PL Capital raises Nifty target to 27,019, warns West Asia tensions and El Niño may derail growth

Brokerage firm PL Capital has raised its one-year target for the Nifty to 27,019 from 26,449, citing improving macroeconomic conditions, easing crude oil prices, and attractive valuations. However, it cautioned that escalating geopolitical tensions in West Asia, the threat of a Super El Niño and rising inflation remain key risks to India's growth outlook.

In its latest India Strategy Report titled "West Asia Crisis, El Niño Can Play a Spoil Sport", the brokerage said India's long-term structural growth story remains intact, supported by resilient domestic demand and policy measures, although near-term uncertainties could weigh on corporate earnings and investor sentiment.

The report noted that the Nifty has gained nearly 7.3% over the past two months and around 8% from its 52-week low, driven by easing crude oil prices, a temporary ceasefire in West Asia and India's robust macroeconomic performance. Credit growth has accelerated to 17%, reflecting healthy demand across retail, services, agriculture and industrial sectors.

Factoring in the improving macro environment, PL Capital raised its one-year Nifty target to 27,019, valuing the benchmark at a 10% discount to its average 15-year price-to-earnings multiple based on FY28 earnings. However, the brokerage remains cautious on the earnings outlook. It has lowered its FY27 and FY28 Nifty earnings estimates by 0.9% and 0.4%, respectively, and expects further downgrades if geopolitical tensions intensify or adverse weather conditions hurt consumption and corporate profitability.

PL Capital expects corporate earnings in the first quarter of FY27 to remain resilient despite global uncertainties. Excluding the oil and gas sector, profit after tax is projected to grow 14% year-on-year, led by strong demand in banks and NBFCs, consumer durables, hospitals, metals, renewable energy and engineering services.

The brokerage also highlighted healthy consumer spending during the wedding and festive season despite elevated gold prices, while robust summer demand boosted sales of air conditioners, beverages and other seasonal products. Rural demand has remained stable, although its sustainability will depend on the progress of the monsoon.

On inflation, the report warned that rising input costs continue to pose risks to corporate margins. Higher food prices, elevated crude oil costs, and logistics disruptions are expected to gradually feed into inflation during the second half of FY27. Inflation, while currently moderate, could rise further due to an unfavourable base effect and the increasing likelihood of a Super El Niño during the ongoing monsoon season.

The brokerage also flagged uneven monsoon rainfall as a key concern. Although the rainfall deficit has narrowed from nearly 40% in June to around 21%, precipitation remains uneven across regions. Kharif sowing is nearly 21% lower than last year for crops such as oilseeds, pulses, and cotton. A prolonged shortfall could hurt agricultural output and push food inflation higher, it said.

PL Capital added that geopolitical developments in West Asia will continue to influence India's macroeconomic outlook. While softer crude oil prices have offered some relief, any escalation in regional tensions could disrupt global supply chains and commodity markets. The report also cautioned that higher subsidy spending and weather-related challenges could strain government finances, although strong GST collections, record RBI dividend payouts and healthy industrial production are expected to provide support.

On monetary policy, the brokerage expects domestic liquidity conditions to improve further following the proposed FCNR bond issuance. However, it warned that persistent food and fuel inflation could make an interest rate hiking cycle unavoidable during the second half of FY27.

From an investment perspective, PL Capital remains overweight on banking, NBFCs, capital goods, defence, telecom, jewellery, hospitals, and consumer durables, citing favourable domestic demand, infrastructure spending, manufacturing growth, and healthy credit expansion. It remains cautious on automobiles, consumer staples, IT services, cement, chemicals, and oil & gas companies.

"India has been showing resilience in the face of an uncertain external environment. The current market rebound is due to steady domestic demand, lower crude oil prices and positive credit growth. However, investors need to remain alert to fresh geopolitical risks, rising inflationary pressures and the potential impact of El Niño. While corporate earnings may remain volatile in the near term, India's long-term growth story remains intact, making a stock-specific investment approach essential," said Amnish Aggarwal, Co-Head, Institutional Equities, PL Capital.