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The AI play no one is talking about: Why BofA is snapping up power & metals instead of IT
In a market where 19 months of flat returns have already tested retail investor patience, Shah warns the reckoning may not be over. “The bear case implies below-average valuations on realistic earnings of 8.5%, which brings you to roughly 12% downside from current levels,” he said in an exclusive interview with ET Markets.
The Earnings Mirage
On the surface, Q4 looked passable as two-thirds of Nifty companies beat estimates. But Shah strips away the gloss quickly by saying that total Nifty earnings growth came in at just 4.6% and nearly half of that was driven by rising steel and aluminum prices. “Markets don’t reward commodity-driven earnings with premium valuations,” he said, adding that higher commodity prices will eventually squeeze margins across the broader economy in coming quarters.
The picture is worse among NSE 200 companies. Earnings growth hit 9%, but 80% of companies in that universe missed estimates. Only 20% beat.
“So while Q4 wasn’t bad, I think it’s a signal that earnings are heading weaker going forward,” Shah said.
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A Dangerous Gap in Consensus
The more urgent problem is what the Street is still pricing in. Consensus forecasts peg FY27 earnings growth at 15%. BofA’s number is 8.5%. “I don’t believe 15% is going to be the reality,” Shah said flatly. “As companies disappoint in the June and possibly September quarters, consensus will have to cut meaningfully.”
BofA has already taken two rounds of cuts, first in early March and then in early April, bringing its estimate down from 14% to 8.5%, factoring in the West Asia conflict, higher crude, a weaker rupee, and the possibility of rate hikes.
With the conflict still unresolved and June nearly done, Shah said given we’re already in June, there’s no bull case left anymore.
Where BofA Is Putting Its Money
Shah has organised his convictions into three buckets.
1) Value: Large-cap financials. BofA likes large private banks and PSU banks, but is notably cautious on mid-sized private banks, which carry exposure to commercial vehicles, microfinance, and MSMEs which are potential stress points. NBFCs are also sidelined given rate-hike risk that could compress margins.
2) Growth visibility: This is where the AI infrastructure thesis comes in and it has nothing to do with software. BofA is backing “anything linked to data centers — cables, wires, transformers, power gensets” alongside non-ferrous metals like aluminum and copper as the global AI capital expenditure cycle is driving a structural commodity supercycle. On the consumer side, the firm favours jewelry, travel and tourism, and quick commerce.
3) Policy plays: The most forward-looking bucket centres on energy security — ethanol, compressed biogas, sugar companies, and the full electrification value chain including power financing, generation, and transmission. Shah also flags shipbuilding as an emerging policy priority, pointing to an aging workforce in China, Korea, and Japan, which together hold 92% of global shipbuilding market share, as an opening for India’s young labour force.
The IT Verdict
On India’s most-watched sector, Shah offers no comfort. “We are underweight and remain underweight,” he said. “We believe AI disruption is real, will impact business models, and create deflationary and margin pressures.”
PE multiples have already compressed from the early-to-mid 20s down to around 15–16x. Shah thinks that’s not the floor. “More derating is possible from here.”
In BofA’s framework, IT doesn’t fit into any of the three buckets. It isn’t cheap enough to be value, doesn’t have the growth visibility to justify a premium, and isn’t a policy play. For now, the firm’s AI trade runs through transformers and transmission lines and not lines of code.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)