With the September quarter earnings season kicking off today, the numbers could reveal India Inc.’s weakest quarterly performance since the June 2020 lockdowns that crippled businesses.
Brokerage estimates, led by Motilal Oswal, predict Nifty earnings will grow marginally by just 2% year-on-year (YoY) in Q2, marking the lowest growth in 17 quarters.
Margin pressure and fears of downgrades
The tepid 2% earnings growth has raised fears of potential downgrades. Motilal Oswal noted that H1 earnings per share (EPS) growth for Nifty could end up at just 3%, while the full-year FY25 growth forecast may slip to 7%, well below the consensus expectations of 13%.
Analysts suggest that the ongoing earnings fatigue could prompt further cuts in projections. Aditya Suresh, head of India equity research at Macquarie, said,
We continue to see earnings expectations fatigue and downside to the consensus forecast 15% 2-year EPS growth. As we saw in Q1, we see more misses than beats in Q2, particularly in consumer discretionary, materials, and financials.
This quarter could mark the second consecutive period of sub-10% profit growth YoY, following Q1’s 4% earnings growth.
Since September 2020, Nifty’s profit after tax (PAT) had risen in double digits until the March 2024 quarter.
Demand-driven earnings slowdown adds to concerns
The more worrying trend, according to analysts, is that the earnings slowdown is being driven by weakening demand rather than external shocks like liquidity crises.
“What’s more worrisome is the earnings slowdown is now being led by demand—and not external/liquidity shock. Reversing demand would thus need a notable policy response, which is not in the offing for now,” said Prateek Parekh of Nuvama.
Nifty’s consensus earnings projections for FY24/25/26 stand at ₹957/1,084/1,250, respectively, indicating continued sluggish growth.
Brokerages expect Nifty’s margins to contract by 40 basis points, settling at 20%.
BFSI and utilities to drive earnings; commodity sectors to drag
Despite the overall slowdown, earnings growth is expected to be supported by sectors like banking, financial services, and insurance (BFSI), which are forecast to see an 11% YoY rise.
Other sectors expected to post strong numbers include healthcare (15% YoY), utilities (24% YoY), and telecom, which is expected to narrow its losses significantly.
According to Motilal Oswal, telecom sector losses could shrink from ₹4,300 crore in September 2023 to ₹400 crore in September 2024.
Conversely, global cyclicals such as oil & gas (O&G) and metals are expected to drag down earnings.
O&G, especially oil marketing companies (OMCs), could see earnings decline by 33% YoY, while metals may post just 2% growth.
Cement, another commodity sector, is expected to decline sharply by 41% YoY.
Real estate and retail stand out
Amid the earnings slowdown, real estate and retail sectors are expected to deliver robust growth.
Real estate could grow by 44% YoY, while retail is projected to increase by 17% YoY. Capital goods (+13% YoY) and consumer segments (+4% YoY) are forecast to grow moderately.
Elara Capital noted that Q2 would be the first in seven quarters to see a decline in both YoY and QoQ earnings among its coverage universe of 235 stocks, as domestic cyclicals struggle to offset the drag from commodity sectors.
Market volatility ahead, but long-term buying opportunities remain
Emkay said it expected a subdued earnings season, though with significant divergence across sectors.
Materials, Energy, and Financials have weighed down Nifty’s aggregate PAT growth to 5%, while other sectors are projected to deliver robust, high-teen growth.
As a result, consensus estimates for FY25 Nifty EPS growth remain steady at 15.9%.
It expected to see a rangebound markets with “heightened volatility” with the upside capped by valuation.
“We see rangebound markets with heightened volatility. The upside is capped by valuations—our Sep-25 target for the Nifty, at a generous 22x PER 1YF, is 26,000 and offers <5% upside from here,” it said.
The brokerage noted that the downside is protected by sustained earnings growth and macro-financial stability, which could prevent a major market correction despite global concerns like the Middle-East oil shock and shifts in foreign portfolio investment flows toward China.
While market volatility is likely to persist over the next few quarters, long-term investors with a horizon of over two years should consider capitalizing on this weakness.
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