Higher cost of capital is here to stay, says IKIGAI’s Pankaj Tibrewal
On the primary market, Tibrewal notes that a substantial portion of the earlier anticipated IPO wave has already passed, though the pipeline in small and mid-caps remains healthy
The age of near-free capital is ending, and Pankaj Tibrewal believes equity investors will have to adjust. “This is no longer merely an inflation story. It is a cost-of-capital story,” he said. When the risk-free rate sits above 5 per cent, the hurdle for every other asset rises. Businesses whose profits sit far in the future become more sensitive to changes in the discount rate. Companies that depend on continually raising capital face a higher cost of doing so.
Those that generate genuine free cash flow and can fund their own growth become relatively more valuable. In his assessment, the shift creates a more favourable backdrop for fundamental stock selection than the liquidity-driven markets of the previous decade. The US 10-year Treasury yield recently touched 5.34 per cent, its highest level since 2002. More than 70 per cent of the rise since February has come from higher real rates, not just inflation expectations.
For over a decade after the global financial crisis, money was abundant and the cost of capital hovered near zero. Duration was rewarded, leverage was easy, and narratives often mattered more than near-term cash flows. That environment, Tibrewal argues, is receding. That view is already reflected in how Tibrewal is managing his portfolios. He has modestly trimmed earnings growth expectations. The Emerging Equity Fund is now projected to deliver roughly 28 per cent growth in FY27 and 25 per cent in FY28, a notch lower than the 29 per cent and 28 per cent estimated earlier.
The numbers remain healthy, and both the Emerging and Small Cap portfolios continue to trade around 25 times forward earnings — a PEG ratio close to 1x that he still finds reasonable. A degree of near-term softness, he says, is expected and manageable. The one development that would force a more meaningful rethink of his estimates is crude oil breaking decisively above $110 a barrel. At $90-100, the range is already known and largely absorbed.
India’s oil intensity has fallen sharply over two decades, services exports provide a solid buffer, and the current-account deficit remains manageable even in an adverse oil scenario. The same wariness of excess appears in his reading of the AI trade. Tibrewal is becoming more circumspect without calling a top. The S&P 500’s cyclically adjusted price-to-earnings multiple has moved above 35 times, margin debt has hit a record $1.3 trillion, and concentration at the top of major indices is extreme.
Hyperscaler capital expenditure is running at levels that raise questions about eventual returns, especially as more of it is debt-financed. Investor expectations around US equities and the AI narrative, he observes, have entered a zone of visible excess. The technology remains transformative; the current pricing of that transformation is a separate matter. Against this global backdrop, Tibrewal remains constructive on India.
Indian indices have endured nearly two years of time and price correction. The economy has not. Real GDP grew 7.8 per cent in the June quarter, gross fixed capital formation rose 12 per cent, bank credit growth is running near 18 per cent — the strongest in a decade — and corporate earnings have continued to compound. Valuations have reset: the Nifty’s forward multiple has compressed by almost 30 per cent from the peaks of two years ago.
The divergence between market performance and economic performance is, in his view, one of the clearer features of the current cycle. Sector preferences remain aligned with the broader thesis. Financials continue to appeal now that NIM compression is largely behind. Materials — specialty chemicals, metals and cement — offer operating leverage as destocking ends and utilisation improves. Healthcare and CDMO benefit from structural supply-chain shifts.
Select auto-ancillaries and parts of consumer discretionary look attractive after valuation compression. More than 70 per cent of the portfolios remain oriented toward the domestic economy. On the primary market, Tibrewal notes that a substantial portion of the earlier anticipated IPO wave has already passed, though the pipeline in small and mid-caps remains healthy. Large-caps may see greater activity through QIBs and bulk or block deals.
IKIGAI itself is evaluating a large-cap offering, though the timing is still open. The larger point he returns to is one of temperament. Markets will keep surprising. Narratives will keep rotating. The enduring edge, in his view, lies in owning businesses with capable management, strong balance sheets and the ability to compound earnings, bought at sensible prices, and held with enough patience for business performance to show up in returns. In a world where capital is no longer free, that discipline may matter more than it has in a long time.
