Avtar Madan

Good Time to Enter India: “Dean of Valuation” Prof. Aswath Damodaran (a) FIIs will return in a herd when AI trade ends (b) AI bubble burst is coming (c) Retail investors ill-served in India; trapped at high PE (d) Wealth of Investing INSIGHTS:. Indian Valuations Getting Better a. Professor of Finance at NYU Stern, Dr. Aswath Damodaran is globally regarded as the “Guru of Valuation.” His free-to-access stock valuation lectures are the world’s most watched finance class on YouTube. b. On Feb 8, 2025 Damodaran wrote on his blog: “The world’s most expensive market is India. No amount of storytelling about India can justify paying 31x Earnings, 3x Sales, and 20x EBITDA.” Investors ignored the Professor’s warning. c. Nifty PE Now Down to 20x: “My advice to investors now is: The old narrative was “India is a great story.” The new narrative is “India has no story at all.” Markets move from extreme optimism to extreme pessimism. d. Time to Enter for Long-Term Investors: (1) Valuations have improved (2) Long-term India story has legs. “Given these two facts, this is a good time to enter. Compared to past, I feel relatively upbeat about equity valuations now.” FIIs Leaving Is a Good Sign a. FIIs are sheep (they have herd mentality). When the herd leaves, it is a good time to enter. Herds reflect the mood of the moment. That’s the time to be a contrarian and act against crowd behaviour. b. FIIs Exits: We assume foreign investors are deep thinkers that do fundamental analysis of countries. In reality, they are looking at the exit door. They see two other people exiting the door, they will exit as well. c. FII Entry: Similarly, they are watching the entry door. If two other people went in through the door, they will enter as well. FIIs are the biggest sheep in the investing community. d. People think professional investors with data & models are smart. In reality, professional investors are capable of some of the stupidest investing decisions. Retail, on the other hand, has better collective wisdom. e. FIIs are exiting because they have a fear of being left alone. The worst thing a professional investor can do is be wrong alone. It’s the end of their career. So, they will stay with the herd even they don’t agree with the herd. FIIs Will Return in a Herd a. FIIs will be back to India as suddenly as they left. They are mood-and-momentum driven; not driven by any serious assessment of the future. The mood shift may come from the rest of the world turning bad (AI going bust) rather than India turning good. b. Markets have a short memory. Remember Argentina as a classic example. It has defaulted 5 times on its sovereign debt. It has a crisis every 3-4 yrs. Yet, every few years I get an email: "Argentina is back. Foreign investors are pouring in." c. Remember: India growth story began when China story was crashing. Investors had to go somewhere. It’s the same thing now in reverse. AI story is sucking money out of India. So, this too shall pass. Retail Investors Ill-Served a. Indian retail investors have been ill-served now for a decade. So much of their money has gone into Indian equity at false valuations. That happened because retail investors had no other choice. b. FD rates in India were low. Real estate was high. Global investing is intentionally made difficult & expensive for retail. So, India is the world’s worst home-bias market: a single-country bet for retail investors. c. Long-Term Entry Point: Considering these limitations, investing your money in India at 20x PE is a fair deal for long-term retail investors. Your existing portfolio is bleeding. But your new money will go in at a much better trade-off. AI Bubble Is Waiting to Burst a. AI is absolutely a bubble that will burst. Think of AI as the largest factory we have built in the history of mankind with trillions of dollars in capex. But we don’t know what the factory will make (no AI apps, AI products, AI services yet: except AI search & AI generated content.) b. The only people who have benefited so far from this factory are the people who supplied the parts to the factory. Chip makers, electrical equipment makers, power companies, and real estate for data centers. c. That’s why I call Nvidia the drug dealer. AI capex is the drug, and the high that it gives is “hope.” These drug suppliers are the people who want the factory to get bigger and bigger. They don’t want the party to end. d. This AI factory without any products is like the ghost cities of China. Millions of empty apartments: and no one to buy them. Right now, the AI product & service business generates $250B in revenue versus a capex of $3 trillion. e. AI product & service revenue has to be much, much, much bigger than $250B for the factory cost to break-even. If you build too large & expensive factory, and there is not enough demand, it is bound to end badly for the shareholders. f. Which Stage Is AI Bubble Now: The last dance performance has begun. Yesterday during Meta Earnings Call, the CFO said they need more AI capex for Muse model. The stock price dropped in real time while the CFO was talking about more capex. g. Two years ago, if you were talking about AI capex, your stock price went up. People were buying the buzz. Now they want to see evidence of money in instead of money out. That’s the stage before the final reckoning. There will write-downs of capex. It’s coming. Endpiece: Advice for Investors If I were to wish a quality on an investor that will make them successful, I would say: Have a perspective across time periods, across markets. It will make you much more grounded about your investing decisions rather than being reactive (impulsive, emotion-driven), which is the most dangerous place for an investor to be.