Indian benchmark stock index's 13% decline this year may not yet lure back investors as slowing growth, elevated oil prices and stretched valuations could limit the scope for market returns, a top executive at Spark Capital Advisors said.
The Nifty 50 is on course for its worst annual performance in over a decade, after nearly tripling over the previous 10 years.
Its outlook for next year hinges on sustaining earnings growth, foreign investors returning after record outflows, easing crude prices, and a revival in private investment, Thyagesh Baba, non executive director at Spark Capital, told Reuters in an interview on Tuesday.
Chennai-based Spark Capital has advised on more than $13 billion of private equity and M&A transactions, giving it a close view of corporate investment trends and capital flows.
Baba did not name a specific market target, but said future returns will likely depend more on earnings delivery than on broad-based valuation gains.
Nifty 50 companies are expected to deliver 20% profit growth in the September quarter, their fastest pace in three years. However, Baba said investors accustomed to 20%-25 % annual earnings growth should recognise that 16% growth remains robust in a 10%-12% nominal growth economy.
Baba nevertheless sees enduring strengths in the economy. India's banking system is healthier after years of regulatory tightening, while companies have reduced leverage and become more disciplined in allocating capital.
"The old model of borrowing at 18%-20% to fund businesses generating 11%-12% returns on capital has largely faded," he said.
Reflecting that view, Spark's Midas fund focuses on companies one to three years before listing rather than chasing late-stage pre IPO premiums. Baba also expects private credit to play a larger role in portfolios, saying cash flow-backed debt investments can offer attractive risk-adjusted returns.
