El Nino, Inflation and Commodity Risks May Curtail Broad-Based Market Rally; PL Capital Raises NIFTY Target to 27,123
Strong 1QFY27 corporate performance, with 15.5% sales growth and 17% PAT growth excluding Oil & Gas, provides support to the market
Strong credit growth of 18.6% and FCNR inflows could improve liquidity and provide USD 70-80 billion of additional credit availability
Deficient monsoons, rising agricultural commodity prices and potential earnings downgrades pose risks to demand, margins and inflation
PL Capital, one of India's most trusted financial services organisations, in its latest India Strategy Report titled "Emerging headwinds to curtail broad based rally", believes that while the Indian equity market has remained resilient despite geopolitical uncertainty, deficient monsoons and global supply-chain disruptions, emerging risks could limit the sustainability of a broad-based market rally. The brokerage remains constructive on the medium-term outlook, supported by resilient domestic demand, strong credit growth and improving liquidity, but expects markets to remain volatile in the near term.
According to the report, India's corporate earnings remained strong in 1QFY27, with PL Research's coverage universe excluding Oil & Gas reporting 15.5% sales growth and 17% PAT growth, the highest PAT growth since 4QFY24. However, EBITDA growth at 9.6% remained below the average of the previous eight quarters, while EBITDA margins declined by 148 basis points, indicating that the impact of higher commodity costs and supply-chain disruptions is beginning to emerge. The full impact of higher-cost inventory is expected to become more visible from 2QFY27.
Taking into consideration market valuations and the medium-term earnings outlook, PL Capital has raised its 12-month NIFTY target to 27,123 from 27,019 earlier. The NIFTY is currently trading at 17.3x one-year forward EPS, representing an 11.7% discount to its 15-year average P/E of 19.6x. PL Capital values the index at 10% discount to its 15-year average P/E, based on FY28 EPS of Rs 1,537.6. The brokerage's bull-case target stands at 30,137, while its bear-case target is 24,971, suggesting limited medium-term downside despite near-term volatility.
The report highlights El Nino and the deteriorating monsoon situation as key risks to inflation and demand. India's cumulative monsoon deficit has widened to around 14%, with 17-18 of 36 meteorological subdivisions reporting deficient rainfall. Skymet has forecast a 70% probability of drought and expects the seasonal monsoon deficit to reach 15%. PL Capital believes a stronger El Niño could drive higher prices of agricultural commodities such as coffee, cocoa, palm oil and soybean, adding pressure to food inflation and consumption demand.
The brokerage also sees risks to RBI's inflation trajectory. While the RBI has projected FY27 CPI inflation at 5%, PL Capital believes inflation estimates for the third and fourth quarters could face upside risks due to deficient monsoons, higher agricultural commodity prices, volatile crude and supply-chain disruptions. Against this backdrop, the brokerage sees a strong possibility of a 25 bps rate hike toward the end of 3Q/4QFY27, with the possibility of a 50 bps increase depending on crude prices and geopolitical conditions.
At the same time, credit growth remains a key support for the economy, rising to 18.6% in June. The FCNR mobilisation is expected to provide an additional USD 70-80 billion of credit availability, equivalent to around 2.5-2.8% of system credit. PL Capital believes this could improve money-market liquidity, support currency stability and provide additional growth capital to the banking system. FCNR inflows had reached USD 52.3 billion as of August 14 and could rise to around USD 75 billion before the window closes on August 31.
On earnings, PL Capital believes the 17.7% NIFTY EPS growth projected for FY27 is at risk as higher raw-material costs, deficient monsoons, successive price increases in essential goods and elevated crude and commodity prices could weigh on demand and corporate profitability. The report notes that NIFTY EPS estimates have witnessed meaningful cuts in five of the last eight years, warranting greater selectivity in the current environment.
From a sectoral perspective, PL Capital remains overweight on Banks, Capital Goods, Diversified Financials, Metals, Healthcare, Telecom and Ports, while remaining underweight on Automobiles, Consumer and IT Services. The brokerage is increasing exposure to Metals, Capital Goods/Defence, NBFCs, Asset Management Companies, Telecom and Ports.
Commenting on the report, Mr. Amnish Aggarwal, Co-Head – Institutional Equities, PL Capital, said, "Indian equities have demonstrated remarkable resilience despite a challenging external environment, supported by steady domestic demand, strong credit growth and improving liquidity conditions. However, the outlook is becoming increasingly bifurcated as deficient monsoons, El Nino, commodity inflation and potential margin pressures could weigh on consumption and earnings. While we remain constructive on India's medium-term growth trajectory and see limited downside at the index level, near-term volatility is likely to remain elevated. In this environment, investors should adopt a selective, stock-specific approach, with greater focus on sectors benefiting from domestic investment, credit growth and structural economic themes."
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