Nifty could deliver low-teen returns as earnings drive next leg of bull market: Anand Rathi AMC

Indian equities are entering a durable, earnings-led phase that could deliver low-teen Nifty returns over the next 12 months, according to Neeraj Gaurh, Director and Fund Manager, Anand Rathi AMC. With FY27 earnings expected to grow 11–12%, he sees the market compounding broadly in line with profits rather than relying on further valuation expansion, while stable crude and global yields could provide additional upside.

Edited excerpts from a chat:

Indian equities have staged a recovery, but the Nifty remains well below its previous peak. Are we at the beginning of a durable bull phase or merely witnessing a liquidity-driven rebound? What index returns do you expect over the next 12 months?

This is a durable phase, not just a liquidity bounce, but it's an earnings-led durable phase, not a multiple-expansion one. The building blocks are nominal GDP growth normalizing back toward 10-10.5%, a resilient manufacturing sector and robust credit growth at an 18%, two-year high. That combination gets you to double-digit, 11-12% earnings growth for FY27. Apply that to current multiples and you get a market that compounds with earnings rather than re-rates dramatically, so I'd frame the 12-month index return in the low teens, largely tracking earnings, with an upside kicker only if crude stays anchored near $80-85 and global yields don't move against us. I wouldn't call it liquidity-driven because domestic flows have been the primary engine for two years, while FIIs were net sellers.

FIIs have returned as buyers after withdrawing about ₹2.6 lakh crore over the previous four months. Is this a strategic reallocation to India or a tactical trade after valuations corrected? What would make foreign investors commit significantly larger capital?

Right now, it reads more tactical than strategic. Valuations corrected, banks in particular came down to attractive levels because a large chunk of that selling was concentrated in Indian financials, so this looks like FIIs picking off value after being underweight, not a wholesale re-commitment to India as a strategic overweight. For that shift to strategic, allocation, you need two things: first, a more stable rupee, once the currency stops gyrating with every crude spike, that removes a hedging cost and psychological overhang for global allocators; second, a "tech reset" globally, where capital that's been concentrated in US AI infrastructure names starts rotating back into Asia, including India, rather than just Korea or Japan. Until both of those are in place, I'd treat this inflow as opportunistic rather than the start of a sustained re-rating in India's weight in global portfolios.

The June-quarter earnings season is now underway. Which sectors can deliver meaningful earnings upgrades in FY27, and where do current market valuations still assume growth that companies may struggle to deliver?

The June-quarter earnings season has now begun, and we will be tracking this closely as results come in, with more insights to follow through the season. For now, upgrades are concentrated in Financials (low credit costs, improving asset quality, strong wealth/AMC operating leverage) and Industrials/Capital Goods (robust order books, sustained infra and energy-transition capex).

Downgrade risk is concentrated in IT Services (sluggish growth, guidance cuts, delayed discretionary spend), Airlines (fuel cost and geopolitical pressure), General Insurance (claims inflation, competitive intensity), and parts of Oil & Gas/OMCs (marketing margin and LPG under-recovery concerns).

The recent rally in IT stocks has revived hopes that the worst may be over. Do valuations now adequately capture weak discretionary technology spending and AI-related disruption, or is it still too early to build a meaningful position in the sector?

Not yet fully priced, and I'd stay selective rather than buy the basket. The stocks have corrected 25-30% and now sit around 14-15x forward, but that's still a meaningful premium to global peers like Accenture, who trade in high single digits — some premium is fair given India's retail/index flows, but not this much. The real question is whether the $1.3 trillion outsourcing market can grow through the ~$250-300 billion of AI-driven deflation, or whether LLMs keep eating share in coding before Indian service companies can prove they'll hold share in enterprise AI. That's a medium-term answer, not one visible today. My stance is, don't chase the whole sector on a multi-year view, wait for a visible tech-spend tailwind and pick companies you trust to defend share in enterprise AI workflows, rather than being three or four quarters early.

For financials, how do you balance the benefits of stronger credit demand and easier liquidity against pressure on net interest margins and the possibility of higher credit costs? Within the space, do you prefer private banks, PSU banks or NBFCs?

