The recent surge in crude oil prices due to the Iran-US conflict has reintroduced macroeconomic pressures on India, potentially affecting the current account deficit, inflation, and GDP growth. Despite these challenges, Karthikraj Lakshmanan remains optimistic about India's earnings growth prospects for FY27, expecting double-digit growth.
By February, the market had absorbed most macro concerns, including trade deal progress with the US and Europe and expectations of double-digit nominal GDP growth. However, the sustained rise in crude prices over the past few months has raised concerns about India's economic stability. Lakshmanan acknowledged potential earnings cuts due to higher crude prices but emphasized India's stronger position compared to past stress periods like 2013.
Q4 earnings have been broad-based and better than previous quarters, although Q1 might see some sector-specific impacts due to elevated oil prices. Lakshmanan highlighted crude as a critical variable to monitor going forward. For FY27, consensus estimates for earnings growth are in the mid-to-high teens, with possible moderation at the index or large-cap level due to commodity pressures.
“India remains in a stronger position compared to past stress periods such as 2013, and still retains the potential for double-digit earnings growth in FY27.”
Karthikraj Lakshmanan
Lakshmanan remains positive on financials, particularly private banks and insurance, citing strong return ratios and attractive valuations. Rising interest rates could further support banking sector profitability. Despite high domestic investor ownership in financials, he believes valuations and fundamentals should drive investment decisions.
He also holds an overweight stance on IT stocks, viewing it as a contrarian call. Indian IT companies continue to generate strong returns and cash flows, with additional earnings visibility from modest rupee depreciation. Concerns about slower constant currency growth and AI disruption are acknowledged, but IT services companies are expected to play a significant role in AI implementation.
In healthcare, mid and small-cap companies offer better growth opportunities than large-cap names. In capital goods, strong momentum is driven by power sector demand and data centre-related capex. However, Lakshmanan advises a selective approach due to high valuations.
Background
The Indian economy has faced various macroeconomic challenges in recent years, including trade tensions and inflationary pressures. The recent surge in crude oil prices adds another layer of complexity, potentially impacting key economic indicators. However, India's economic fundamentals have shown resilience in the past, providing a buffer against such external shocks.
The unpredictability of capital flows, whether FII or domestic, should not dictate market positioning. Instead, investment decisions should focus on fundamentals, earnings visibility, and valuation comfort. While near-term volatility from crude oil and inflation risks exists, India's broader earnings cycle into FY27 suggests steady growth, with selective sector opportunities driving market returns.
