India's cyclical recovery faces risks; oil supply shock, AI capex may hit corporate margins from Q2FY27: Report
India’s economic recovery faces growing risks from the oil supply shock, fading domestic stimulus and slowing AI investment, Nuvama Institutional Equities said. The brokerage expects pressure on corporate margins to emerge from Q2FY27, with small- and mid-cap companies and cyclical sectors particularly exposed.
India's cyclical recovery faces mounting risks, according to a Nuvama Institutional Equities report. The report warns that an oil supply shock could disrupt corporate margins as early as Q2FY27, following a similar pattern from the 2022 war. Inventory gains that previously protected margins will dissipate from Q2FY27, it adds. Simultaneously, the AI investment surge may wane, potentially weakening the positive impact on exports and metal prices from the latter half of FY27, as Nuvama predicts.
The report also raises concerns over AI investment slowing further, citing major technology firms grappling with higher chip costs, fierce competition from China, and reduced cash flows. The potential for a slowdown in AI investment is likened to the late-cycle phase seen before the 2000 dot-com bubble burst. Additionally, a hawkish Federal Reserve and rising global bond yields could heighten pressure on risk assets.
The surge in US, European, UK, and Japanese bond yields, driven by tighter central bank policies and altered global dollar recycling, could weigh on risk assets and demand, especially with weak consumption and real estate markets globally. The report highlights that the Indian equity market's flat performance over the past two years hides significant polarization, with India trailing emerging markets, large-cap stocks, and defensive sectors.
Factors contributing to this divergence include the AI capex boom and domestic policy support, with GST cuts and RBI's regulatory easing boosting goods consumption. However, the report cautions that sustainably broadening cyclical recovery is crucial to maintaining the earnings gap as low-hanging fruits have already been harvested.
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