Equity Oversupply Acts as a Natural Check on Market Valuations
Hari Shyamsunder, Vice President and Senior Institutional Portfolio Manager for India Equities at Franklin Templeton, has highlighted a significant market dynamic: the current oversupply of equity is effectively capping valuations in the secondary market. In a recent discussion, Shyamsunder pointed out that the sheer volume of equity hitting the market—from a flurry of Initial Public Offerings (IPOs) to potential government divestments and sales by promoters and Foreign Institutional Investors (FIIs)—is creating a self-correcting mechanism that prevents stock prices from soaring to unsustainable heights.
The Double-Edged Sword of Market Supply
The concern isn't just the total quantity of shares being sold, but the concentrated pace at which this supply enters the market, which can cause short-term dislocations and volatility. Shyamsunder illustrated this with a telling example from 2024, where more than half of the year's IPO value was crowded into a short window between mid-October and mid-December. This period coincided with significant FII exits, creating a scenario where even robust domestic inflows could not fully absorb the selling pressure, leading to near-term market churn.
He explained that when multiple players, including the government, promoters, and FIIs, act without coordination, it puts pressure on the markets. However, if this supply were to be released in a more orderly and spaced-out manner, it would be far more manageable for the market to digest.
The Meteoric Rise of Investors Beyond Metros
Beyond the analysis of market mechanics, Shyamsunder shed light on a powerful, ground-level transformation: the explosive growth of investors in India's Tier-II cities and state capitals. His travels across nearly all states revealed a consistent narrative of tremendous growth, with cities like Bhopal, Patna, Lucknow, Chandigarh, and Jaipur emerging as vibrant investment hubs. The momentum is not confined to state capitals alone; even smaller centres like Coimbatore are witnessing a strong surge in investor participation, creating what he describes as 'problems of plenty.'
Anecdotal evidence from a recent trip to Rajkot provided a tangible sense of this broad-based economic pickup. Following GST cuts, dealers in northern regions reported facing supply issues and a shortage of AC mechanics, signaling a sharp, unexpected revival in demand that challenges the conventional 'metro bubble' perspective.
Premiumization: The Defining Structural Trend
Translating these on-ground observations into investment strategy, Shyamsunder identified premiumization as a powerful, structural theme playing out across the economy. Whether in Bihar or Bengaluru, consumer demand is disproportionately shifting towards higher-end products. This trend is evident across sectors, from consumer durables and appliances to real estate, where buyers are increasingly opting for branded, organised players and better-quality offerings, even at a premium.
This shift from unorganised to organised markets is driven not just by regulatory compliance but by a clear aspiration among Indians, who are now buying what they want, not just what they need. Even after GST reductions, companies note that consumers often prefer to upgrade to more premium models instead of settling for cheaper alternatives.
Valuation Outlook and Sectoral Preferences
Addressing the perennial question of market valuations, Shyamsunder acknowledged that while markets are not cheap, the current levels can be justified. Large caps are trading above historical averages, but a structural decline in the cost of capital, stable rates, and lower inflation volatility support this re-rating. Midcaps, trading at 27-28 times earnings, continue to justify their premium with stronger double-digit earnings growth compared to the high single-digit growth of large caps.
Looking ahead, he expects a potential earnings rebound in FY27, with growth projected at 17-18%, largely driven by the financial sector. From a sectoral standpoint, Franklin Templeton remains positive on financials, consumer discretionary, services, and real estate. The firm is underweight on capital goods due to stretched valuations and historical concerns about order books translating into actual revenues and profits, though they acknowledge the strong medium-term growth story linked to capex.
In the power sector, the approach has become more selective, focusing on companies with solid balance sheets and clear execution capabilities. The overarching investment philosophy remains grounded in long-term, qualitative insights gathered from granular, on-ground feedback rather than relying on isolated data points.
