Nifty 50 above 27,000? PL Capital raises target, sees more upside in Indian stock markets but flags key risks

PL Capital has turned more optimistic on Indian equities, raising its one-year target for the Nifty 50 to 27,019 from 26,449, citing improving macroeconomic conditions, resilient domestic demand and easing crude oil prices.

While the brokerage believes India's long-term growth story remains intact, it has cautioned that geopolitical tensions in West Asia, the possibility of a Super El Niño and inflationary pressures could inject volatility into markets and corporate earnings over the coming quarters.

The brokerage said the recent recovery in Indian equities has been supported by a combination of lower crude prices, a temporary ceasefire in West Asia and strong domestic economic activity. At the same time, it believes current valuations remain reasonable despite the recent rally, prompting it to raise its Nifty target while retaining a cautious stance on near-term earnings expectations.

"Taking into consideration the improvement in the macroeconomic environment and valuations, we have raised our one-year NIFTY target to 27,019 from 26,449. We continue to value the index at a 10% discount to its average 15-year price-to-earnings multiple for FY28 earnings. Despite the recent rally, the NIFTY is still trading at an 11.7% discount to its historical average," PL Capital said in its latest India Strategy Report.

Why has PL Capital turned more bullish on the Nifty?

According to PL Capital, India's macroeconomic backdrop has improved meaningfully over the past two months. The brokerage noted that the Nifty has gained nearly 7.3% during the period and around 8% from its 52-week lows, helped by easing crude oil prices, a temporary ceasefire in West Asia and resilient domestic economic activity.

PL Capital expects first-quarter FY27 corporate earnings to remain healthy despite global uncertainty. Excluding the oil and gas sector, profit after tax is expected to grow 14% year-on-year, supported by robust demand across banks, non-banking financial companies (NBFCs), consumer durables, hospitals, metals, renewable energy and engineering services.

The brokerage highlighted strong wedding and festive demand despite elevated gold prices, healthy summer demand for products such as air conditioners and beverages, and stable rural demand, although it cautioned that the sustainability of rural consumption would depend on the progress of the monsoon.

However, the brokerage remains cautious on earnings revisions. It has reduced its FY27 and FY28 Nifty earnings estimates by 0.9% and 0.4%, respectively, and believes additional downgrades are possible if geopolitical tensions or adverse weather conditions hurt consumption and corporate profitability.

What are the biggest risks?

Despite its constructive outlook, PL Capital believes several macro risks could weigh on markets in the coming months. The brokerage said higher food prices, rising crude oil prices and logistics disruptions could gradually push inflation higher during the second half of FY27.

It also warned that the increasing probability of a Super El Niño and uneven monsoon distribution remain significant concerns. If rainfall remains deficient, agricultural production and food inflation could come under pressure.

The brokerage further noted that geopolitical developments in West Asia continue to pose risks despite softer oil prices. Escalating tensions could once again disrupt global supply chains and commodity prices, while higher government spending on subsidies and weather-related challenges may strain public finances.

"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. But investors need to remain alert to geopolitical risks, rising inflationary pressures and the possible impact of El Niño. While near-term earnings volatility may persist, India's long-term growth dynamics remain intact, making a stock-specific investment approach essential," Amnish Aggarwal, Co-Head, Institutional Equities, PL Capital, said.

What should investors do?

While PL Capital has become more optimistic on the Nifty's medium-term trajectory, it believes the market's next leg of gains will depend on how effectively India navigates geopolitical uncertainties, weather-related disruptions and inflationary pressures. The brokerage maintains that a selective, stock-specific investment strategy remains the most prudent approach as investors balance structural growth opportunities against evolving macroeconomic risks.

From a sectoral perspective, PL Capital remains positive on Banking, NBFCs, Capital Goods, Defence, Telecom, Jewellery, Hospitals and Consumer Durables, citing favourable domestic demand trends, infrastructure spending, manufacturing prospects and robust credit growth. However, it remains cautious on Auto, Consumer, IT Services, Cement, Chemicals and Oil & Gas companies.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.