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PL Capital, one of India's most trusted financial services organisations, in its latest India Strategy Report titled "West Asia Crisis, El Niño can play a spoil sport", believes that while India's structural growth story remains firmly intact, the domestic economy continues to face near-term risks from geopolitical uncertainty, weather-related disruptions and inflationary pressures. Despite these challenges, improving domestic demand, easing crude oil prices and attractive market valuations continue to provide support to the broader equity market.

According to report, the NIFTY Index has witnessed gains of nearly 7.3% in the past two months and 8% from 52-week lows on the back of easing crude oil prices, temporary ceasefire in West Asia, and robust economic performance in India. Credit growth has picked up to 17%, indicating solid demand in sectors such as retail, services, agriculture, and industry, while policies of the Indian government have insulated the economy from global disruption in supply chain and commodity prices.

Taking into consideration the improvement in the macroeconomic environment and valuations, PL Capital has raised its one-year NIFTY target to 27,019 from 26,449 before. The company estimates the value of the index at 10% discount to its average 15-year price-to-earnings ratio for FY28 earnings. Despite the rally in the market, which has raised valuations, the NIFTY is trading at a discount of 11.7% to its historical average.

However, report notes that there is an indication that earnings expectation is still under pressure. Earnings expectations for FY27 and FY28 NIFTY have been reduced by 0.9% and 0.4% respectively by PL Capital with their forecast still lower than the overall market expectation. The research firm believes that there could be additional earnings reduction should any adverse geopolitical developments and weather situations negatively affect consumption and earnings of firms.

Corporate Earnings in the first quarter of FY27 has generally remained solid amid global uncertainty. Earnings after taxes excluding the oil and gas sector is expected to be up 14% YoY due to good demand in Banks/NBFC, consumer durable, hospitals, metals, renewable and engineering services. Demand for weddings and festivals has generally been strong despite higher prices of gold while good summer demand has resulted in increased sales of air conditioners, beverages and others. Rural demand has remained stable although its sustainability would largely be determined by monsoon progress.

The report also mentions that increased input costs continue to be a major worry, as seen by margin pressures in various sectors. Increased food costs, crude cost increases and disruption in logistics are likely to gradually translate into higher inflation over the second half of FY27. Inflation, despite remaining moderate, is anticipated to increase on account of an unfavourable base effect as well as the growing likelihood of Super El Niño phenomenon in the current monsoon season.

Monsoon situation, yet again, continues to be one of the major concerns. While deficit rainfall has reduced from about 40% in June to about 21% currently, unevenness of rainfall persists throughout the country. Sowing in Kharif crops has been almost 21% lower this year compared to last year in crops such as oilseeds, pulses and cotton. If such deficits continue to prevail for the rest of the monsoon period, then agricultural production as well as food inflation would come under pressure.

Moreover, the report adds that geopolitical factors will continue to shape the macroeconomic dynamics of India as well. Although reduced oil prices have brought some reprieve for India, there may still be disruptions in global supply chains and commodity prices if tensions escalate in West Asia. Higher spending by the government on subsidies, along with weather issues, may cause further problems for the government's finances, although record dividend payments from the RBI, buoyant GST revenues, and strong industrial production will continue to aid the economy.

In terms of monetary policy, PL Capital feels that liquidity in the country will see even more improvement with the FCNR bonds issue planned. However, with higher inflation in food and fuel prices, an interest rate hiking cycle may become unavoidable in the second half of FY27.

From the sectorial point of view, PL Capital has a positive outlook on the Banking, NBFCs, Capital Goods, Defense, Telecommunication, Jewellery, Hospitals and Consumer Durables segments based on the favourable trends in domestic demand, infrastructure investment, manufacturing prospects, and credit growth. However, the brokerage is cautious on Auto, Consumer, IT Services, Cement, Chemicals and Oil & Gas companies.

Commenting on the report, Mr. Amnish Aggarwal, Co-Head Institutional Equities, PL Capital, said, "India has been showing resilience in the face of an uncertain external environment. The current market rebound is due to steady domestic demand, lower crude oil prices and positive credit growth. But at the same time, investors need to be alert to any potential problems that may emerge from new geopolitical issues, rising inflationary pressures and the likely impact of El Nino. Although some volatility in corporate earnings might continue in near term, long-term growth dynamics will keep us cautiously optimistic on India. We feel that it is important for investors to have a stock-specific approach in investing."

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