Citi Research has cut its Nifty target to 26,000 from 27,000, citing rising earnings downgrade risks amid prolonged geopolitical tensions, but said India remains one of the most under-owned markets among foreign investors and could benefit if global conditions stabilize.
In a strategy note, the brokerage said allocations to India in global emerging market funds have fallen to a near five-year low, while foreign institutional investor (FII) positioning is close to the most underweight levels seen in two decades.
"The combined impact of geopolitics, AI and El Nino risk has resulted in subdued sentiment, particularly among FIIs," Citi strategists Surendra Goyal and Vijit Jain said.
The brokerage rolled forward its valuation framework to March 2028 and reduced its target valuation multiple to 18 times forward earnings from 19 times earlier. It also lowered its Nifty target to 26,000 from 27,000 to reflect increased risks to earnings forecasts.
Despite the downgrade, Citi said India's medium-term outlook remains healthy. It believes low foreign ownership and resilient domestic flows could create room for upside if tensions in West Asia ease and overseas selling moderates.
The brokerage noted that domestic demand has remained relatively strong and that India's weight in emerging market indices has declined sharply from around 20% in mid-2024 to nearly 11% currently. Domestic investors have also continued to support markets despite bouts of weakness.
According to Citi, cumulative FII outflows have exceeded $30 billion this year, while domestic equity inflows have remained resilient.
The brokerage highlighted a few risks that could affect markets in the near term. A sharper slowdown in India's Global Capability Centres (GCCs) could weigh on jobs and wage growth. Any moderation in domestic equity inflows would also be a concern. Citi further cautioned that AI-related value creation could increasingly shift from infrastructure providers to end beneficiaries, potentially altering market leadership.
On the earnings front, Citi said BSE100 companies reported headline EBITDA growth of about 6% year-on-year in the March quarter, slightly below its expectations and long-term trends. Consumer and materials companies delivered improving earnings growth, while financials and utilities lagged estimates.
The brokerage also flagged risks from higher crude oil prices and El Niño-related weather disruptions, which could create cost pressures and force companies to raise prices.
In terms of sector preferences, Citi remains overweight on financials, telecom, healthcare, utilities and defence. It is underweight on IT services, consumer staples and metals.
The brokerage's India Sentiment Indicator currently points to around 10% one-year forward returns, suggesting that sentiment remains weak relative to fundamentals.
Citi also said it has added Hitachi Energy India to its preferred stock list following its recent initiation of coverage on the electrical equipment sector.
