India's Stock Market Through A Bottom Up Investing Lens | Govindraj Ethiraj

ELI5/TLDR

A fund manager sits down and walks through where he’d put money in Indian equities over the next 5-7 years, working company-up rather than economy-down. His three big bets are lending (people are borrowing more, banks look cheap), energy (India under-built power plants for a decade and is now scrambling), and the slow shift of Indians from buying basics to buying nicer versions of everything. He thinks the last two flat years were a pause, not a top, and expects roughly 12-14% annual returns from here — driven by company profits growing, not by stocks getting more expensive.

The Full Story

This is a calm, one-on-one interview with Rakesh Vyas, who runs portfolios at Quest Investment Managers in Mumbai. The host, Govindraj Ethiraj, asks him to skip the usual macro hand-wringing (oil, geopolitics, the consumption slowdown) and instead look at the market “bottom up” — start with individual companies and sectors, not with GDP forecasts. What follows is essentially a tour of where Vyas sees long runways.

The lending engine

Vyas keeps returning to one idea: Indians are getting more comfortable taking on debt, and that’s structural. Credit growth has gone from around 8% a year ago to roughly 16% now. The RBI and the government have actively nudged this along after a stretch where credit was sluggish.

He likes banks not just for the growth but for the price. Balance sheets are clean, capital levels are healthy, bad loans are under control — and the valuations don’t ask you to pay much for that.

The ROEs that they generate versus the multiples that you are paying for that ROE and growth looks very, very reasonable.

He’s lukewarm on insurance. It’s still a “push” product — something agents sell to you, not something you go out and buy — and too much of the premium gets eaten by commissions. The government stepping into health and life cover also blunts the private opportunity. Asset management, on the other hand, he likes: Indians are only at the start of moving savings into equity markets, and SIP inflows (the monthly automatic investments) remain strong even after two flat years.

Premiumization: “we haven’t reached a quarter of the journey”

The second theme is that as incomes rise past a threshold — he cites roughly $2,000-2,500 of per-capita income — spending doesn’t just grow, it changes shape. People move from staples to experiences: travel, bigger homes, convenience. India’s quick-commerce boom (10-minute grocery delivery) is his favourite example of a category that, oddly, barely exists anywhere else in the world.

Globally, quick commerce as a business actually doesn’t exist. Only in India.

Crucially, “premiumization” doesn’t only mean luxury. He frames it as every layer of the economy trading up one notch. A Zudio store pulling a shopper off the street and into an organised, formal retail format is premiumization, even if the clothes are cheap. He points to Trent talking about going from roughly 1,000 value-fashion stores toward 5,000, and argues most organised retail formats have 5-10x of store expansion ahead. The old staples players — he names HUL — will have to reinvent themselves toward premium and beauty to keep up.

Sitting underneath this is “formalization”: commerce shifting from the corner mom-and-pop shop into organised, tax-paying, branded channels. That shift alone is a tailwind even before any income growth.

Energy: paying for a decade of under-building

The third bucket is power, and here the story is scarcity. The summer of 2026 has been brutal — heat waves, peak demand hitting around 270 gigawatts, frantic hunting for coal, gas unavailable. Vyas explains how India got here: a building binge between roughly FY06 and FY12 left lenders burned when many plants never turned profitable. Financing froze for 8-9 years. Capacity barely grew while demand rose a steady 5-7% a year. That backlog is the pain being felt now.

His read is that the government, a few years ago, stopped treating renewables as the only answer and went back to building coal capacity too — because solar only works in daylight and imported gas is too expensive to lean on. Big new plants mean big transmission needs, so the wires-and-equipment side (transmission and distribution, “T&D”) rides the same wave. Add data centres and AI as hungry new electricity guzzlers — India is dangling near-zero tax for data centres out to 2047 — and demand looks well supported.

Where is his actual money? Mostly transmission, not generation. He wants companies with a real moat — proprietary technology, a long execution track record — and names equipment makers like Hitachi Energy and Siemens Energy plus line-builders like Kalpataru and Techno Electric. On solar he draws a sharp line: developers (who sign 25-year power-purchase contracts) are interesting; equipment makers are not, because government incentives are pulling in so much capacity that oversupply will crush their margins. He’s seen this movie before, in the 2006-08 capex glut.

Stock returns are a function of corporate earnings. And if you see concerns around that, that will lead to some sort of risk.

