Dramatic rally elusive, but healthy returns within reach: Kunal Vora

BNP Paribas expects Indian equities to recover as earnings improve, with private banks, telecom and consumer staples favoured despite crude oil and geopolitical risks

The worst phase for Indian equities appears to be over, but the pace of recovery will hinge on earnings growth. While a sharp rally is unlikely, easing foreign outflows, reasonable valuations, and earnings growth in the low- to mid-teens could help Indian equities deliver healthy double-digit returns, says Kunal Vora, head of India equity research at BNP Paribas, in a conversation with Sundar Sethuraman in Mumbai. Edited excerpts:

 

What are your thoughts on renewed tensions in West Asia, and how could they affect Indian equities? 

Corporate updates for the last quarter remained strong despite renewed tensions in West Asia. Inflation has risen, and companies have taken price hikes, but consumers have been cushioned as overall prices remain lower than a year ago due to goods and services tax (GST) rationalisation. We remain watchful of any escalation in West Asia and higher crude oil prices. The current situation resembles 2022, when crude briefly crossed $100 a barrel due to Russia-Ukraine conflict, before retreating. That had little lasting impact on India’s earnings or growth. Even if earnings are affected for a quarter or two, the longer-term outlook remains comfortable.

 

Is the worst over for Indian equities? 

The first half of the year was volatile. Optimism over economic recovery, tax relief, lower interest rates, and infrastructure spending gave way to concerns over artificial intelligence (AI), West Asia, higher crude prices, and heavy foreign selling. By June, many of these pressures had eased, and valuations became more reasonable. While crude has again started rising, the worst phase appears to be behind us. Recovery will depend on earnings growth. A dramatic rally may be unlikely, but easing foreign outflows, stable valuations, and earnings growth in the low- to mid-teens could support healthy double-digit returns. 

Is India merely an AI hedge? 

India remains a long-term growth story backed by favourable demographics and sustained GDP growth. However, investors also see it as vulnerable to AI due to its dependence on information technology (IT) services. Valuations have corrected to around their 10-year average from the highs seen two years ago. India could benefit if the global AI trade unwinds, as it never participated in that rally to the same extent as developed markets. Stable domestic inflows, a steadier currency and an earnings recovery in 2026-27 are supportive. But it is too early to call this a broad anti-AI trade. Even a moderation in foreign selling would allow domestic investors to support the market. 

Are the days of wealth creation in Indian IT over? 

The key question is how the industry will look three to five years from now. AI has created uncertainty around business models. Recruitment has slowed, reflecting both post-pandemic overhiring and the possibility that AI will reduce manpower needs. At the same time, enterprises will need partners to integrate AI into legacy systems, redesign workflows, and manage applications. The market may  be pricing in an overly pessimistic structural decline, though the timing of any recovery remains uncertain. 

How do Indian valuations compare with other emerging markets (EMs)? 

Indian equities have historically traded at a 30-35 per cent premium to other EMs. That premium widened during the rally but has now returned closer to its long-term average. India remains relatively expensive, but valuations are no longer as stretched. Unlike Taiwan or South Korea, India offers a diversified market spanning financials, IT, manufacturing and consumer businesses, with the depth and liquidity global investors seek. 

What will attract foreign investors? 

Foreign investors want reasonable valuations, strong earnings growth, macroeconomic stability, and a steady currency. Valuations alone are unlikely to attract them. The key attraction will be growth. With GDP expanding at 6.5-7 per cent and earnings reflecting that, foreign interest should improve. 

What is the outlook for April-June quarter earnings? 

Several sectors may face margin pressure. Consumer staples are dealing with higher raw-material and packaging costs. Automobile manufacturers face rising aluminium and copper prices, and currency pressure on imported inputs. Volumes remain healthy, but profitability could be squeezed. Cement companies face higher logistics costs, oil-marketing companies have absorbed part of the spike in fuel costs, and IT growth is likely to be muted. Consumer companies should report healthy volume growth despite softer margins. 

How long will earnings take to normalise? 

Assuming oil prices remain at current levels or decline, the biggest impact should be visible in the current quarter, with some pressure extending into July-September. By October or November, lower-cost inventory should begin flowing through, allowing earnings to normalise. The impact of the West Asia conflict should largely fade in the second half of 2026-27 (FY27) unless crude rises sharply for a prolonged period. 

What could be the effect of a deficient monsoon? 

June rainfall was well below average, but June accounts for only about 15 per cent of annual monsoon rainfall. An overall shortfall of 8-10 per cent would be manageable. A larger deficit would be more concerning, but India is better prepared than before, with ample foodgrain stocks and improved irrigation. 

What is the earnings growth forecast, and which sectors will drive it? 

Corporate earnings growth of 13-15 per cent appears achievable in FY27. Financials should lead the recovery after low single-digit growth in 2025-26, supported by strong credit demand, stable margins, and steady interest rates. Automobiles should benefit from healthy volumes, while consumer staples may gain from better demand, GST cuts, and lower commodity prices. IT services are likely to remain low, though rupee depreciation offers some support. 

Which sectors are preferred? 

Private-sector banks remain attractive because of strong earnings prospects, healthy balance sheets, low non-performing assets, and reasonable valuations. Telecom is also preferred, backed by pricing power, potential tariff hikes, lower capital expenditure, and stronger free cash flow. Consumer staples look attractive as demand improves and commodity costs stabilise, while select consumer internet firms offer opportunities.