Nilesh Shah Sees Modest Returns Ahead: Earnings, Not Multiples, Will Drive Indian Equities

Nilesh Shah, Managing Director at Kotak Mahindra AMC, has a message for Indian investors who still expect 20 to 30 percent annual gains: those numbers are not owed to anyone. In an interview with Moneycontrol, he said returns from here are more likely to land in the high-single-digit to low-double-digit range.

His reasoning rests on earnings. The March 2026 and June 2026 quarters both came in ahead of expectations, and Shah expects that momentum to carry into September 2026 and beyond. He named the obstacles: a below-average monsoon, supply-chain disruptions, higher oil prices and rising interest rates. Listed India, he argued, has shown it can deliver even when conditions are messy. Valuations, in his view, are fair, neither cheap nor expensive, so earnings growth rather than expansion in price-to-earnings multiples will do the heavy lifting.

On rates, he was direct. There is an inverse correlation between yields and PE multiples, because higher yields raise the risk premium and compress valuations, while also squeezing the interest coverage of leveraged borrowers. Real estate feels it first, he said, particularly developers with stretched balance sheets and buyers waiting for cheaper EMIs. But he cautioned against painting the sector with one brush: well-capitalised players with inventory in the right micro-markets and strong pre-sales can still grow. Banks can even benefit if lending rates rise faster than deposit costs and net interest margins widen. In his words, it is a sector-by-sector, stock-by-stock story.

Asked about the US Federal Reserve, Shah said Fed funds futures are pricing a shallow hike before year-end, not a hiking cycle of the old kind. He said the Fed will be guided by inflation that has stayed above target for five years and a reasonably healthy job market, and that Donald Trump's known preference for lower rates will not decide what Kevin Warsh, or whoever holds the chair, does. His advice was to prepare for a modestly higher-for-longer path rather than a sudden pivot. On whether pressure on Iran could produce a deal before the US midterms, he said it could create a window or could escalate, and that nobody can predict it. For India the practical issues are energy prices, supply chains and risk premium. "We cannot trade the headlines," he said, only keep portfolios resilient.

On whether equities can break out of their long consolidation, Shah said it depends on the definition. A 25 percent move is unlikely soon; 10 percent is quite possible. Earnings have been strong and valuations have cooled from the froth, but IPO and OFS supply is keeping a lid on the market. Domestic flows are acting as the shock absorber, while FPI selling has been the headwind. When that selling eases and private capex revives, he expects the market to grind higher, as a bottom-up market rather than a broad rally.

In banking he was equally selective. Large-cap banks trade at historically low valuations after FPI selling and a growth scare, and the picture at a few of them may clear up after leadership transitions. Mid- and small-cap banks have shown higher loan growth and better return on assets. His approach: pick by valuation, asset quality, deposit franchise and management, favouring quality over momentum and high-float names over tightly held ones.

On the rupee, he said it can find stability after past depreciation, helped by FCNR(B) inflows. But he reminded listeners that about $130 billion must be repaid after three years, a medium-term fact he said should not be forgotten. Elevated crude and global uncertainty will keep the currency volatile, though he expects the RBI to manage that as it has before.

He sees bottoms forming in both IT and FMCG, provided investors avoid what he called dinosaurs. In FMCG, that means companies reaching a new set of consumers through innovative products and differentiated channels; in IT, firms using AI to deliver cheaper, better and faster solutions. His overall stance: neutral weight on equity, a bias to quality large- and mid-caps, accumulating on corrections, and moderate return expectations. The things to watch are the rate path, the pace of FPI selling and the rupee.