India has slipped to seventh place in the global market capitalization rankings. foreign investors sought AI-based opportunities in markets such as Taiwan and South Korea, raising concerns that the country is losing its appeal. After the meeting investors has BofA India Conference in Mumbai, BofA Securities India Managing Director and Head of Research Amish Shah says global funds don’t want to be left behind when India’s story starts to pick up again.
“There is still real excitement about India. Investors know that this is a business cycle, and they know that India has multiple themes and sectors that will do well over time,” Shah said in an exclusive interview with ET Markets on the sidelines of their India conference.
Edited excerpts from a discussion:
Let me start by asking you about the fourth quarter earnings season. Do you think India Inc managed to get a passing grade?
The results in general have been excellent. But once you start analyzing it in more detail, the picture becomes more nuanced.
Two-thirds of reporting Nifty companies delivered a beat. This looks encouraging, but looking at the absolute quantum, the total earnings growth of Nifty companies stood at 4.6%, which is quite modest in the Indian context.
The second data point is that 45% of that 4.6% profit growth came from commodity companies due to rising steel prices, rising aluminum prices, etc. From an investor’s point of view, high valuation multiples should not be assigned to these, as these are considered cyclical profits. It’s not like a consumer company is gaining market share, where that franchise is sustainable. Markets do not reward commodity profits with premium valuations.
Now, if you look at the NSE 200 companies, the earnings growth was 9%. But again, a third of that came from commodities companies and, unfortunately, 80% of the companies in that universe missed their estimates and only 20% exceeded.
So it really depends on where you want to swing. If you are bullish, you focus on the two-thirds of Nifty companies that are delivering a beat. If you’re more balanced, you get into these nuances: This is a marginal beat, primarily driven by commodities, and rising commodity prices will eventually lead to margin pressures over the coming quarters for a wide range of other companies. The outlook for profit growth is therefore also called into question.
So while the fourth quarter wasn’t bad, I think it’s a sign that earnings are going to weaken going forward.
So, a common narrative in the market is that low inflation has led to low earnings growth. Won’t this commodity inflation you’re talking about really translate into higher growth?
Yes and no. Rising commodity prices increase the profits of commodity companies, but create pressure on the margins of non-commodity companies, that is, the consumers of these commodities. On an overall basis, our estimate is earnings growth of 8.5% for FY27, which we describe as low growth on a low base. FY26 as a whole was around 6%, so an 8.5% reduction on that basis is not very encouraging.
Are you not concerned about the rating downgrades in the first and second quarter given the impact of rising prices of crude oil and other commodities?
No, because we had already revised our earnings estimates downwards in two rounds. First at the beginning of March, then at the beginning of April. We went from 14% to 8.5%, taking into account the conflict in West Asia – rising crude oil prices, rising raw materials, possibility of higher rates and weak rupee. We put it all together and revised it down on an upward basis.
However, looking at the consensus, a downward earnings revision is certainly a risk. The consensus still expects earnings growth of 15%, compared to 8.5% for us. I don’t believe 15% is reality. As companies disappoint in the June and possibly September quarters, consensus will need to cut rates significantly. We may not have to.
Looking at the market trajectory, do you think the worst of the West Asian crisis is priced in at the index level?
This relates to the duration of the conflict, which unfortunately no one knows. You can only draw scenarios. Our baseline scenario assumes that the conflict will end by the end of June, just by assumption.
Profit growth of 8.5% therefore relies on a resolution of the conflict by the end of June. If it extends beyond that, we have a modeled bear case. If this drags on even longer, we are faced with a worst-case scenario. We can only manage sensitivities.
Since it is already June, there are no more bull cases. We hope the base case scenario holds, but it could easily turn bearish or worse.
So what does your bearish scenario look like?
The bearish scenario is where markets first reduce the consensus forecast growth of 15% to 8.5%, leading to the capitulation of domestic retail flows. The markets have already been showing stable returns for around 19 months. At some point, retail investor fatigue may set in: if growth fails to materialize, perhaps a fixed deposit with a guaranteed return looks more attractive.
If that happens, the way to think about it is: if India’s nominal GDP growth is 10%, we would expect the Nifty 50 companies to do better because they are expected to gain market share. But if they’re growing at 8.5%, below nominal GDP, you’ll logically want to pay them a lower-than-average valuation multiple. So, the bearish scenario involves below-average valuations on realistic earnings of 8.5%, which brings us to a downside of around 12% from current levels.
Capital outflows from FIIs have been persistent. Is it valuations, lack of earnings growth or domestic liquidity that facilitates an easy exit?
It’s a combination. Since the peak in September 2024 till today, FII outflows total around $52 billion. In return, domestic investors invested around $60 billion – so yes, domestic flows clearly provided an exit route for FIIs.
But the main reasons for these capital outflows are: First, there are many alternatives globally: Korea and Taiwan on AI, Brazil on raw materials, Japan on fiscal expansion, and even China is cheap at 13x versus India at 20x. Second, India’s growth has been impacted: lower growth, higher valuations, macroeconomic headwinds from conflict in West Asia, weaker rupee, potential rate hikes. And third, LTCG taxes and currency depreciation eat into returns for foreign investors, making Indian business less attractive when you are already making low or negative returns.
What can India do to bring back FIIs?
Several things. Energy security reforms, even if they take years to implement, give investors confidence that India is structurally solving its current account deficit problem. Reforms in shipbuilding and electricity distribution create new avenues for growth. Streamlining regulations and taxes is important. And on the FDI side, India needs to continue to improve the fundamentals: smooth land acquisition, skilled labor, cheaper industrial power, good logistics infrastructure and easier business processes. We have made a lot of progress on each of these points, but we are not yet at 10 out of 10.
As for the rupee, it is falling because India’s balance of payments is negative. We import a lot of crude and gold, which creates a current account deficit. The three main capital inflows that should offset this situation – FDI, FII and remittances – are all under pressure. Net FDI is actually in the single digits when you take into account strategic investors monetizing their stakes and repatriating capital. FII flows are negative. And remittance flows are circular: if the rupee depreciates, Indians abroad hold on to their dollars waiting for a better rate, which in itself adds to the pressure for depreciation.
What are the key takeaways from the conversations you are having with investors at your conference in India?
India still arouses real enthusiasm. Investors know that this is a business cycle and they know that India has many themes and sectors that will do well over time.
They want to understand what policymakers think about energy security, fiscal consolidation, investment and reforms. They want to know how businesses are handling headwinds in West Asia.
They do their homework and want to be prepared to know what they want to buy if some of these things were to happen. They don’t want to be left behind when India’s history starts to pick up again.
