Whalesbook
Nifty earnings forecasts have stabilized after a year of downgrades, according to BofA Global Research's Amish Shah. Consensus growth for FY26 is now 8% and FY27 is 15%, with earnings cuts behind. The market's performance will depend on earnings growth. Sector divergence is expected, with rate-sensitive sectors like financials and real estate likely to outperform. BofA maintains a Nifty target of 25,000 for the calendar year.
Amish Shah, Head of India Research at BofA Global Research, has indicated that Nifty earnings forecasts have stabilized, marking an end to a year of consistent downgrades. He notes that the consensus is now building in approximately 8% earnings growth for the fiscal year 2025-26 (FY26) and 15% for fiscal year 2026-27 (FY27), with the gap between BofA's estimates and the market's consensus significantly reduced.
Shah stated that earnings forecasts for FY26 were cut by 10% and for FY27 by 7%, but this phase of reductions is now concluded. He views the end of earnings cuts as positive news for the market. BofA projects Nifty 50 earnings growth to accelerate, with FY25 showing 5.5%, the first half of FY26 reaching 8.6%, the second half potentially near 9%, and FY27 rising to 13%.
Regarding valuations, Shah observed that the market has not corrected significantly because earnings have largely kept pace with its rise. He finds it difficult to justify further valuation expansion, emphasizing that future market performance will be primarily driven by earnings growth.
Sector divergence is anticipated to continue. Mass consumption and capital expenditure (capex)-related categories might experience a mild recovery, while rate-sensitive segments are expected to outperform, driven by anticipated interest rate cuts from the Reserve Bank of India (RBI). Real estate, REITs (Real Estate Investment Trusts), power utilities, and financials are identified as beneficiaries. Within consumption, discretionary categories are expected to perform better than staples.
Financials are highlighted as one of the few sectors that are not expensive. Shah pointed out emerging earnings upgrades in this sector after two years of downgrades, improved regulatory clarity, and a return of foreign investors to mid-sized banks.
However, Shah cautioned that state-level spending due to election promises could weigh on capex. He noted that total subsidies by the Centre and states amounted to about $90 billion in FY24, with broader consumption stimulus rising to an estimated $150 billion. This figure could potentially increase to $200 billion over three years with pay commission increases and rate cuts, implying a reduced fiscal space for capex acceleration.
BofA Global Research reiterates its Nifty target of 25,000 for the current calendar year, with a potential upward revision to 26,000 if positive factors such as progress in trade negotiations and clearer visibility of rate cuts persist.
On the Information Technology (IT) sector, Shah described it as a 'bottom-up' call. While earnings downgrades have ceased, large-cap IT firms are projecting only mid-single-digit revenue growth without significant upside risks, making their current valuations appear expensive in that context.
Premium consumption categories like travel, alcohol, jewelry, and four-wheelers are expected to maintain strong demand, while mass consumption categories such as staples, footwear, and apparel may see a slower recovery as lower-income households focus on reducing debt.
Impact
This analysis provides investors with crucial insights into the projected earnings trajectory for Indian companies and the broader market. The stabilization of forecasts and anticipated growth pickup can boost market sentiment. The identified sector divergences offer strategic opportunities for investors, particularly in rate-sensitive and discretionary consumption areas. However, the cautionary note on fiscal constraints and their impact on capex highlights potential headwinds. The BofA Nifty target offers a benchmark for market expectations.
Rating: 7/10
