HSBC analysts Herald van der Linder, Prerna Garg and Adam Qi report that India is back on investors' radar as valuations have become more reasonable. According to their India strategy report, the Nifty 50 is trading at 16 times forward price-to-earnings, a level reached only twice in the past decade. Mid-cap valuations have also become less stretched, with valuation premiums easing across financials, IT services, real estate and consumer staples. The analysts believe the market reset has improved the risk-reward profile of financial stocks, making the sector their preferred investment choice. Global investors are showing greater willingness to look beyond artificial intelligence-led investment themes, with Indian equities becoming more attractive as valuations moderate.
HSBC expects India Inc's earnings to grow 11-12% year-on-year (YoY) in FY27, below consensus expectations. As reported by the brokerage, earnings growth is expected to lose momentum in the second half of FY27 after recovering over the past year. Less supportive base effects, elevated input costs and rising inflation could weigh on demand, particularly in rural areas. While consensus forecasts continue to assume mid-teens earnings growth in the second half, HSBC considers these expectations slightly optimistic. The brokerage forecasts modest downward revisions to market estimates, with FY27 earnings growth of 11-12% YoY anticipated. Despite improving valuations, HSBC cautioned that some of the de-rating reflects weaker growth prospects, suggesting the market correction has been driven by fundamental concerns.
Within financials, HSBC favours private sector banks and diversified non-bank financial companies (NBFCs). The brokerage also sees opportunities in industrials, particularly capital goods, defence, ports, electronic manufacturing services and renewable energy. In metals, it prefers aluminium, while remaining selective in consumer stocks, favouring specific retailers and automobile companies over consumer staples. Despite improving valuations, HSBC identified elevated oil prices and rising bond yields as key risks for Indian equities, with relatively modest earnings growth potentially leaving the market more vulnerable to higher energy costs and rising yields. The sector preferences reflect the brokerage's focus on growth opportunities amid a more measured earnings outlook.
HSBC's forex strategist sees some near-term support for the rupee, supported by healthy foreign exchange reserves and measures taken by the Reserve Bank of India. Meanwhile, initial public offerings and other new share issuances have diverted liquidity from the secondary market, with HSBC expecting this drag to ease from early 2027. The brokerage also flagged the potential impact of intensifying El Niño conditions on food prices and rural demand, noting that India's consumer price index food inflation accelerated to 7.7% in September and could rise further as El Niño intensifies. Lower oil prices and bond yields would provide meaningful support to the market, according to the analysts.
