India Strategy – Holding steady in global headwinds

Indian markets have been flattish from past three months, despite headwinds like rising incidence of US penal and non-penal tariffs and Rs850bn selling by FII. Normal monsoons and expected pick-up in domestic demand have been key catalysts for markets to absorb the current negative news flow. Geopolitical situation remains fragile, and India is absorbing the impact of penal tariffs and hefty increase in fee for H-1B visas. However, rising GCC exports will curtail any significant negative impact on overall economy. We believe, current wave of global protectionism is negative for trade and will impact global growth in future. Although there are expectations around concluding a trade deal with the US in a few months, the scenario looks increasingly tough given sustained differences on agriculture, dairy, GM crops and labor-intensive industries. First five months have seen 43% higher capex outlay by GOI, and rest of the year will be flattish unless there is an incremental allocation by GOI. Revival of demand will likely increase private sector capacity utilization and private capex, which has been waiting on the sidelines. GOI has implemented GST 2.0, which is expected to neutralize the impact of US tariffs substantially. The conditions seem ripe for revival of consumption demand given 1) normal monsoons, 2) benign inflation, 3) 100bps cut in interest rates, 4) significant cut in GST rates on consumer discretionary and daily use items and 5) benefits of tax cuts in FY26 budget. There has been a strong start to festival season demand, which is likely to see follow-on buying in wedding season. Implementation of the 8th Pay Commission in 2026 will provide another trigger to demand and sustain momentum in FY27 as well. FY27 NIFTY EPS was introduced in Oct24 and there was a cut of 9.4%/7.9% in PL NIFTY EPS for FY26 and FY27. NIFTY EEPS has seen incremental change of -1.9/-2.1% for FY26/27 with 12.1% CAGR over FY25-27 and EPS of Rs1229/1415 even as we introduce FY28 NIFTY EPS at Rs1582. We value NIFTY at 15-year average PE at 19.2x Sep27 EPS and arrive at 12-month target of 28781 (27609 earlier). We believe that domestic oriented sectors will continue to outperform. We expect banks, NBFC, auto, retail, consumer staples, defense, metals and select durables to outperform.