India valuations have become “expensive again,” said international brokerage house, Jefferies. According to them, the valuations are up 14% since March lows and closer to last September peaks. As a result they expect moderation in earnings expectations and pointed out that the US-India trade deal could be a near-term trigger. Jefferies has made changes to their Model Portfolio too. They have added key defence stock BEL and major cement play Ambuja Cements and removed Shriram Finance and Coal India.
Jefferies on India: The big valuation worry
The MSCI India price-to-earnings ratio is at 23x times, significantly above the 21x reading in March and it is now closer to the September 2024 peak of 24x PE. Jeffereies highlighted that this implies that the valuations at these levels are “demanding especially in the context of FY25-FY27 EPS expectation of 11-12%,” and this is accompanied by its “usual downside risk.”
The rally in India has been partly supported by a central bank easing cycle. “While the lending financials are still trading below averages, the non-financial PE at 26.1x is 27% above average,” added Jefferies. The EPS growth expectations have moderated as result. According to them, “the ratio of upgrades/downgrades to FY26 earnings has worsened.” This has been primarily ascribed to NIM compression for banks & weaker IT services outlook.
Jefferies trimmed the earnings estimates for FY26 for MSCI India by 1.1% and the FY26 earnings expectation is now hovering around 11%.
US-India trade deal: Potential near-term trigger, flows on track
Jefferies considers the US-India trade deal to be a potential trigger over the near-term, A deal “on the lines of te UK-India FTA (link), can be a near-term trigger.
FPI flows should be a supporting factor.” Jefferies added. They expect flows from foreign institutional investors to stay positive as “ India’s position is still close Neutral to Underweight for many funds and allocations being raised.” The dollar depreciation will also help EM flows, as per their analysis
“With US sobering its stance on tariffs with several rollbacks/temporary exemptions, including that for China, tariffs have ceased to be an issue for now,” they highlighted.
Jefferies: Key changes to model portfolio
Keeping in mind the changing dynamics, Jefferies has made some changes to their India model portfolio. They have large Overweight on financials, removed Shriram Finance and Coal India from the portfolio, and instead added Bharat Electronics, an advanced electronics and defence systems provider with high visibility. Jefferies also added weight to cement along with defence. They added Ambuja Cements to the model portfolio on expectations of moderating industry competition will aid margins for this counter.