‘Current valuations leave little room for re-rating of multiples’: 3P Investment Managers’ Prashant Jain

In the seventh quarterly update released by 3P India Equity Fund 1, Prashant Jain, Founder and CIO of 3P Investment Managers, reflected on his expectations of the market performance hovering so close to its potential, that any further surprisingly higher returns seem unlikely now.

He believes that current market valuations offer limited upside potential. “After the strong run over last five years, markets have finally consolidated over last six months,” he observes. This consolidation, he argues, is a welcome development that improves the risk-reward profile for long-term investors. Returns are likely to be driven primarily by earnings growth, not a rapid increase in valuations. The market may be entering a period of more subdued returns compared to the recent past, requiring a shift in investor expectations.

Jain points out that the recent slowdown in profit growth is not necessarily indicative of a weakening economy. Instead, it reflects the normalisation of profit margins after a period of unusually low levels. “The higher growth in corporate profits of last few years was due to a decadal low base of margins because of high NPAs, weak capex cycle and low commodity prices,” he explains. With these factors now largely behind us, Jain expects corporate profits to grow at a more sustainable pace, roughly in line with nominal GDP growth. Companies will need to focus on operational efficiency and sustainable growth rather than relying on cyclical factors for profit growth.

At present, Nifty is trading at 20x FY26 and 17x FY27, which, Jain further expects Nifty EPS to grow at 10% CAGR in FY24-26 compared to 16% CAGR between FY22-FY24.

This slower profit growth, coupled with already elevated valuations, implies limited scope for significant multiple expansion. At present, Nifty is trading at 20x FY26 and 17x FY27, which, Jain further expects Nifty EPS to grow at 10% CAGR in FY24-26 compared to 16% CAGR between FY22-FY24.

Achieving a 6-8% growth going ahead is “more realistic and would be no mean achievement” as per Jain. While he acknowledges that these valuations are reasonable for large-cap stocks in the medium to long term, he cautions that significant upside from multiple expansion is unlikely. Thus, implying the market is not cheap. Investors are paying a premium for current earnings, leaving less room for error in company performance. A focus on value investing and identifying undervalued companies may be more crucial in the current market environment. Consequently, Jain advises a cautious approach and suggests that investors should temper their return expectations.