In a sharp reality check for the Indian equity markets, BofA Securities has sharply downgraded its Nifty earnings growth forecast for financial year 2026-2027 (FY27) from 14 per cent to 8.5 per cent, warning that the ongoing conflict in West Asia could weigh on corporate profitability through higher crude oil prices, rising inflation, macro stability, and currency resilience.
Speaking in an interview with ET NOW, Amish Shah, Head of India Research at BofA Securities, said the brokerage has reduced its FY27 Nifty earnings growth estimate to 8.5 per cent from 14 per cent projected earlier, citing a deteriorating macroeconomic backdrop following geopolitical tensions in the Middle East.
Created with AI. Errors are possible“Coming to growth, because of the West Asia conflict primarily, otherwise it was looking like a year that on a low base of FY26 growth, FY27 can be 14-15% earnings growth. But because of the West Asia conflict, crude, commodities, macro factors getting impacted, we now think that Nifty earnings growth for FY27 will only be 8.5 per cent,” Shah said.
Valuations still expensive
Despite a correction from recent highs, Shah believes Indian equities continue to trade at elevated valuations relative to both their own historical averages and other emerging markets.
According to BofA, India’s valuation premium over emerging markets had peaked at around 110 per cent and currently stands at about 73 per cent, significantly above the long-term average of 46 per cent.
“Valuation-wise, India unfortunately does not offer comfort. Looked at multiple ways, when we look at India’s valuation compared to its own history we are slightly higher than the long-term average. When you compare it to the emerging markets adjusted for growth, India at the peak used to be at 110% valuation premium to EMs. Currently it’s at 73. Long-term average is 46. So, there’s still some scope for valuation contraction rather than expansion. Compared to even bonds in India, valuations for bonds are now more attractive than the Indian equities. So, valuation unfortunately is not going to be the driver for the market,” Shah said.
“14% is what we had started the year, but immediately as the conflict broke out we brought it down to 8.5 per cent because we had to budget for higher crude, higher commodities, fiscal deficit higher, inflation higher, rates higher, currency depreciating, so on and so forth. So, when you pack up pack it all together, earnings growth has come and knocked down,” he added.
Valuation is not going to be market driver: Shah
Shah further expects market returns to broadly mirror earnings growth as long as domestic institutional inflows continue to support valuations.
“Valuation is not going to be the market driver. Markets will compound equal to earnings growth. If earnings growth is going to be 8.5 per cent, broadly that’s the return that you will get from the markets. Domestic flows are large part of even that 8.5 per cent earnings growth. For whatever reason, if the domestic flows were to stem, then the valuation gap that we were talking about contracts. But we don’t think as a base case that domestic flows do come off. As a result, we do think that valuation stays. Markets compounds in line with earnings,” he said.
Banks, telecom and commodities to lead growth
BofA expects a handful of sectors to contribute the bulk of earnings growth in FY27. Shah identified banks, telecom operators, commodity producers and industrial companies as key earnings drivers. He further believes telecom companies to benefit from tariff hikes, while metal producers could gain from stronger aluminium and copper prices.
“Different indices different answers. If you stick to Nifty, banks I think is a large part of it. Telecom on the back of tariff hikes that are expected this year is a large part of it. Commodity plays is a large part of it because aluminium, copper, all of these prices are going up. And then you have certain subsectors like industrials on the back of strong order book. We do think that vast majority of them will do 15% to 20% earnings growth. And then shade higher is going to be utilities. So, they will do about 10%-11%. And then there are other sectors which are going to be a drag on growth like IT, staples, downstream energy and so on and so forth which is going to be a drag on the earnings growth,” Shah said.
Energy security emerging as a major theme
One of the key themes highlighted by Shah was India’s need to reduce its dependence on imported energy in light of geopolitical disruptions.
On the outlook for power sector, Shah stated, “A large part of their growth depends on whether the government comes up with policies for energy security. Logically and economically, it makes sense to come up with these policies. Will the government come? It’s anybody’s guess. Maybe that is the reason why we are also zooming in a lot during our conference with a variety of speakers and policy makers to explain us on what are they thinking in terms of energy security. But, think about it that as we know that this is not an India conflict. This is somebody else’s conflict, but we are getting impacted only because we import a lot of energy. How do you, if this were to happen next time, how does India not get impacted?”
“By saying that, what can we have our own energy sources where we don’t have to import from the rest of the world. How do you do that? Plenty of ways. One of the examples is electrify. So, can you have more EVs at the cost of, let’s say, a gasoline-run car? Can you have more induction cooking? Can you have an electric furnace for industries rather than a gas-fired furnace? Can you have biofuels that are that are manufactured more from the agricultural products and therefore replace crude. And can you also have coal gasification, which is India’s coal converted into gas and brings down imported gas. So there are solutions to it. And as I’m saying that you know, when you do the numbers, there is an economic viability to do these things. But will we do it is uh you know, is a billion-dollar question. And we will see as we go along. In if India works towards these policies, I think the growth outlook of all of these firms that you mentioned improves meaningfully,” he said.
IT sector still lacks triggers: BofA Securities
On the information technology sector, Shah said the worst of the slowdown may be over, but visibility on a meaningful recovery remains limited.
“From IT sector, growth perspective, we do think that the large IT companies are already down to 2% to 3% growth, constant currency terms without taking the benefit of rupee depreciation. That we think now sustains. From throwing in valuations and therefore thinking of that as a stock argument or debate perspective, we do think that, now they’ve come off to levels where…we are still underweight on that sector, by the way. But we have toned down our underperformance,” Shah said.
“But at the same time, we don’t see reasons to get excited or there are no there are no triggers to be excited, especially because there’s a there is still a large valuation gap because the international IT firms are trading at 9 to 10 PE multiples, whereas the Indian IT firms large caps are trading at 15 to 16. The midcaps are trading upwards of 25. There is not too much of difference in terms of their growth or free cash flow yields. And even the client said that they cater to is the same. In a variety of other sectors you can make an argument that India offers higher growth and higher returns and therefore Indian peers should trade at a premium to their foreign peers. But in IT you can’t make that argument because they’re catering to the same cohort of clients and the same markets and as a result, 40-50% kind of a valuation gap is too large enough. So, we are not as excited to jump or bottom fish in that space yet,” he explained.
While he believes Indian IT companies will eventually benefit from artificial intelligence adoption, the timing remains uncertain.
“It’s more the latter. We do think that the benefits will accrue. The debate now within investors is only about the timing of it. That can it get worse before it gets better? That’s a tough one to answer and which is why because you cannot answer what will happen to earnings growth, you will want to reflect that in cheaper valuation multiples,” he added.
“The worst is over but there is no visibility of an uptick yet. So till that time the visibility does not come in, you know, valuation expansions is difficult to argue,” he said.
Speaking about the IT theme from an India standpoint, he said, “If you’re a domestic mutual fund manager, I would argue that you would have to be underweight IT. If you’re a foreign investor, you may you know, if there is no compulsion for you to own IT, you may not want to have it in your portfolio right now. If you’re a hedge fund, you might probably want to still continue with long AI short IT trade which I think will continue to work.”
“The ecosystem plays exist like you know, we have data centers, cables, transformers, gensets and so on and so forth. That I think continues. But yes, are we going to be an AI large language model innovator? That unfortunately is difficult,” he concluded.
Indian IT Sector Facing Severe AI Challenge: Is The 50% Valuation Gap Justified? | Midcap IT vs PSUs {WATCH FULL}
