India valuations hit 6-year low, but stocks still expensive than EM peers

Mumbai: India's equity valuations are at their lowest levels in six years following the recent market decline sparked by a slew of factors, including foreign selling, a weaker rupee, higher crude prices and rising US bond yields. But that may not be reason enough for overseas investors to reverse their pessimistic view, as stocks here, despite coming off their highs, remain more expensive than their emerging market (EM) peers.

The dollar-denominated MSCI India Index trades at around 18.5 times its 12-month forward price-to-earnings (P/E) ratio, the lowest level since May 2020. It hit a record high of 24.54 times in September 2024, when the Sensex and Nifty reached their all-time highs.

The valuation measure is down from 22.5 times at the start of the year and below its 10-year average of 19.7 times, but investors do not appear to be in a hurry to pile into battered Indian equities.

"The Nifty forward PE looks cheap only if you believe the forward EPS," said Vivek Iyer, partner and CIO at Rational Equity Asset Management. "With crude where it is, we think consensus estimates still have cuts ahead, so the true multiple is higher than the headline."

In dollar terms, the Sensex and Nifty are down 18%-19% so far in 2026, while MSCI India has fallen 15.4%. Other than MSCI China, which has dropped 20%, most other markets are up.

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Iyer said the recent equity decline is more of a "large-cap de-rating" as mid- and small-cap stocks are still trading at a 50%-70% premium to their historical medians. "The broader market has not reset at all. The reset is incomplete," he said.

Foreign investors tend to compare Indian equities with their regional peers. The MSCI Emerging Markets Index trades at 8.7 times forward earnings, down from 13.3 times at the beginning of the year and below its 10-year average of 12.05 times. India's valuation is roughly double that of EMs.

Among other major markets, MSCI US, the most expensive, trades at around 18.8 times one-year forward earnings against its 10-year average of 19.2 times and has gained 12% in dollar terms so far this year. Taiwan and Japan trade at 16.8 times and 15.4 times forward earnings, respectively, versus 10-year averages of 15 times each, with the two markets gaining 57% and 17% this year. China trades at 9.2 times forward earnings versus its 10-year average of 11.5 times.

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The argument in favour of India is that Indian equities have always traded at a premium to their peers because of the country's relatively stable corporate earnings outlook and broad-based market.

"We would avoid prescribing a fixed India-EM premium as fair value," said Saurabh Patwa, head of Equity and Portfolio Manager at Quest Investment Managers.

"A meaningful premium is justified where businesses deliver superior earnings growth with durability," he said.

For now, many investors are not buying that argument, pointing to faster growth in South Korea and Taiwan, where semiconductor and chipmaking industries have emerged as some of the biggest beneficiaries of the global AI boom.

"In the near term, AI and data-centre investments are creating stronger growth opportunities in markets such as South Korea and Taiwan, competing for global capital," said Patwa.

A decline in crude prices will be critical for Indian equities. "The valuation compression has been concentrated in large caps, particularly crude-sensitive and rate-sensitive stocks such as oil marketing companies, paints, autos, aviation, cement, consumer discretionary and lenders," said Iyer.

"That is where foreign selling has been concentrated because that is where the earnings risk from $100-plus crude is greatest."
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