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.
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.
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.
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%.
