Amish Shah (1) — There’s still genuine excitement about India. Investors know it’s an economic cycle, and they know India has multiple themes and sectors that will do well over time.

India has slipped to the seventh spot in global equity market capitalisation rankings as foreign investors chased AI-driven opportunities in markets such as Taiwan and South Korea, raising concerns about whether the country’s appeal is fading. After meeting investors at BofA India Conference in Mumbai, BofA Securities India MD and Head of Research Amish Shah says global funds don’t want to be left out when the India story starts to pick up again.

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“There’s still genuine excitement about India. Investors know it’s an economic cycle, and they know India has multiple themes and sectors that will do well over time,” Shah said in an exclusive interview with ET Markets on the sidelines of their India conference.

Edited excerpts from a chat:

Let me start by asking you about the Q4 earnings season. Do you think India Inc managed to obtain passing marks?

Results in general were a beat. But once you start analyzing it further in detail, the picture gets more nuanced.

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Two thirds of the Nifty companies that reported delivered a beat. That sounds encouraging, but when you look at the absolute quantum, the total earnings growth from Nifty companies came in at 4.6%, which is quite muted in India’s context.

The second data point is that 45% of that 4.6% earnings growth came from commodity companies due to higher steel prices, higher aluminum prices, and so on. From an investor perspective, you don’t want to assign high valuation multiples to that, because these are considered cyclical earnings. It’s not like a consumer company gaining market share, where that franchise is durable. Markets don’t reward commodity-driven earnings with premium valuations.

Now, if you look at NSE 200 companies, earnings growth was 9%. But again, one third of that came from commodity firms, and unfortunately 80% of companies in that universe missed estimates and only 20% were a beat.

So it really depends on where you want to swing. If you’re an optimist, you focus on two-thirds of Nifty companies delivering a beat. If you’re more balanced, you get into these nuances — it was a marginal beat, mostly driven by commodities, and higher commodity prices will eventually lead to margin pressures in upcoming quarters for a wide range of other companies. The earnings growth outlook is therefore also challenged.

So while Q4 wasn’t bad, I think it’s a signal that earnings are heading weaker going forward.

So one narrative in the market has been that low inflation has led to low earnings growth. Won’t this commodity inflation that you are talking about actually translate into higher growth?

Yes and no. Higher commodity prices lift earnings for commodity companies, but create margin pressure for non-commodity companies — the consumers of those commodities. On an aggregate basis, our estimate is 8.5% earnings growth for FY27, which we describe as low growth on a low base. FY26 as a whole came in at around 6%, so 8.5% off that base is not very encouraging.

Are you not worried about downgrades in Q1 and Q2 given the impact of higher prices of crude oil and other commodities?
No because we had already taken our earnings estimates down in two rounds. First in early March, then in early April. We came down from 14% to 8.5%, factoring in the West Asia conflict — higher crude, higher commodities, the possibility of higher rates, and a weaker rupee. We put all of that together and revised down on a bottom-up basis.

However, when I look at consensus, earnings downgrades are definitely a risk. Consensus is still penciling in 15% earnings growth versus our 8.5%. I don’t believe 15% is going to be the reality. As companies disappoint in the June and possibly September quarters, consensus will have to cut meaningfully. We may not have to.

Talking about the market’s trajectory, do you think the worst of the West Asia crisis is priced in at the index level?

That gets into the timing of how long the conflict lasts, which unfortunately nobody knows. You can only draw scenarios. Our base case assumes the conflict ends by the end of June for the sake of an assumption.

So 8.5% earnings growth is premised on the conflict resolving by the end of June. If it drags beyond that, we have a bear case modeled. If it drags even further, we have a worst case. We can only run sensitivities.

Given we’re already in June, there’s no bull case left anymore. We’re hoping the base case holds, but it could easily become a bear or worst case.

So what does your bear case scenario look like?
The bear case is where markets first de-rate from the 15% consensus growth expectation down toward our 8.5%, and that leads to capitulation of retail domestic flows. Markets have already delivered flat returns for about 19 months. At some point, retail investor fatigue could set in — if growth isn’t materializing, maybe a fixed deposit with a guaranteed return looks more attractive.

If that happens, the way to think about it is this: if India’s nominal GDP growth is 10%, you’d expect Nifty 50 companies to do better because they should be market share gainers. But if they’re growing at 8.5% — below nominal GDP — you logically want to pay them a lower-than-average valuation multiple. So the bear case implies below-average valuations on realistic earnings of 8.5%, which brings you to roughly 12% downside from current levels.

FII outflows have been persistent. Is it valuations, lack of earnings growth, or domestic liquidity providing an easy exit?
It’s a combination. From the September 2024 peak to today, FII outflows total roughly $52 billion. Against that, domestic investors have put in around $60 billion — so yes, domestic flows have clearly been providing FIIs an exit.

But the core reasons for the outflows are: first, plenty of alternatives globally — Korea and Taiwan on the back of AI, Brazil on commodities, Japan on fiscal expansion, even China is cheap at 13x versus India at 20x. Second, India’s growth story has been impacted — lower growth, higher valuations, macro headwinds from the West Asia conflict, weaker rupee, potential rate hikes. And third, LTCG taxes and currency depreciation eat into returns for foreign investors, making the India trade less compelling when you’re already making little or negative returns.

What can India do to bring FIIs back?
Several things. Energy security reforms, even if they take years to implement, give investors a visibility that India is fixing its current account deficit problem structurally. Shipbuilding and power distribution reforms create new growth avenues. Rationalization of regulations and taxes is important. And on the FDI side, India needs to continue improving on the basics — smooth land acquisition, skilled labor, cheaper industrial power, good logistics infrastructure, and easier business processes. We’ve made a lot of progress on each of these, but we’re not at 10 out of 10 yet.

On the rupee — it’s falling because India’s balance of payments is negative. We import a lot of crude and gold, creating a current account deficit. The three main capital inflows that should offset this — FDI, FII, and remittances — are all under pressure. Net FDI is actually single-digit when you account for strategic investors monetizing stakes and repatriating capital. FII flows are negative. And remittance flows are circular — if the rupee is depreciating, Indians abroad hold back dollars waiting for a better rate, which itself adds to the depreciation pressure.

What are the key takeaways from the conversations that you are having with investors at your India conference?
There’s still genuine excitement about India. Investors know it’s an economic cycle, and they know India has multiple themes and sectors that will do well over time.

They want to understand what policymakers are thinking on energy security, fiscal consolidation, capex, and reforms. They want to know how corporates are managing the West Asia headwinds.

They’re doing homework and want to be prepared to know what they want to buy if some of these things were to play out. They don’t want to be left out when India story starts to pick up again.

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