Nomura Highlights Earnings Strength but Flags Oil and Geopolitics Risks

Nomura has released a cautious outlook for Indian equities, noting that while corporate earnings are expected to grow steadily, external factors such as rising crude oil prices and geopolitical tensions could weigh on market valuations. The firm anticipates earnings growth outside the oil and gas sectors to hover between 11 and 12 percent over the next nine months, with an acceleration to approximately 16 percent forecasted for the fiscal year 2027-28.

Despite this promising earnings trajectory, Nomura warns that sustained high commodity costs may squeeze profit margins. Companies might find it increasingly difficult to absorb rising input expenses without passing some of the burden onto consumers, especially if oil prices remain elevated for an extended period.

Commenting on the recent market volatility, Nomura emphasized that the increase in crude oil prices alone does not fully explain the extent of the equity market correction. The firm points out that crude oil, which hovered around $70 per barrel before the outbreak of conflict in West Asia, has climbed to roughly $90 per barrel. However, the impact of this rise has been partially mitigated by oil marketing companies and government measures such as reduced excise duties.

According to Saion Mukherjee, Managing Director and Head of India Equity Research at Nomura, "If oil prices settle in the $100 to $110 range for the foreseeable future, we can expect earnings revisions downward." He also highlighted the prevailing geopolitical uncertainty as a significant factor contributing to lower market valuations. "Until August, the outlook seemed stable with oil prices retracting and a ceasefire in place. The recent escalation in conflict has introduced fresh uncertainty, which the market is reflecting through subdued valuations," Mukherjee said.

The brokerage also notes that the pass-through of higher oil and commodity costs to consumers has been limited so far. Companies have borne much of the increased input costs, which may not be sustainable if crude prices remain high. This dynamic poses a risk to earnings if companies can no longer shield their margins.

Nomura’s target for the Nifty index in March 2027 stands at 25,900 points, suggesting a potential return of around 13 percent from current levels. The firm acknowledges that this projection carries uncertainty given the evolving geopolitical situation in West Asia. Investors are advised to approach the market with caution and to consider valuations carefully amid ongoing technology sector disruptions and geopolitical risks.

The firm expects that investors will remain selective, focusing on companies with stronger valuation comfort as the backdrop of geopolitical tensions and commodity price volatility persists. Even as earnings growth remains robust, Nomura suggests that lower valuations are likely to stay due to these heightened risks.

Overall, the report paints a picture of resilience in Indian corporate earnings but highlights the challenges posed by external economic pressures. This nuanced outlook underlines the need for investors to balance optimism about earnings prospects with caution about market headwinds from oil prices and geopolitical uncertainties.