In a conversation with ET Now, he flagged oil as the single most important variable for Indian equities, warning that sustained supply disruption could materially alter FY27 earnings estimates and capital flows.
Crude oil emerges as dominant market driverSonthalia said the ongoing geopolitical situation remains unresolved, keeping crude markets on edge.
“The biggest variable currently is oil and the ceasefire which was supposed to result in a diplomatic settlement has not yet fully played out even as we speak. So, the problem is that we have seen $125 on the crude, currently we are hovering at around 116. So, till about 125 gets hit, broadly we have seen the negatives as far as Indian markets are concerned.”
He added that supply-side risks are intensifying due to production constraints in West Asia, with inventories expected to tighten further.
“Now what happens is that if these sort of embargoes still remain in West Asia, then we will see oil inventories because the production capacity has got whittled down significantly due to the war and the cushion is basically the inventories which are there. Now, the inventories are going to reach stress levels in the month of June.”According to him, the market is currently oscillating purely on geopolitical headlines.“The markets could swing either way based on whether we see a settlement on a diplomatic basis or we see a settlement on a military basis. So, from that point of view markets will be very range bound in the near term, maybe between 22,000 and 25,000, difficult for the markets to cross 25,000 in a hurry till about the resolution of the West Asian crisis.”Earnings outlook under pressure if oil spikes persistOn earnings, Sonthalia noted that while current corporate performance is broadly stable, risks are building for FY27 if crude remains elevated.
“At least for the fourth quarter there have been beats more than misses this far. 50% of the companies which have reported and those which we track have reported numbers and are beating the estimates and 25% of the companies are missing the estimate.”
However, he cautioned that sustained oil inflation could force downgrades.
“As we speak and if this embargo does not end very soon, then obviously FY27 numbers is going to be cut because this inflation shock, rate increase, the working capital, the supply chain disruption will mean that there is going to be stress on the balance sheets of companies.”
He currently pegs earnings growth at a lower range but acknowledges downside risk.
“As in the first week of May as we look into FY27, we still believe that 11-12% is doable but this can change very rapidly on the negative side if this whole war does not end quite soon.”
Valuations not cheap; 18 PE seen as floorOn market valuations, Sonthalia said India is trading close to fair-to-rich levels on forward earnings.
“The Indian markets are currently trading at around 19.5 times FY27. So, we cannot say it is exactly very-very cheap. For a 10% to 12% sort of earnings growth, then 18 PE is more than enough.”
He identified 22,000 as a critical support zone for Nifty.
“I think the floor comes at around 18 PE and that will be coinciding with levels of around 22,000… currently also we believe 22,000 acts as a floor.”
However, he warned that higher crude could break this range.
“Currently can break on the downside if oil prices were to spike $125 and beyond on the Brent side.”
FII flows weak; domestic liquidity key supportSonthalia does not expect meaningful foreign inflows in the near term, citing macro headwinds.
“As far as the FII flows are concerned, I will not really build in any expectation of FII flows into the near future in India… currency is depreciating big time, we are running overshooting risk on the current account deficit beyond 2%.”
He added that domestic investors will remain the stabilising force.
“We will have to lean on the support of the SIP flows and our domestic mutual funds to have a cushioning impact as far as the downside of the Indian markets is concerned.”
Sectoral positioning: energy, banks and select manufacturing themesDespite macro risks, Sonthalia believes stock-picking opportunities remain strong, especially in energy-linked and financial sectors.
“Power, energy, anything to do with the power value chain, energy, critical minerals, or AI infrastructure build which is globally the big theme, these are sectors which are likely to do well.”
Within financials, he remains constructive on lending and insurance.
“Banks and insurance both on the health insurance as well as the general insurance… even the banking system, the entire pack you have to pick and choose between the private sector banks and the public sector bank.”
He also highlighted select manufacturing and export-linked segments. “Semiconductor space or your mobile EMS, these are some of the sectors will be favoured.”
At the same time, he warned against overcrowded trades.
“I will be slightly mindful of over owned sectors, the transformer space or some of these high-fly names everybody seems to be buying all these names. So, valuations are a big hygiene check that one needs to do.”
For Sonthalia, the market’s near-term trajectory hinges almost entirely on crude oil and West Asia developments, with earnings revisions and foreign flows acting as secondary effects. Until clarity emerges, Indian equities are likely to remain range-bound, with domestic liquidity providing the primary cushion against downside shocks.
