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A sustained decline in crude oil prices, stronger corporate earnings and a renewed focus on stock valuations could help Indian equities recover from recent weakness, although geopolitical uncertainty and domestic macroeconomic pressures are likely to weigh on market sentiment in the coming months, according to a research report by Kotak Institutional Equities.
Kotak Equities identified three potential triggers for a market recovery, a durable end to the Iran-US conflict and normalisation of crude oil prices, stronger-than-expected corporate earnings, and a shift in investor attention towards valuations rather than short-term price movements and fund flows. We do not see any immediate relief for Indias challenged macro, the report said, citing the stalemate in peace talks, risks of further escalation and deficient monsoon conditions. It also warned that the impact of elevated crude oil prices on India's major macroeconomic parameters could become disproportionate beyond a certain level. Against this backdrop, the ongoing September-quarter earnings season could provide greater clarity on the outlook for corporate profitability. Net profits of Nifty-50 companies reporting so far in the second quarter of FY27 rose 19 per cent year-on-year, exceeding estimates by 1.7 per cent, while earnings before interest, taxes, depreciation and amortisation (EBITDA) increased 13 per cent, according to the report. The brokerage expects Nifty-50 net profit to grow 18 per cent in FY27 and 13 per cent in FY28. It said limited earnings downgrades in recent months and stronger first- and second-quarter results offered some comfort despite persistent macroeconomic headwinds. The report also pointed to opportunities emerging from the recent market correction, arguing that lower valuations have improved the risk-reward balance across a wider range of stocks. We believe that a greater focus on the favorable price-value gap in more stocks after the sharp correction in recent weeks will help dispel the gloomy mood in the market, it said. However, the outlook remains sensitive to the trajectory of crude oil prices. Under its base-case scenario, the report assumes average crude prices of USD 90 per barrel in FY27, with real GDP growth at 7.2 per cent and average consumer price inflation at 5.2-5.5 per cent. In an adverse scenario involving crude prices averaging USD 105 per barrel, growth could moderate to 6.3-6.8 per cent, while inflation could rise to 5.5-6 per cent. The report noted that the sustainability of an equity market recovery would depend on easing external pressures and improving confidence in earnings growth and valuations. (ANI)
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