BofA Securities has delivered a sobering read on Indian equities: rich valuations, downgraded earnings, and a market that will likely compound only as fast as its profit growth - no more.
India's equity market enters FY27 carrying a difficult combination: valuations that remain elevated by almost every measure and an earnings growth outlook that has been more than halved since the year began. That is the central message from Amish Shah, Head of India Research at BofA Securities, who argues that the West Asia conflict has fundamentally altered the profit trajectory for corporate India.
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"We had started the year at 14% Nifty earnings growth," Shah said. "But immediately as the conflict broke out we brought it down to 8.5%, because we had to budget for higher crude, higher commodities, fiscal deficit higher, inflation higher, rates higher, currency depreciating — so on and so forth." The cumulative effect of those pressures, he adds, has delivered a "knockdown" to the earnings outlook that investors cannot ignore.
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Valuations will not be the engine of market returns
Valuations leave little room for optimism. India's equity premium over emerging market peers currently stands at 73%, still far above the long-term average of 46%, and well below the peak of 110%. That gap, Shah warns, is more likely to narrow than to widen from here. Even relative to domestic bonds, Indian equities no longer look attractive on a yield basis. The conclusion is blunt: valuations will not be the engine of market returns. Instead, the Nifty is likely to compound at roughly the same pace as earnings, meaning investors should brace for returns in the 8–9% range.
"Domestic flows is a large part of even that 8.5% earnings growth. If flows were to stem, the valuation gap contracts — but we do not think that is the base case." says Shah.
The one force keeping valuations from correcting more sharply is the steady stream of domestic institutional investor (DII) flows into equities. Shah does not expect this to reverse, which means the market is more likely to see a time correction, trading sideways while earnings catch up, rather than a sharp price fall.
Where the growth is, and where the pain is. Within the Nifty's 8.5% aggregate, the picture is highly uneven.
Banks (private & PSU)
Positive
Rate hikes benefit lending margins; private banks at cheapest valuations in 30 years
Telecom
Expected tariff hikes to drive meaningful earnings uplift
Industrials & utilities
Strong order books; 15–20% earnings growth expected in industrials
IT services
Cautious
Growth slumped to low single digits; valuation gap vs global peers still wide
Autos & CVs
Rising commodity input costs squeezing margins
Downstream energy
Largest single drag on Nifty earnings in FY27
Underweight on IT
On IT specifically, Shah notes that the sector's PE multiple has already de-rated significantly, large-caps from 25× to 15–16×, midcaps from 35× to around 25×, and is unlikely to compress much further. But with growth languishing at 2–3% in constant currency terms and a persistent valuation gap versus global peers like Accenture and Capgemini, BofA remains underweight. There is no obvious catalyst to get excited, he says.
The longer-term wildcard, Shah suggests, is India's energy security policy response — from EV adoption and coal gasification to biofuels and green hydrogen. If the government moves decisively, capital goods, power, and utilities could see materially better earnings trajectories. For now, that remains a policy question without a firm answer.
