India's equity market enters FY27 with elevated valuations and a halved earnings growth outlook, according to Amish Shah, Head of India Research at BofA Securities. The West Asia conflict has significantly impacted corporate India's profit trajectory, reducing Nifty earnings growth from 14% to 8.5% due to higher crude prices, inflation, and other economic pressures.
Valuations in India's equity market remain high, with a 73% premium over emerging market peers, far above the long-term average of 46%. Shah warns that this gap is more likely to narrow, with Indian equities no longer attractive on a yield basis compared to domestic bonds. The Nifty is expected to compound at the same pace as earnings, with returns in the 8–9% range.
Domestic institutional investor flows are a key factor preventing sharper valuation corrections. Shah anticipates a time correction in the market, with equities trading sideways as earnings catch up, rather than a sharp price fall.
“We had started the year at 14% Nifty earnings growth. But immediately as the conflict broke out we brought it down to 8.5%, because we had to budget for higher crude, higher commodities, fiscal deficit higher, inflation higher, rates higher, currency depreciating — so on and so forth.”
Amish Shah, Head of India Research at BofA Securities
Within the Nifty's 8.5% earnings growth, banks and telecom sectors show positive prospects, while IT services and autos face challenges. The IT sector's PE multiple has de-rated significantly, and BofA remains underweight due to sluggish growth and valuation gaps compared to global peers.
The longer-term wildcard for India's market could be its energy security policy response. If the government takes decisive action on EV adoption and green energy, sectors like capital goods and utilities could benefit significantly.
Background
India's equity market has been grappling with high valuations for some time, and the recent geopolitical tensions have further complicated the earnings outlook. The market's premium over emerging peers and domestic bonds has been a concern for investors seeking attractive returns.
Investors should monitor domestic flows and government policy responses closely, as these will be critical in shaping the market's trajectory in the coming months.
