India equities face moderate returns as oil risks squeeze margins
Escalating West Asian conflicts and rising crude costs threaten corporate margins, prompting a leading Indian pension fund CIO to urge moderate return expectations for the current financial year.
Sandeep Pandey, chief investment officer at SBI Pension Fund, is advising investors to temper their return expectations for Indian equities this financial year as escalating conflicts in West Asia threaten corporate profitability.
The collapse of the ceasefire has reintroduced severe volatility, with India's heavy reliance on imported crude leaving domestic producers exposed to rising input costs. Because corporate profit margins are already near multi-year highs after several years of expansion, companies have limited room to absorb these expenses.
To protect their bottom lines, businesses are likely to pass higher costs onto consumers. Pandey warned this dynamic could create an inflationary environment that dents consumer sentiment and drags on overall demand, potentially triggering meaningful downgrades to corporate earnings.
The immediate impact is visible in consensus estimates for the June quarter, which point to high single-digit earnings-per-share growth for the Nifty 50, dragged down primarily by the oil and gas sector. While stronger growth is anticipated in the second half of the financial year, it remains uncertain whether full-year earnings can maintain double-digit expansion.
Valuations offer some cushion, having corrected to below their 10-year average. However, future earnings growth will require a shift away from margin expansion and toward top-line revenue growth, driven by domestic consumption and recent trade deals boosting manufacturing exports. Pandey noted the upcoming 8th Pay Commission could support spending, though rural demand remains vulnerable to potential El Niño weather events.
Capital flows and sector opportunities
Global investor rotation away from saturated artificial intelligence trades in markets like Korea and Taiwan could benefit India. Foreign institutional investor outflows have eased recently, with some debt inflows returning, though Pandey cautioned it is too early to declare a firm reversal.
Beyond geopolitical tensions, additional macro risks include fiscal constraints that may limit government spending, and currency volatility. If global interest rates rise faster than domestic rates, the rupee could face further pressure, though recent central bank interventions should provide near-term support.
Despite the cautious macro backdrop, Pandey identified specific pockets of strength. The banking sector is supported by robust 15-17% credit growth and improving deposit mobilization. Power demand remains elevated, driving thermal capacity expansion that benefits capital goods and manufacturing firms.
Real estate demand is holding up, with commercial properties buoyed by global capability centres and premium residential bookings remaining healthy in Bengaluru and the National Capital Region. Furthermore, the defence sector is seeing improved delivery timelines as material shortages ease, alongside a pickup in export demand.
