Earnings down to 10% in fourth quarter as Strait of Hormuz crisis bleeds into corporate profits, but Motilal Oswal reckons valuation reset has created entry point
Indian equities are navigating their most treacherous stretch in two decades, with foreign investors yanking $15.8 billion out of the market this calendar year and a Middle East conflict threatening the energy lifeline that fuels Asia’s third-largest economy. Yet Motilal Oswal Financial Services believes the pain has set the stage for a recovery, provided the guns fall silent.
In its FY27 preview note, the Mumbai-based brokerage paints a picture of a market caught between two opposing currents. On one side, a barrage of policy stimulus — repo cuts, the “game-changing GST2.0,” personal tax relief and bilateral trade pacts with the UK, EU and US — has built what should have been a launchpad for equities. On the other, the Iran-Israel-US conflict has choked sentiment and inflated the import bill of a country that depends on the Strait of Hormuz for 35% to 40% of its crude demand and more than half of its pre-war LPG needs.
“The Indian equity market should benefit from a favorable base year,” Motilal Oswal noted, citing accommodative monetary policy, better-than-expected GDP prints and “sustained faith from retail investors.” But the brokerage was blunt about the near-term setup, warning it has been “vitiated by the Iran-Israel/US war.”
Outlook FY27
The fourth-quarter earnings season, set to roll in over the coming weeks, will be the first to fully reflect the energy shock. Motilal Oswal expects profits across its coverage universe to grow just 10% year-on-year, a sharp deceleration from the 18% clocked in the December quarter and the 15% in the September quarter. Strip out financials, and the growth rate slips to 9%.
Large-caps are shouldering the brunt of the slowdown, with profit growth projected at 7% — dragged down by oil and gas companies, automakers, public sector banks, healthcare and capital goods. Mid-caps are the bright spot, with earnings expected to rebound to 25% growth from 16% in the prior quarter. Small-caps should deliver 18%, helped by a softer base.
The crude spike has also reversed what had been a hopeful trend of upward earnings revisions. Motilal Oswal trimmed its FY26 aggregate earnings estimate by roughly 1.4% in March and slashed FY27 forecasts by about 3%. “The surge in crude and gas prices has not only driven earnings cuts but also caused a jump in the implied equity risk premium, resulting in a sharp market decline,” the report said.
Cheapest in a Decade Versus Peers
The selloff has, however, produced something that has eluded India for years: a reasonable price tag. The Nifty 50 now trades at 18 times forward earnings, a 14% discount to its long-period average of 20.9 times. More striking is India’s valuation premium over emerging-market peers, which has compressed to 27% — well below the 10-year average of 73% and a fraction of the 145% peak reached during the post-pandemic euphoria. It is now hovering near a multi-decadal low of 21%.
The performance gap tells the same story. India has dropped 3% in FY26 while the MSCI Emerging Markets index has surged 31%, an underperformance of 34 percentage points that Motilal Oswal called “likely the most severe over the past two decades.”
Domestic institutional investors have been the breakwater. They have poured $28.8 billion into Indian stocks so far this calendar year, sustained by the unbroken systematic investment plan flows that have become a defining feature of the post-pandemic equity culture. Foreign investors briefly returned in February with $1.7 billion of net buying before the war triggered $14.2 billion of selling in March alone.
The Ceasefire
Motilal Oswal’s base case rests on the conflict not dragging on for “several months or quarters.” A prolonged war is the chief risk, given India’s reliance on imports for more than 85% of its crude demand — a dependency that could trigger imported inflation, rupee stress and demand destruction.
The brokerage projects earnings to compound at roughly 16% annually for both the Nifty and its broader universe between FY26 and FY28. With downside seen as limited at current levels, it is steering clients toward stocks “with high earnings growth visibility that have experienced reasonable valuation contraction” — a bottom-up tilt for a market that has stopped rewarding top-down bets.