India’s economy is growing. However, the global brokerage house Bernstein believes investors need to look beyond the headline numbers. For instance, government subsidies, tax cuts, domestic liquidity and capital flows are influencing everything from corporate earnings and consumer spending to stock valuations.That does not necessarily mean investors should avoid these trends.
Its latest India strategy report highlighted several such opportunities, ranging from Mahindra & Mahindra (M&M), financials and consumer companies to Electronics Manufacturing Services (EMS), electric vehicles and quick-commerce players.
Where does Bernstein see the biggest opportunities, and which distortions could shape the next phase of the market? Let’s take a look –
Corporate earnings: Look beyond the headline growth
Bernstein’s first concern is about the way corporate earnings are being interpreted.
The National Stock Exchange 200 index recorded only around 8% earnings growth in the June quarter. Yet, there has been a growing focus on earnings excluding oil marketing companies (OMCs).
Bernstein argues that this approach can miss the connection between different parts of the economy.
The brokerage said, “An economy is an interconnected system, and removing one part of it to reveal the “underlying” picture can often be misleading.”
According to Bernstein, OMCs reported around $2 billion in losses in the quarter, while the government absorbed another $8-10 billion through measures such as excise-duty cuts and higher subsidies.
GST boost: How much demand has been pulled forward?
The Goods and Services Tax (GST) cut is another factor Bernstein wants investors to consider.
The brokerage believes lower taxes have supported discretionary consumption particularly in segments where the previous year provided a weak comparison. But some of this spending may have simply shifted forward.
Bernstein report added, “stimulus is a one-time benefit.”
Passenger-vehicle companies, for example, have largely avoided significant price increases despite pressure on margins. Bernstein believes that may not continue indefinitely.
PLI: A risk in some sectors, opportunity in others
Production Linked Incentive (PLI) schemes are another major source of policy-driven earnings. The brokerage house believes incentives can support the reported profitability of some companies. This is particularly in electric vehicles and electronics manufacturing.
But it makes an important distinction. For industries where India is still building capabilities, such as electronics components and manufacturing, PLI can help establish an ecosystem and reduce import dependence.
“The most direct beneficiaries are Electronics Manufacturing Services (EMS), emerging Aerospace & Defence companies, and the EV ecosystem. As long as policy remains supportive, these sectors offer the most efficient way to invest in the PLI theme,” added the brokerage house in its report.
Rural spending keeps M&M in focus
Rural consumption presents another puzzle. Tractor demand and discretionary spending have remained resilient despite a weaker monsoon backdrop.
Bernstein believes government transfers and rural support measures could be contributing to this resilience.
If that trend continues, M&M could be one of the more direct beneficiaries.
But Bernstein cautions against treating strong consumption alone as evidence of a broad improvement in rural incomes.
Why could Eternal and Delhivery benefit?
Bernstein also identified an unintended consequence of subsidies and transfers. Its argument is that welfare support can increase the supply of workers willing to take flexible, lower-entry-barrier jobs instead of moving immediately into higher-productivity occupations.
That could benefit businesses that depend on large pools of delivery workers.
This brings Eternal and Delhivery into focus, alongside other companies operating in quick commerce, food delivery and logistics.
The brokerage said, “The key is not to fight them but to identify who benefits while they last.”
Liquidity is keeping valuations elevated
Another distortion comes from domestic capital flows. India has restrictions on overseas investment by residents and mutual funds. Bernstein believes this leaves a large pool of domestic savings searching for opportunities within Indian financial assets.
Bernstein does not expect a sharp market de-rating simply because Indian valuations look high compared with other countries.
Wage revision could support consumption but at a cost
Bernstein is also looking ahead to the next government wage-revision cycle.
The brokerage estimates that central government wage revisions could eventually result in more than $20 billion of annual transfers, with the impact potentially rising above $30 billion when state governments are included.
This could support discretionary consumption in 2027 and 2028.
How to invest in India’s distortions
The brokerage’s argument is not that policy distortions will last forever. It is that they can remain powerful for longer than investors expect.
Financials could benefit from strong liquidity. M&M could gain if rural demand stays firm. EMS, EV and defence companies can benefit from PLI support, while Eternal and Delhivery could benefit from labour availability for delivery-led businesses.
Bernstein report noted, “Distortions can persist far longer than investors expect.” For now, the brokerage retained a 26,000 target for the Nifty 50.
Disclaimer: This article is based on research reports from one or more brokerage firms and is for informational purposes only. The views, target prices, and recommendations expressed are those of the respective brokerage firms and do not reflect the official policy or position of Financial Express. This should not be construed as an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor before making any investment decisions.