India's improving macroeconomic backdrop is strengthening the earnings outlook, but elevated valuations and heavy equity supply could limit broad-based market returns, according to Jefferies' India equity strategy report by Mahesh Nandurkar. Jefferies remains overweight on banks, power, metals, property and hospitals, with a preference for sectors offering stronger earnings visibility.
Within financials, the brokerage remains overweight on lenders as credit growth recovers and the drag from net interest margin compression begins to fade. It expects earnings growth to benefit as nominal GDP accelerates.
Power is another preferred sector, supported by improving demand and stronger activity. Jefferies also favours metals, which it believes could benefit from the broader economic recovery.
The brokerage is positive on property and hospitals, citing their relatively strong earnings visibility. It expects these sectors to benefit from accelerating nominal GDP growth.
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GDP Outlook
Jefferies expects nominal GDP growth to accelerate to 11.5%-12% in FY27, from around 9% last year. The brokerage believes the improvement in nominal growth should translate into stronger corporate earnings, with EPS growth expected to move above 14%.
The brokerage said several major economic and corporate performance indicators have strengthened recently. Credit growth has recovered to a 12-year high, while corporate earnings upgrades have improved and auto sales, property activity and power demand remain supportive. Jefferies also expects inflation normalisation to contribute to the acceleration in nominal GDP growth.
Jefferies also sees domestic flows as an important support for Indian equities. Domestic flows continue to provide a strong cushion, while SIP flows remain resilient. However, the pace of flows could moderate as SIP returns slow and one-time EPFO resets fade.
Foreign flows could provide an additional catalyst if the positioning of foreign portfolio investors in Indian equities improves. At the same time, the brokerage flagged equity supply as a concern, with IPOs, promoter sales, private-equity exits and government disinvestment potentially capping market returns.
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