US-Iran conflict risks Indian earnings cuts, says HDFC Securities
Escalating geopolitical tensions threaten to delay India's earnings recovery, but corrected valuations and strong domestic credit growth position the market for a rebound in late 2026.
A prolonged US-Iran conflict could force analysts to cut Indian earnings estimates, delaying a widely expected corporate recovery. Dhiraj Relli, managing director and CEO of HDFC Securities, warned that the street's expectation of 15% compound annual earnings growth for fiscal years 2027 and 2028 is vulnerable to further escalation in West Asia. While the immediate threat of a broader US-Israel-Iran war previously receded, renewed tensions have reintroduced risks of elevated energy prices and currency pressure.
The Indian market has spent the past two years in a phase of volatile consolidation, driven by global trade tariff uncertainties and supply disruptions. Valuations across most market pockets have shed 20% to 30% over the past 12 months. Relli expects fiscal 2027 earnings growth to ultimately outpace fiscal 2026, with the second half of calendar year 2026 (H2CY26) marking a turning point driven by reasonable valuation multiples and prolonged consolidation.
India's core economy continues to provide a buffer against foreign investor outflows and a weaker rupee, supported by steady government infrastructure spending and robust local mutual fund inflows. The primary threats to this stability remain external. Swings in oil prices threaten corporate margins, while El Niño-driven monsoon delays could spike food inflation and dampen rural demand in the first half of fiscal 2027.
Against this backdrop, Relli recommends an overweight stance on diversified financials, private banks, manufacturing, industrials, defence, pharmaceuticals, cement, and consumer discretionary sectors. The banking sector recently outperformed expectations with system credit growth of around 15%, outpacing deposit growth, while asset quality continued to improve. The firm is underweight on consumer staples, where high valuations face risks from crude-linked input volatility.
Within the pharmaceutical sector, the US outlook for fiscal 2027 is muted. Companies like Dr Reddy’s, Zydus Lifesciences, Natco, and Cipla face headwinds from gRevlimid genericization, and US price erosion is unlikely to ease due to lower drug shortages. However, strong balance sheets with massive cash reserves are driving mergers and acquisitions, such as Sun Pharma's acquisition of Organon, while heavy R&D spending supports niche product launches.
Defence and aerospace companies offer multi-year revenue visibility and growing export opportunities amid global supply chain shifts. For investors navigating these overlapping domestic and international risks, Relli advocates for adding selective global equities to portfolios. He notes that international exposure reduces concentration risk and provides access to technology and healthcare leaders, provided India remains the foundational allocation.