I'd lean toward owning banks, with a preference for private banks specifically. The credit growth number (18%, a two-year high) and resilient corporate working-capital demand are genuine positives, and the FCNR/ECB inflows ($50-$60 billion aggregate expected) directly address the credit-deposit growth gap that's been the industry's core funding constraint — that protects margins rather than just growth. A couple of private banks have seen 5-10bps of margin pressure from product mix, but the ones managing opex well — adding branches without adding much headcount — should compound at that 15-17% ROE range regardless. I'm not building a case for a big re-rating back to 3.5-4x book; most private banks are at 1.5-2x now, so the return is more compounding than multiple expansion, with upside optionality if global flows return or margins surprise higher in a rate-hike scenario. On PSU banks and NBFCs specifically, I'd be more selective — the same credit-growth and funding-gap dynamics help PSU banks too, but the balance-sheet discipline and cost management that differentiate quality names matters more there than in private banks broadly.

Manufacturing, defence and the broader capex cycle remain consensus structural themes. After their substantial rerating, which parts of this ecosystem still offer GARP opportunities—and where is there a growing disconnect between order books, cash flows and valuations?

This is one of my two medium-term pillars, alongside discretionary consumption: autos, ancillaries, capital goods, chemicals, cement, building materials, general engineering all sit inside it, and rupee depreciation is a direct tailwind for the exporters in that basket. That said, "substantial rerating" is the right word of caution — GARP is harder to find after the run, so I'd be more selective within it now: names where volume/utilization is already high and a pricing lever is still available look more attractive than names purely riding an order-book narrative. In capex-and-defence-adjacent names where order books have ballooned but cash conversion and working-capital cycles haven't kept pace, that's where valuations can be pricing execution that hasn't shown up in cash yet.

India is simultaneously dealing with volatile crude oil, a weaker rupee and uncertainty over the US Fed and West Asia. Which global variable poses the biggest risk to Indian equities, and which sectors would be most vulnerable if oil and the dollar remain elevated?

The single biggest risk isn't the geopolitical headline itself, markets have now seen this movie enough times (Russia-Ukraine, Israel-Iran, this latest round) that they're learning to live with it rather than re-price every recurrence, as long as crude holds in the $80-90 band. The bigger risk is what sits underneath: global bond yields. If elevated crude feeds into inflation that central banks stop calling "temporary," and developed-market 10-year yields , already at elevated levels , move higher, that raises the cost of capital and drives a de-rating across global equities, India included, independent of anything India-specific. On sectors most vulnerable if oil and the dollar stay elevated together: import-dependent and rate-sensitive names get hit hardest — OMCs/paint-and-chemical names with crude-linked input costs. Banks are relatively more insulated than people assume here, given the FCNR-driven funding cushion, unless yields spike enough to also pressure credit costs.

If you were constructing an equity portfolio today for the next three years, how would you allocate it across large caps, midcaps and smallcaps? Which three sectors would you overweight, which would you avoid, and what developments would make you change that positioning?

Given where we are , earnings-led rather than multiple-led market, credit cycle just turning up, and valuations in banks still reasonable rather than stretched — I'd weight this toward large cap and select midcap, keeping small cap deliberately light until there's more clarity on the global liquidity/tech-reset backdrop; small caps tend to amplify both the earnings upgrade cycle and any de-rating from a yield shock, and I'd rather take that risk once the FII-reallocation and rupee-stability questions are further resolved.

Three overweight: (1) private banks, for the credit-growth-plus-funding-relief combination; (2) manufacturing/capex-linked exporters — autos, ancillaries, capital goods, as the structural, multi-year theme benefiting from rupee depreciation and trade-treaty tailwinds; (3) discretionary consumption, the second pillar alongside manufacturing.

What I'd avoid, or hold very selectively: real estate, until there's clearer evidence of disciplined capital allocation rather than land being bought at prices well ahead of finished-unit appreciation; and the broad IT basket, rather than hand-picked names, until enterprise-AI share and tech-spend tailwinds are demonstrable rather than hoped-for.

What would change this positioning: a sustained, not spike, move in crude above $90 that stops looking like a geopolitical one-off; a genuine rise in developed-market bond yields on persistent inflation rather than the current "temporary disruption" read from central banks; or, on the positive side, clear evidence of the global tech-reset reallocating capital from the US into Asia including India — any of those would be reason to revisit both the sector mix and the large cap/midcap/small cap split.