The brokerage notes that the Nifty 12‑month forward price-to-earnings multiple has dropped to about 17 times, “close to the pre-Covid (Jan’15-20) average” and at a 12% discount to the last five years. On current consensus earnings, the index is trading near minus one standard deviation to its 10-year average, with Jefferies arguing that “expectations of 4-5% earnings cuts have been built” into prices.
It also points out that the gap between government bond yields and the Nifty’s earnings yield has narrowed to 1.2 percentage points, slightly below the 10-year average of 1.4 percentage points, suggesting equities are no longer stretched versus bonds.
In its base case, Jefferies assumes the Middle East conflict and “strict closure of the Strait of Hormuz” are resolved over the next month and bakes in 2-4% cuts to FY28 Nifty earnings estimates. Under this scenario, it expects FY26-28 Nifty earnings to grow at around 12.2-13.4% and factors in a modest 5-6% re-rating in the one-year forward P/E to 18 times, yielding a revised Nifty target of 25,000 for March 2027, implying about 10% upside from current levels.
The bull case presumes a quicker normalisation in the Middle East and only about a 2% earnings cut to FY28, with EPS rising at a 13.4% compound annual rate over FY26–28. Applying post-Covid average multiples of 19.7 times, Jefferies arrives at a Nifty target of 28,000, or nearly 23% potential upside.
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In contrast, the bear case assumes persistent high oil prices, gas shortages and supply-chain disruptions beyond the June quarter, leading to an 8% cut to FY28 earnings and a “return to pre-Covid average P/E of 16.8x,” which would peg the March 2027 Nifty target at 22,400—“flattish vs. current level, i.e., limited downside.”
Jefferies flags that the index has fallen 13% year to date and is flat over the past two years, which has already compressed valuations. On an “extreme case of close to no earnings growth in FY27,” it estimates the implied Nifty P/E at about 20 times, close to the post-Covid average, while an 8% earnings downgrade, leaving just 6% EPS growth, would still translate into a multiple near the 10-year average of 18.6 times.
How Jefferies changed its model stock portfolio
Reflecting its relatively constructive stance, the brokerage has raised its overweight on banks by adding 3 percentage points to names such as State Bank of India, HDFC Bank and Axis Bank.
It argues that “Covid-level low valuations for banks, likely limited downside to EPS, and prospects of govt. support should help the bank stocks” outperform from here, while also highlighting that Nifty Bank price-to-book is “near lows (just ~10% above Covid lows)” and that net interest margin compression “won’t be a drag on FY27E/28E earnings.”
Jefferies has also added Sai Lifesciences to its model portfolio, taking pharma to a neutral weight, saying the sector faces “limited impact from ongoing geopolitical worries” and is “set to deliver 15–20% revenue CAGR over the next 3–5 years.” On the other hand, it has removed BPCL from the portfolio as it expects Brent crude to remain elevated at 85–90 dollars a barrel over the next 12 months and has trimmed overweight positions in autos and cement on the view that margin compression is “likely ahead.”
Among thematic calls, Jefferies reiterates that real estate “remains the best non-consensus buy” within its coverage universe and keeps the sector overweight in its India model portfolio. The portfolio, launched in September 2020 and reviewed one to two times a month around macro and stock-specific events, is designed as a basket of fundamentally selected Indian stocks that Jefferies estimates will outperform the MSCI India Index over a one-year horizon.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times.)