian and Australian markets, respectively, as of Dec 2024.

FTSE India was one of the top performers in APAC in 2024, on the back of solid domestic fundamentals and rising capex growth. By industry, Telecom (+39%) and Health Care (+38%) outperformed other industries in 2024 (Exhibit 5). Telecom stocks benefited from rising 5G capex and expansion of both mobile and non-mobile 

businesses. That said, Telecom only accounted for 3.6% of the FTSE India Index, and hence its impact on the overall index is rather limit. Consumer Staple (-5%) lagged with Food Products stocks such as Nestle India, and Personal Products Hindustan Unilever being main draggers due to weaker-than-expectation earnings results. Urban area sales growth slowed and outpaced the recovering growth trend in rural markets. Rising material inflation (e.g. palm oil and tea) also pressured profit margin.

In terms of contribution, Technology (+26%) and Consumer Discretionary (+24%) industries were the major positive contributors. More precisely, Software and Computer Services sector has benefited from not only global AI upcycle but also Indian BFSI (Banking, Financial Services, and Insurance) sector’s effort to adopt more advanced technologies such as AI and blockchain. US’s ongoing rising AI-related demand and investment also benefit India’s IT services sector. India’s services exports, with IT and non-financial business services being the main driver, have seen double digit growth since 2H24 (Exhibit 6).

The Automobiles and Parts (+22%) sector were supported by India’s strong domestic private consumption growth. The domestic sales of two-wheeler automobiles particularly continue to see double digit sales growth (Exhibit 7). 

The Health Care (+38%) industry saw another strong year due to strong growth in both domestic and global pharmaceutical markets. The shares of pharmaceutical products of total India goods exports grew from 3.5% in 2013 to 4.9% in 2023 full year. Medicaments in measured doses or for retail sales, such as Generics and OTC medicines, accounted for almost 90% of India’s pharmaceutical goods exports (Exhibit 8). Vaccines exports have grown significantly from ~5% in 2013 to almost 8% in 2023. India has long been an important supplier of vaccines such as tetanus, measles, BCG and hepatitis B, to particularly lower-income markets. Covid-19 vaccines since 2021 were the major contribution to India’s vaccines exports. 

Although the valuation of India isn’t at its historical high level, it is currently the second most expensive market among APAC, following New Zealand (Exhibit 9). A high valuation, while being the result of investor confidence, premium and capital flows, nonetheless can increase the risks of market correction. In 4Q24, India (-11%) underperformed the region (FTSE Asia Pac -7%) as investors rotated some of their India positions to cheaper markets such as Hong Kong and China.

That said, the macro fundamentals and structural growth outlook of India remain solid. Bank credit growth slowed from the peak pace but still printed a double digit yoy growth. FDI (Foreign direct investments) flows have rebounded in 2024. Likewise, on the corporate side (Exhibit 10), the forecasted EPS growth is also one of the highest among APAC markets and saw the strongest upward revisions in earnings growth over the past 12 months.

We compared the forecast EPS growth and forward P/E over the last one year and last three-year trends. Valuation-wise (Exhibit 11), the Technology and Health Care industries are trading close to their historical high P/E levels. In contrast, the valuations of the Financials and Energy sectors are around or even lower than their historical averages.

In terms of EPS growth, over the past 12 months, most industry saw an upward revision of their EPS growth. The industries that saw the largest upward revision of EPS growth include Energy, Consumer Discretionary and Basic Materials (Exhibit 12). The valuations of these three industries are far lower than their historical peak levels, offering some room.

Technology also saw an upward revision over the past three years, but almost stayed flat over the past one year. At the same time, the valuation is trading at a historical high level. The Health Care stocks outperformed other industries in 2024 while the forecast EPS growth was revised stronger over the past one year. However, it has become more expensive. As for Financials, both EPS growth momentum and valuation have decreased much. The expected EPS growth of Financials declined, partially due to slowing credit growth and markets’ anticipation of central bank rate cuts.

India's equity market has demonstrated remarkable resilience and growth, making it one of the top performers in APAC for 2024. The high valuation contributed to recent underperformance in 4Q24, but the market's solid fundamentals and structural growth outlook remain strong from both a macro perspective and on the corporate side. As we move into 2025, the key question is whether India's equity market can sustain its performance given its high valuation. In 2024, we saw significant contributions from industries such as Technology, Health Care, and Consumer Discretionary. Technology and Health Care were expensive compared to their historical levels. Energy, Consumer Discretionary and Basic Materials, on the other hand, have a stronger earnings growth outlook and with relatively fair valuations. 

Note:

[1] We add up Korea’s Technology and Telecommunications industries, given that Samsung Electronics is a big global player of consumer electronics and semiconductors, and it was only re-categorized from Tech to Telecom in Jun 2023.