Mideast escalation may drive correction in overvalued India stocks

FPIs are staying away due to expensive valuations. Most FPIs are awaiting a correction in India Pratik Gupta CEO & co-head, Kotak Institutional Equities

- Ram Sahgal

An escalation of hostilities in the Middle East makes India vulnerable to oil price shocks and could result in a correction in stock prices, which already seem overvalued based on earnings estimates for the current fiscal, according to Pratik Gupta, chief executive officer and co-head of Kotak Institutional Equities.

Gupta said this could cap market upside over the next few months but expects earnings to pick up in the second half of the current fiscal. Foreign portfolio investors acknowledge India's strong macros and resilience of domestic flows, but await a correction to make large fresh investments, he said.

Edited excerpts:

Nifty earnings in FY25 grew in modest single digits, reflected in market valuations correcting from October to March. Our GDP growth is slated at 6.5% and inflation at 3.7% for the current fiscal, per the central bank. That means nominal growth of around 10%. How do you see Nifty and the broader market earnings pan out this fiscal year in this context? Do you expect the correction in markets since October to continue, or is the worst behind us?

We expect net profits of the Nifty 50 Index to grow 12% in FY26 and 15% in FY27, following a modest 6.4% growth in FY25. Diversified financials, metals & mining, oil, gas & consumable fuels and telecom will provide the bulk of the incremental profits for FY26 of the Nifty 50 Index. The sector-wise trends for the broader Kotak coverage universe of almost 300 companies are very similar to the sector-wise trends for the Nifty 50 Index. We estimate that the metals & mining sector will account for 22% and 16% of the incremental profits of FY26 of the Nifty 50 Index and KIE coverage universe, respectively.