FY27 earnings growth may drop to 10%: Jitendra Sriram on the impact of sustained $100 oil

With the West Asia conflict now in its two-month mark, Baroda BNP Paribas’ Jitendra Sriram warns that FY27 earnings growth could moderate to 10-12%. Highlighting a strategic shift toward upstream energy, Sriram explains why $100 crude threatens monetary easing and discretionary spending, while noting that the recent "relief rally" makes large-cap valuations increasingly attractive for long-term investors.

Edited excerpts from a chat:

How have you been tweaking your portfolio during the war? Did you load up on existing portfolio stocks during the fall or picked fresh ideas that looked even more promising?


The war forced changes on quite a few fronts. First was a re-assessment of the “new-normal” for crude and on certain commodities where supply impacts were felt. As an example within the energy space, we cut back on oil marketing and moved towards upstream oil. That was a change in stance itself. Second was that energy markets are by and large fungible so a pressure build up on one will cascade on to other parts as demand/economics forces shifts. As an example, disruption in oil meant a renewed interest and offtake on electricity (power). At a household level one can relate to it that a shortage on cooking gas is being substituted by an induction cooker. This would fall under the bucket of fresh ideas too. Lastly, market gyrations and steep falls also made some exposure look a lot more appealing. In areas, where we were confident on the earnings resilience we did add to our positions.

Given that the war is now over 2-month-old, what is your estimate as to how much of earnings hit are we about to take in FY27 as a result of soaring crude oil, rupee depreciation and geopolitical uncertainty impacting orders? Which sectors do you think will feel most of the pinch?

Indeed, with the conflict being 2-month-old, if we take stock we would say first order impacts are already being felt like in oil marketing companies, tile makers (gas shortages) etc. The April-June quarter may see the second order impacts. As the conflict persists it may be difficult to hold on to older fuel pricing and a hike maybe around the corner. This may push up freight costs across the board from primary articles (foodgrains, vegetables & fruits) to industrial products and thereby the demand elasticity to prices. The higher price levels also mean that monetary policy from a stance of potential softening at the beginning of the year has switched to a long pause to a rising possibility of increases. This may have implications for sectors with high leverage.

If crude sustains closer to $100, what are the most material second-order effects investors should brace for across rupee, margins and demand?

If crude ranges near the three-figure handle, we can probably wish away monetary easing hopes. The pressure on the current account deficit and thereby the currency will keep inflation forecasts lodged with an upward bias. This would be negative for importers (electronics goods, hardware etc) and advantage exporters (technology, pharma, metals etc). Discretionary spending may see some slack in favour of consumption as households need to shell out more from their wallet for primary articles and transport.

After the crash in March, the market recovered sharply in April. Is the rally surprising given that crude oil is still around $90-100 mark and rupee around 94-95 against the dollar?

Markets are always in the mezzanine space between the present and its expectation of the future. It is not a surprise because at the current crude levels, the level of the rupee etc are the dislocations caused by current events. However, the fact that the US and Iran were willing to sit across a table for negotiations brings some hope for a resolution which logically leads one to anticipate normalcy in 1-2 quarters. To our mind, this relief rally was what was reflected in markets.

How attractive do you think valuations are looking at at this stage across Nifty and the broader market?

Valuation froth for India largely has drained off and when we look at the same across the capitalisation curve (large, mid and small) we can see that valuations are now in line or below long term mean levels. With the three, large cap is looking the most attractive given that it bore the brunt of FII selling.

Looking ahead, where do you see the most compelling valuation opportunities for long-term investors who might be looking to enter the market during this period of high volatility?

As mentioned earlier, large cap valuations are looking the most appealing. That is also a segment that has historically enjoyed lower volatility. The other options for low volatility seeking investors could be hybrid offerings such as balance advantage. If someone seeks a slightly longer term holding and is willing to tolerate higher volatility, the flexicap, Multicap segments may also be options.

How do you think the Q4 earnings season has been for India Inc? Do you think more pain could be visible in Q1?

Q4 hardly saw any impact as the conflict dynamics were seen only for 1 month and inventory levels in the system would have cushioned the blow materially. As a result, the impact of higher crude and weaker currency is likely to be felt in Q1. In our view, earnings growth for FY27 may now be more likely in the 10-12 range versus the mid-teens one was expecting prior to the West Asia conflict.