The brokerage said the prolonged West Asia crisis has sharpened the risk of a two-fold impact on Indian corporates in the form of a margin shock from higher energy and commodity prices and currency depreciation, and a “growth shock” from weaker government and private capex, slower credit growth and demand contraction.
Its economists now assume crude at $92.5 dollars, with India’s FY27 GDP growth trimmed to 6.5% and headline CPI pegged at 5.2%.
“In the event of a prolonged conflict, our worst case suggests a sharp slowdown in demand & investments, with GDP growth falling towards 3% and Nifty earnings growth dropping to 0% in FY27,” BofA warned, flagging risks from India’s heavy energy dependence on the Middle East, which accounts for 28% of crude, 64% of LNG and 94% of LPG imports. The report estimates that around a quarter of Nifty earnings face a negative impact from the spike in energy and commodities, while only about 11% of index profits stand to benefit.
Even after the reset, BofA’s 8.5% Nifty FY27 earnings growth forecast is well below consensus expectations of 15%, and the brokerage expects “another round of earnings cuts for Nifty” as analysts factor in higher input costs and softer volumes.
It projects Nifty earnings growth at 7% in FY26, 8.5% in FY27 and 14% in FY28, against consensus at 7%, 15% and 15%, respectively.Also Read | Earnings downgrade alert: How $110 crude and Iran war are threatening India Inc’s double-digit dreamOn valuations, the house argues that while the selloff has improved the risk-reward, the market has yet to reach bargain territory. “Even on our conservative earnings, Nifty now trades close to long-term average valuations,” it noted, adding that its base case assumes a one-year forward multiple of 20.4 times, slightly above the 10-year average of 19.4 times, implying a 15% upside to its December 2026 Nifty target of 26,200 from the current level of 22,713.
However, in a bear case where valuations slip to about 16.3 times, below minus one standard deviation, the index could fall to 20,910, or roughly 8% downside, while a worst-case scenario of zero earnings growth and a 15 times multiple (minus two standard deviations) would take the Nifty down to 17,404, about 23% lower.
“Our analysis of six crises over the past 15 years suggests Nifty valuations typically contract between -1SD and its 10-year long term averages, while they expand to a premium versus LTA post the crisis,” the strategists wrote, concluding that “markets are still not in a value zone” given the scope for further de-rating if flows and macro conditions worsen. They also pointed out that on relative metrics, the Nifty remains expensive versus emerging markets both on price-to-earnings-growth (PEG) and on earnings yield versus bond yields, and reiterated their call that India is likely to underperform EM peers.
Foreign investor behaviour is a key swing factor in BofA’s framework. The report highlights that India is on track for “two consecutive weak FII flow years,” something it “never witnessed” in the past decade, and cautions that in its bear case, domestic institutions may be “unable to absorb continued FII selling,” putting additional pressure on valuations.
Historical data in the note show significant Nifty drawdowns coinciding with periods of negative combined FII and DII flows.
Which stocks to buy?
Despite the cautious top-down stance, BofA is not uniformly bearish on Indian equities and stresses that the risk-reward is “turning favourable” selectively. It prefers largecaps mostly Nifty vs Nifty Junior, and specific themes in small and midcaps, while downgrading rate-sensitive pockets such as mid-sized private banks, NBFCs, real estate and passenger vehicles to underweight, and staying wary of mass-consumption and capex plays like staples, retailers, steel, cement, capital goods, roads and railways.
The brokerage’s preferred themes include energy security (regulated power utilities, gensets, cables, transformers), “rate hike beneficiaries” such as large private and PSU banks, and “well-off consumption” plays in travel and tourism, durables and two-wheelers, along with upstream energy, aluminium and pharma among global cyclicals.
Its list of 24 “high conviction ideas” spans HDFC Bank, ICICI Bank, Shriram Finance, Bharti Airtel, Larsen & Toubro, M&M, Hero MotoCorp, NTPC, Power Grid, NHPC, Coal India, Vedanta, Hindalco, Eternal, ONGC, Oil India, IndiGo, Varun Beverages, Dabur, Apollo Hospitals, GAIL, Petronet LNG, Lodha and Godrej Properties, where it sees value at current levels despite macro headwinds.
Overall, BofA’s message to investors is that Indian equities are no longer at euphoric valuations but have not yet reset to levels that would justify calling them cheap, especially in the context of elevated geopolitical risk and a looming earnings downgrade cycle.
“Relief rally over the next 12 months could be shallow,” it said, arguing that the Nifty’s recovery from the current crisis may look more like the post Russia–Ukraine or China slowdown episodes than the powerful rebound that followed the Covid crash.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
