Expert view: Karan Aggarwal, co-founder and CIO at Ametra PMS, believes the Nifty 50 can hit 27,000 by March 2027. He, however, added that the market may be overlooking the risks of elevated bond yields in the US and Japan, rich valuations of Asian and US markets, and commodity inflation.
In an interview with Mint, Aggarwal said there may be no EPS de-rating in India, but negative global cues could lead investors to give up on the next round of re-rating, triggering 10%-20% valuation compression for the Nifty 50.
Edited excerpts:
Why do you think Nifty at 27,000 represents a best-case scenario rather than a broad bullish call?
At present, Nifty 50 valuations at 21 times on a consolidated basis can be justified with an EPS growth rate of 15% or above. However, given trends in Q1 and negative base effects in the auto, banking, and metals sectors from Q3, the EPS growth rate of 10%-11% seems a reasonable expectation for FY27.
We assume that, in a best-case scenario, investors would take solace in the re-rating of the Nifty 50 (10-11% versus 5% in FY26) and, in the absence of any global shock, might wait a few quarters for the next round of re-rating.
In this case, there is no valuation compression, and Nifty 50 levels would move in line with EPS, translating to 27,000 by March 2027.
A bullish case can be built on valuation expansion or EPS re-rating. With commodity inflation shrinking gross profit margins by around 200 bps, the EPS growth profile may take longer than expected to justify current valuations, let alone valuation expansion.
What are the key risks that can drive Nifty 50 down 10-20% from the current levels?
There are multiple global factors at play which are not yet accounted for by markets. Rising bond yields in the US and Japan, with the threat of rate hikes in both countries, are being ignored across global markets.
For example, in 2022, a 30-year bond yield above 5% triggered a nearly 30% drop in equity benchmarks across Asia, Europe and the US.
Moreover, valuations across Asia and the US are 3 to 6 standard deviations above 10-year averages, which are based on historically unrealistic expectations of 30%-300% EPS growth rates.
Commodity inflation is already in play; markets are trading at oil at $70 while crude is steadily going up to $90-95 per barrel.
It seems that markets have not factored in any negative surprises as of now, leaving them exposed to a 30%-50% drawdown in the event of negative developments, including EPS derating and valuation compression.
We don’t see scope for EPS de-rating in India, but negative global cues mean investors are giving up on the next round of re-rating, which would trigger 10%-20% valuation compression for the Nifty 50, with 25%-30% drawdowns in broader markets, as valuation imbalances are at the extreme end in those segments.
Do you think a 14–15% required earnings growth is difficult to reconcile with the expected 10–11% growth?
In an ideal scenario, 14%-15% earning growth was largely expected in Q1 FY27, with credit growth hovering round 18% and record automobile sales in the last quarter.
Sales growth for the quarter reflects a bullish tone, at 15%-18%.
However, commodity inflation is squeezing nearly 200 bps from margins, with EPS growth languishing at 10%-11%.
With crude sustaining in the range of $85-$95, Q2 seems to be a repeat of Q1, while Q3 comes with its own headwinds in the form of negative base effect for financials, metals and automobiles.
Based on these readings, it seems investors might have to wait a few more quarters before growth moves into mid-teens territory.
How do you see the current market valuation? Are mid- and small-cap fund flows moving in the opposite direction to valuation comfort?
Across segments of the Indian stock market, there is a clear imbalance between growth and valuation.
Large caps need EPS growth of 15% while midcaps/small caps need EPS growth of 25% to justify their valuations.
Large caps have been faltering for eight quarters now. Midcaps delivered the required growth in the first half of FY26 and have moderated since then. Small caps have a good Q1 FY27, but this comes after a negative EPS growth rate for six quarters.
For all the talk about high growth in the broader market, the Nifty 500 has delivered annualised growth of 7%-9% in Q1 FY27, vis-à-vis 10%-11% for the Nifty 50.
FPIs are withdrawing money from the Indian market, but large caps are disproportionately impacted due to legacy bias towards large companies.
Higher flows into midcap and small-cap are a result of recency bias rather than any long-term changes in fundamentals.
Both midcap and small-cap benchmarks are trading at abnormally high multiples of 30, with low double-digit growth rates at best.
On a technical basis, the outperformance of midcap and small-cap stocks over the Nifty 50 has already peaked on key parameters, and a reversal is overdue.
Having said that, the small-cap and mid-cap space boasts some interesting names in themes such as defence, precision engineering, data centres, manufacturing, capital goods, and energy, where the mainstreaming of new megatrends can justify high valuations.
What is your view on large IT and private banks? Can they be the contrarian bets at this juncture?
Though headline numbers for banks look exceptional at 20% EPS growth, banks have been a big disappointment in the earnings season, with falling or stagnant margins in an environment marked by 18% credit growth, while real operating profits barely crossing 10%.
IT companies are shifting from long-term contracts to short-term AI transformation projects, which means they might never attain past FMCG-like valuations.
Having said that, large-cap IT is trading at a 6%-7% earnings yield with a nearly 8% cash-to-market-cap ratio, which makes these firms suitable contrarian plays.
For a patient investors with 5-7 year horizon, large cap IT seems like a suitable contrarian bet as markets are valuing these business at 0% growth rate.
Valuation for some names like HDFC Bank are also reflecting baseline growth rates and is coming across a lucrative contrarian play in banking sector. However, we would wait for NIM recovery before considering names in banking.
Can FCNR(B) inflows help the rupee?
FCNR(B) inflows are a one-time remedy that can help banks shore up their margins, but we don’t see them as an antidote to persistent FII outflows.
We believe the rupee depreciation is positive for the Indian economy if it does not lead to inflation. A gradual, slow-paced depreciation over the next few years must be a priority for the regulators.
How should investors construct portfolios when domestic valuations and global liquidity risks are moving in opposite directions?
Ideally, investors should take a multi-asset approach with nearly 60% in debt, 30% in equities, and 10% in gold, with a monthly 5% shift to equities.
It would ensure that investors do not miss out on returns in a range-bound market while leaving enough cash on the table to capitalise on short-term dips.
Read all market-related news here
Read more stories by Nishant Kumar
Disclaimer: This article is for educational purposes only and does not constitute investment advice. The views and recommendations expressed are those of the expert, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