IT: bombed out, starting to look interesting

Vyas has been underweight IT services for two years — first because rising global interest rates squeezed client tech budgets, then because of the “AI scare.” His nuanced point: AI is a revenue headwind for the big players, because the productivity gains get passed back to clients as lower prices — they do more work but charge less. The explosion of in-house global capability centres (GCCs) also lets multinationals take work back from the outsourcers.

But he thinks the de-rating overshot. He’s bought mid-size names — he flags Coforge as an example (explicitly “not a recommendation”) — bought after the sell-off at roughly a 1x price-to-earnings-growth multiple, betting on 15-20% growth. His longer thesis: enterprises will eventually need lots of help deploying AI, and that work flows to IT services. He even cites Anthropic setting up an IT-services joint venture as evidence the category survives — work is just 12-18 months out.

The thread that ties it together

Asked what connects financialization, energy and consumption, Vyas lands on lending. Energy capex needs debt, not just equity. Consumption growth runs on credit. And savings flowing into banks and funds deepen the pool of cheap capital. Everything routes back through the lending system.

On the market overall he’s measured. Indices trade around 18-19x earnings — roughly the long-term average — so neither cheap nor stretched. The last two years saw single-digit corporate-earnings growth; he expects a return to the 13-15% India norm starting in the second half of the year. His portfolios, he claims, are positioned for 25-27% earnings growth next year. The risks he flags: a fiscal deficit constraint, crude spiking and hurting the current account, and rupee depreciation (though he thinks the worst of that has passed). His parting bet on the next big theme: manufacturing and exports — especially newer pharma molecules (Sun Pharma, Glenmark, Wockhardt moving beyond generics into billion-dollar drugs), chemicals and electronics.

Key Takeaways

Credit growth in India has roughly doubled in a year, from ~8% to ~16%; the NIM (net interest margin) cycle is near its bottom as loans and deposits finish repricing.
The per-capita income threshold where discretionary and premium spending accelerates is around $2,000-2,500 — India is just crossing it.
“Premiumization” is better understood as every income tier trading up one notch (street vendor → organised value store), not just rich people buying luxury.
Quick commerce (10-minute delivery) is a business model that has essentially only worked at scale in India.
India’s current power crunch traces to a financing freeze after the FY06-12 capacity glut left banks with stressed loans; capacity barely grew while demand rose 5-7%/year.
In energy, the smart-money positioning is transmission and equipment (moats, track record) over generation; among solar, developers over equipment makers (incentive-driven oversupply kills equipment margins).
AI is a revenue headwind for large IT services because productivity gains get passed to clients as price cuts — more work, lower billing.
GCCs (multinationals’ in-house tech centres) have roughly doubled in 4-5 years, pulling work away from outsourcers.
A “price-to-earnings-growth” (PEG) multiple of ~1x is the kind of valuation Vyas hunts for in beaten-down quality names.
Mild inflation helps the economy: it lets staples companies pass on cost increases; the two flat years partly reflected a lack of inflation squeezing those margins.
Indian indices at ~18-19x earnings sit near the long-term average — fair, not cheap or expensive.
The base-case forward expectation: ~12-14% CAGR returns over 18-24 months, driven by earnings growth with no help from re-rating.

Claude’s Take

This is a competent, honest sell-side-adjacent walkthrough — the kind of thing a thoughtful PMS manager says when he’s not trying to sell you a hot tip. The virtue is the consistency: every theme loops back to a single mechanism (rising incomes → more credit, more formal spending, more capex needing debt), which makes the worldview coherent rather than a grab-bag of stock ideas. The repeated “this is not a recommendation” caveats and the refusal to promise bull-market returns are points in his favour.

The weaknesses are the usual ones for this genre. Almost everything is framed as a tailwind; the bear case gets a brief, polite paragraph at the end. “We’re only a quarter into premiumization” is the kind of claim that’s unfalsifiable and conveniently always true. And a fund manager forecasting 25-27% portfolio earnings growth is, definitionally, talking his own book — treat that number as marketing, not data. The genuinely useful, transferable ideas here are structural, not predictive: why the power shortage happened, why IT pricing deflates under AI, why solar equipment makers are a worse bet than developers. The return forecasts are noise; the mechanisms are signal.

Score: 6/10. Clear, well-organised, and a good map of how an Indian growth-equity investor is thinking right now — but it’s one manager’s optimistic narrative with no pushback, and nothing here is rigorously argued or backed by anything you couldn’t get from his quarterly investor letter.