Manishi Raychaudhuri sees earnings revival as key for FII comeback in India

A persistent divergence between foreign and domestic institutional flows continues to define the trajectory of Indian equities, even as valuations begin to look more reasonable after last year’s excesses. While foreign institutional investors (FIIs) remain cautious, steady domestic inflows are providing a crucial cushion to the market.

Speaking on the evolving dynamics, veteran investor, Manishi Raychaudhuri, noted, “Now, the phenomenon that you mentioned that FIIs are selling and they have been selling for last 18 months roughly and the domestic institutions buying, that is not something new. I mean, we have seen this for last 18 to 24 months.”

He added that the sustained outflows from FIIs have been offset by robust domestic participation, particularly through systematic investment plans (SIPs). “The spate of FII selling has been neutralised by this massive systematic investment plans, the SIPs, that continue to come in, almost about $3 billion every month.”

Global Opportunities vs India’s Structural Story

According to Raychaudhuri, the reluctance of foreign investors is not necessarily a reflection of weakness in India alone, but rather a function of relative attractiveness elsewhere. “The foreign investors have a large firmament, a large universe to choose from and compared to India, they have better choices elsewhere in the emerging market space.”

He pointed to North Asian markets, where themes like artificial intelligence and related capital expenditure remain strong, alongside relatively lower geopolitical risks. “So, it is a combination of stronger growth and slightly lower risk that the FIIs are playing.”

In contrast, domestic institutional investors continue to benefit from a structural shift in household savings. “This is a direct consequence of the financialization that we have seen, it is not recent, it has been there for about last five to seven years.”

Importantly, he believes this trend still has room to run. “Indians are on an average still underinvested in equities… maybe it is still about 85-90-95% of Indian investments would remain focused on the home markets.”

Valuations Cooling, But Earnings Still a Concern
India’s valuation premium, once a major deterrent, has seen meaningful moderation. “At the peak in September 24 India's price earnings multiple 12-month forward price earnings multiple was 87% higher… The last 15 years average is about 38-39%. And today India's premium has actually come down below that level.”

He noted that the current premium of around 35–36% makes India relatively more attractive again. However, that alone may not be enough to trigger a strong return of FII flows. “The FII universe as a whole is not biting into this yet simply because the earnings environment is not yet supportive.”

Highlighting global comparisons, Raychaudhuri said, “If you look at last six months… you have Korea right on top… about 80% upgrade… Taiwan… 20-25%… But the Indian consensus EPS estimate… has still declined over the past six months by about 4.5% or so.”

This lag in earnings revisions remains a key overhang.

Macro Triggers and the Earnings Outlook
The outlook for earnings, in turn, hinges on a mix of fiscal, monetary, and external factors. “At some point this large fiscal stimulus that went in in 2025… will begin to have some effect… but it needs to be more sustained.”

He also indicated room for monetary easing, subject to inflation trends. “The central bank can perhaps afford to cut rates a little more… if we do have a situation where the Middle East situation settles down… we could have this concern about earnings destruction behind us.”

A moderation in crude oil prices toward the $60–70 per barrel range could be particularly supportive.

Can Valuations Hold?
On the question of sustainable valuation levels, Raychaudhuri struck a cautious note. “If you look at last 15 years average one year forward PE for India, it is about 18.8 times.”

However, he warned that valuations cannot remain elevated without earnings support. “If it remains in single digits, then those high-teens kind of PE are unsustainable.”

He emphasized the importance of reverting to a healthier growth trajectory. “Unless we get back to that situation… nominal GDP growth of about 10% to 12% and therefore corporate revenue and earnings growth of 13% to 14%… it will be difficult for these long range PE multiples to hold on.”

Sectoral Preferences: Banks, Industrials, Consumption
Despite near-term uncertainties, Raychaudhuri remains constructive on select pockets of the market. “Private banks… I have been kind of thumping the table on this for quite some time.”

He also highlighted opportunities in industrials and defence. “Defence expenditure is likely to rise stratospherically across the world… Industrials would also cater to India's infrastructural ambitions.”

On the consumption side, he sees broad-based potential. “I would also be looking at consumer discretionaries in India… auto companies… household electronics goods… even some of the hospital and diagnostic chains.”

Additionally, cyclical sectors could offer tactical opportunities. “In the near term some of the cyclical sectors like base metals could also do well.”

IT Under Pressure
One notable exclusion from his preferred list is information technology. “I have stayed away from Indian IT for… almost a year now.”

He believes structural changes driven by artificial intelligence could weigh on the sector. “Indian IT… they are the classic AI losers… the average man-hour rate comes down and therefore the valuations of the IT companies come down.”

With earnings growth in single digits and valuations still elevated, he added, “They are trading at about 18 to 20 times PE, simply not sustainable.”