“Valuations matter in the long run, but may not have an impact in the short run. There is never a definitive valuation for a stock, as it is subjective,” says Mukesh Dedhia, director at Ghalla & Bhansali Securities. He explains that a stock with a higher P/E ratio may continue to rise due to increased demand, driven by higher earnings possibilities. This creates confusion about what constitutes the “right” valuation.
Rajiv Thakkar, CEO of Parag Parikh Financial Advisory Services, agrees that it is difficult to find value picks in the broader market, but believes that a bottom-up approach can uncover stocks with appropriate valuations. He emphasizes the need to consider multiple factors beyond just a ratio when investing in stocks, such as sustainability of growth and capital requirements.
Some experts suggest that higher valuations can be justified if foreign investors continue to invest in Indian companies with expectations of improved performance. Devendra Nevgi, Founder & Principal Partner of Delta Global Partners, believes that the current valuations do not reflect India’s long-term growth potential, and that the market carries a premium compared to other emerging and global markets. He argues that foreign investment could justify this premium.