PPFAS CIO says 15-20% annual returns from Indian stocks unrealistic

Rajeev Thakkar, chief investment officer at PPFAS Mutual Fund, told ETMarkets that investors expecting 15-20% annual returns from Indian equities are likely to be disappointed. The statement lands at a time when the Nifty 50 has delivered about 13% compounded over the last decade. The bar Thakkar is flagging sits above the index's own long-run average.

Thakkar did not name specific stocks or sectors. The warning applies across the broad market. Indian equities trade at a trailing price-to-earnings multiple near 24 times, a premium to both their five-year average and most emerging-market peers. For the index to deliver 15-20%, earnings would need to grow faster than nominal GDP for several years in a row, or valuations would need to expand further. Neither is a safe bet when the earnings cycle is already near a peak, several fund managers have said in recent months.

The comment is especially relevant for the technology and financial-services sectors, where the highest return expectations tend to cluster. Infosys (INFY) carries an Alpha Score of 57/100, labeled Moderate, on the AlphaScala proprietary model. Wipro (WIT) scores 46/100, labeled Mixed. HDFC Bank (HDB) sits at 43/100, also Mixed. Those scores reflect valuation and momentum signals that are not screaming "buy the dip" and are not flashing distress. For a fund aiming at 15%+ annualised, those are the sorts of names that would need to outperform. Thakkar argued that the base is already high enough that even continued earnings growth will not produce the percentage returns investors have become accustomed to.

There is a mechanical reason why the 15-20% target is hard. The Indian market's return over the last three years has been driven heavily by a narrow set of large-caps and by a surge in retail inflows through systematic investment plans. Those inflows create a self-reinforcing bid. They also inflate valuations. When flows slow, the multiple compresses. Thakkar's point is that the base is already high enough that even continued earnings growth will not produce the percentage returns investors have become accustomed to.

The crunch matters most for the mid-cap and small-cap segments, where valuations are even more stretched. The BSE Midcap index trades at a trailing P/E of about 33 times, the Smallcap index at roughly 26 times. Those multiples incorporate an expectation of above-average growth. If that growth disappoints, the re-rating could be sharp. Thakkar's comment implies the risk is asymmetric: the upside from current levels is capped by valuation, while the downside has room to run if earnings slow.

Rajeev Thakkar is known for running a concentrated, long-only portfolio with a bias toward financials and consumer names. His public remarks carry weight among institutional investors because his fund has historically avoided frothy segments.

The next concrete test for the thesis comes with the July earnings season. If Nifty 50 companies report profit growth below 10% for a second consecutive quarter, the argument that 15-20% returns are unrealistic will have fresh data behind it.