Jefferies anticipates a rise in corporate earnings growth to 14% in FY27, following a 10% growth for MSCI India in FY26. Despite improved earnings momentum, with companies excluding oil and gas and metals recording 18% year-on-year growth in the June 2026 quarter, elevated valuations and rising equity supply may limit returns.
Jefferies' preferred stocks are in sectors like lenders, power, ports, and real estate, expected to benefit from the investment cycle and higher nominal growth. The brokerage sees potential upsides of 24% for HDFC Bank, 35% for Axis Bank, and 28% for SBI. In power, NTPC, Adani Energy Solutions, and JSW Energy are projected to have upsides of 30%, 49%, and 39%, respectively. Adani Ports and JSW Infrastructure are expected to see 31% and 19% potential upsides.
The Indian market remains expensive compared to other emerging markets, with MSCI India trading at around 20 times one-year forward earnings. The valuation premium is about 98%, compared to a 10-year average of 63%. Companies accounting for 31% of MSCI India's weight trade at valuations over 10% above historical averages, leaving less room for multiple expansion.
Domestic investors continue to support Indian equities, but Jefferies expects the pace of domestic flows to moderate. SIP returns have weakened, particularly in large caps, with one-year SIP returns for the Nifty 50 at minus 1.3% as of July 31, 2026. Rising equity supply from IPOs, promoter sales, and government disinvestment could absorb fresh demand.
Bank credit growth has surged to 18%, driven by higher working-capital demand. Jefferies expects credit growth to normalize to 13%-15% from the second half of FY27. The brokerage forecasts 14% loan growth and 13% net-interest-income growth for banks over FY26-FY29. However, PSU banks face risks from transitioning to expected-credit-loss provisioning norms and potential wage cost increases.
The power sector presents significant opportunities, with investment in generation and transmission expected to rise 2.1 times to over $200 billion in FY26-FY29. However, the execution of projects and capacity additions are crucial for realizing these opportunities. In the ports sector, terminal privatization offers potential upside, but the pace of privatization and capacity commissioning will be key.
While the real estate sector shows strong demand, with residential property sales expected to grow 10%-15% in FY27, the recovery remains concentrated among organized developers. Industry-wide sales growth may support a selective stock rally rather than a broad market surge.
Background
India's stock market has been characterized by high valuations compared to other emerging markets, which poses challenges for investors seeking growth opportunities. The country's valuation premium over emerging markets is significantly higher than its historical average, necessitating strong earnings growth to justify current levels.
As India navigates these dynamics, investors should watch for shifts in domestic and foreign inflows, valuation adjustments, and sector-specific developments that could impact market performance.
