India's earnings recovery has begun to broaden across sectors, but the market is yet to fully price in the upcycle, according to Hemant Kanawala, senior executive vice president and head of equity at Kotak Life Insurance. After two weak years, relative valuations have moved closer to multi-year lows while large-caps are trading at about 19.7 times estimated FY27 earnings. With Nifty profits expected to grow 17% to 18% in FY27 and Q1 earnings rising 18%, well above expectations, the setup offers a more favourable risk-reward equation, provided private capex revives and external risks remain contained. As Kanawala notes, much of the bad news appears priced in, with earnings set to compound in the mid-teens, though the recovery isn't yet reflected in current valuations.
Q1FY27 delivered what Kanawala described as a picture-perfect, broad-based quarter with an earnings upgrade, one of the strongest in recent years. Nifty 50 PAT grew 18% year-on-year versus the expected 10%, marking a 10-quarter high. The broader universe (excluding oil marketing companies) delivered 22% growth, with encouraging performance across all market segments. Small-caps led with 31% growth, mid-caps posted an 11-quarter-high 23%, and large-caps grew 21%. Positive surprises came from metals, Financials (BFSI), select autos and power utilities, while oil marketing companies were the key drag amid high crude prices. Encouragingly, many sectors beat expectations and the upgrade-to-downgrade ratio turned favourable at 1.5x, indicating broad-based improvement across the market. Recent reports confirm this strength, with approximately 70% of Indian firms meeting or beating HSBC's estimates, and FY27 earnings upgrades increased by 50 bps to 14.3%, led by financials.
The market shows sharp contrasts with aggregate valuations appearing reasonable, with the Nifty near 19.7x FY2027E, broadly its long-term average, but this masks wide dispersion. Low-P/E sectors like banks, metals and energy anchor the index, while parts of consumption and investment trade richly, with a significant portion of index weight trading over 10% above historical averages. Mid-caps and small-caps carry premiums, but this partly reflects their exposure to higher-growth themes, so selective opportunities remain attractive. Conversely, banks and IT services have de-rated meaningfully, offering value. As Kanawala emphasizes, earnings are priced unevenly with the froth concentrated, not broad-based, creating selective opportunities for disciplined investors.
Financials screen best with banks and insurers offering reasonable valuations, troughing margins, strong credit growth, benign credit costs, and solid balance sheets. Telecom offers earnings visibility from tariff-led ARPU gains, while discretionary consumption provides good earnings visibility supported by lower taxes, rate cuts and improving incomes. Metals benefit from safeguard duties and higher realisations, though it's cyclical. On the vulnerable side, downgrade risks exist in staples due to margin pressure, IT services facing weak discretionary demand plus AI overhang, and residential real estate due to affordability strain. Energy earnings remain volatile given crude and marketing-margin swings. As Kanawala notes, a durable leadership shift ultimately needs earnings to sustain it, making selective positioning crucial.
While Q1 earnings showed resilience, analysts warn of potential challenges ahead. HSBC flagged risks of downgrades in coming quarters as elevated commodity prices persist and the benefits of GST cuts and inventory gains fade. The impact of further price hikes on demand represents another significant risk factor. ICRA noted that while aggregate revenues of 838 listed companies grew 22% year-on-year in Q1, this was driven by commodity and bullion price-led value inflation, and resilient consumption volumes despite West Asia flare-ups and El Niño concerns. The strong Q1 performance has led to FY27 earnings upgrades for nearly half of companies in FTSE India since June-end, but sustained growth will depend on maintaining current momentum while navigating these emerging headwinds.
