Citi Cuts Nifty Target To 26,000 As West Asia Risks Cloud Earnings Outlook

Brokerage firm Citi has lowered its 12-month target for the Nifty 50 to 26,000 from 27,000, citing heightened geopolitical tensions in West Asia and growing concerns over corporate earnings downgrades if the conflict persists.

The revised target implies an upside potential of around 12% from current levels.

The Nifty 50 was trading at 23,179 in morning trade on Thursday, down 0.2%. The benchmark index has declined around 10% since late February, when tensions between the US and Iran escalated, and remains nearly 12% below its record high touched earlier this year.

Valuation Multiple Cut Again

Citi also reduced its target valuation multiple for the Nifty to 18 times one-year forward earnings from 19 times earlier, reflecting a more cautious outlook on earnings growth.

The brokerage warned that a prolonged period of geopolitical uncertainty could result in broader earnings downgrades across sectors.

This marks Citi's second downward revision this year. In March, the brokerage had cut its Nifty target to 27,000 from 28,500 and lowered its valuation multiple to 19 times from 20 times, citing similar concerns around growth and profitability.

FII Sentiment Remains Weak

According to Citi, the combination of geopolitical risks, artificial intelligence-related uncertainties and concerns around El Niño has weighed heavily on foreign investor sentiment.

The brokerage noted that India's allocation in global emerging market funds is currently near a five-year low, while active underweight positioning is close to the highest level seen in nearly two decades.

The brokerage said the sharp correction in Indian equities has improved valuations but investor caution remains elevated.

Despite persistent foreign selling, Citi believes domestic liquidity continues to provide a strong cushion for Indian equities.

So far this year, foreign institutional investors (FIIs) have sold nearly ₹3.36 lakh crore worth of Indian equities, while domestic institutional investors (DIIs) have purchased shares worth around ₹4.20 lakh crore.

The brokerage also pointed out that India's weight in the MSCI Emerging Markets Index has fallen to around 11% from nearly 20% in mid-2024, potentially creating room for future allocation increases if sentiment improves.

Key Risks Remain

Citi cautioned that a slowdown in the IT services sector and global capability centre (GCC) spending could affect employment growth and wage trends.

The brokerage also warned that any moderation in domestic institutional inflows could put additional pressure on market performance.

Sectorally, Citi remains overweight on financials, telecom, healthcare, utilities and defence, while maintaining underweight positions on IT services, consumer staples and metals.

The brokerage has also added Hitachi Energy India to its list of preferred stock ideas following the initiation of coverage.

The cautious stance comes amid increasing concerns over the impact of artificial intelligence on the IT services industry.

Separately, HSBC recently warned that rising merger and acquisition activity, coupled with AI-led pricing pressures, could continue to weigh on the sector's growth outlook over the next six to eight quarters.