Iran Conflict Escalation May Disrupt Fuel Supplies and Erode Q4FY26 Profit Margins

India Market Outlook Amid Iran Conflict

Key Takeaways

• The Iran conflict poses a significant macro risk to India's economy, primarily through rising oil prices, which could lead to higher inflation and a wider current account deficit.
• Despite this risk, India's domestic economy remains a key driver, with sectors linked to capex and consumption expected to outperform over time.
• Preferred sectors include:
  • Domestic Cyclicals: Financials, Capital Goods / Infrastructure, Autos & Ancillaries, driven by government capex and private investment revival.
  • Structural Themes: Manufacturing / China+1 beneficiaries, Defence and aerospace, Power equipment.
  • Select Defensives: Healthcare / Pharma / Consumer staples.

Market Expectations

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• The market is likely to remain range-bound in the near term, supported by strong domestic flows and earnings visibility.
• Brent Crude has climbed above $90/barrel due to the conflict, which poses a significant risk to the economy.
• Historically, most Middle East conflicts create volatility but limited long-term market impact unless energy supply is disrupted.

Sectoral Outlook

• IT Services: The sector is likely close to the bottom, but a sharp recovery is not expected yet. The narrative has shifted from "digital transformation" to AI-centric deals, which now form nearly 74% of new contracts for major companies.
• Cyclicals: The sector is expected to perform well, driven by government capex and private investment revival. However, concerns about rising input costs due to high energy costs may squeeze margins.

Economic Growth

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• The base case for 7% economic growth in FY26 and FY27 remains intact, driven by strong domestic consumption, infrastructure capex, manufacturing shift toward India, and services exports resilience.