India Stocks: Limited Earnings Hit If West Asia Conflict Ends Soon

The report noted that geopolitical developments, particularly signals from the United States regarding the Iran-Israel conflict, have raised hopes of easing tensions and stabilising energy supplies.

"The recent comments of the POTUS raise hopes about (1) an end to the ongoing Iran-Israel/US war and (2) normalisation of crude oil and gas supplies over the next few months, thereby limiting the damage to the Indian economy and market earnings," the report said.

Kotak Institutional Equities said its base case scenario assumes the conflict may continue for a few weeks, but without causing long-term disruption to global oil infrastructure.

"The statements of the POTUS have improved the odds of our base case scenario of (1) the conflict continuing for a few weeks, (2) elevated tensions for the next few months, (3) reopening of the Strait of Hormuz over the next few weeks and (4) no long-lasting damage to oil & gas infrastructure in the Middle East," the report stated.

According to the report, if the conflict ends within two to three weeks and oil supply conditions improve thereafter, the impact on Indian corporate earnings may remain limited.

"We see limited earnings downgrades for FY2027E and FY2028E if (1) the Iran-Israel/US war ends within the next 2-3 weeks and (2) oil & gas supply conditions improve over the next few months," the report said.

It added that government actions have helped shield Indian consumers and businesses from the full impact of rising oil prices.

"We note that the government has largely isolated Indian consumers and companies from the negative impact of higher retail oil prices for now," the report added.

Despite the recent volatility, the report highlighted that valuations across several sectors have corrected, improving investment opportunities.

"The negative news cycle of the past few weeks with respect to the war and consequent supply disruptions appears to have hypnotised market participants into extrapolating the current negative environment in perpetuity," the report noted.

It added that "the reward-risk balance has improved across more parts of the market, given the correction in valuations of the market and in many sectors and stocks."

Market benchmarks have already seen a sharp correction since the start of the conflict. The report noted that the Nifty-50, Nifty Midcap 100 and Nifty Smallcap 100 indices have fallen 11 per cent, 10 per cent and 8.2 per cent, respectively, during this period.

Looking ahead, Kotak Institutional Equities expects corporate earnings to remain resilient. It projects Nifty-50 earnings growth of about 17 per cent in FY2027 and 15 per cent in FY2028, although it cautioned that risks remain if geopolitical tensions escalate or crude prices stay elevated for longer.

The report also flagged other risks for India's economy, including weather-related concerns and agricultural supply issues.

"We would worry more about (1) weaker-than-normal monsoons due to potential El Nino conditions and (2) fertiliser shortages, which could result in a subpar summer crop," it said, adding that India currently has "a reasonable food-grain buffer."

Overall, the report suggested that while geopolitical tensions may keep markets volatile in the near term, the structural outlook for India's corporate earnings remains intact if the conflict does not escalate further.

- ANI