Weak India Inc earnings and downgrades fuel market selloff; will the tide turn in H2FY25?

The weak September quarter earnings have triggered a significant selloff in Indian equities in recent weeks, driving stocks to multi-month lows, with some hitting fresh one-year lows. Several recently-listed companies that reported earnings below market expectations faced severe investor backlash, leading them to trade below their issue prices.

One notable trend observed during the earnings season was that companies reporting numbers that met or exceeded expectations saw their stock prices skyrocket, while those failing short of estimates faced sharp declines.

Consequently, brokerage firms also lowered earnings estimates and target multiples for a majority of stocks, compounding the erosion in investor wealth. Mid- and small-cap stocks have been particularly affected, witnessing the most significant EPS cuts.

Market experts attribute the slowdown in earnings to a decrease in government spending ahead of the national elections, which has also led to a deceleration in high-frequency economic indicators.

During their earnings updates, company managements also expressed concerns about the slowdown in urban consumer spending across various categories, including essential goods such as food and personal care products, as well as discretionary items. This trend is primarily driven by economic uncertainties and the rising cost of living

Weaker-than-expected earnings have also dampened overseas investor confidence in Indian equities. This has led to sustained foreign portfolio investor (FPI) outflows, further pressuring the markets.

The combination of subdued corporate earnings and ongoing FPI withdrawals has heightened market volatility, pushing frontline indices into correction territory and forcing them to trade at multi-month lows.

Other factors currently weighing on investor sentiment include a spike in inflation, which has dashed hopes for an RBI rate cut in FY25, fading expectations of a US Fed rate cut in December, and uncertainty regarding the potential impact of a Trump regime in the US on emerging markets.

Additionally, the latest round of tensions between Russia and Ukraine has added another layer of unpredictability to the market, further dampening investor mood.

Broad-based weakness

In its latest report, domestic brokerage firm Elara Capital stated that Q2FY25 experienced broad-based earnings pressure, with a 6% YoY contraction in its coverage universe—the first decline in seven quarters, driven by weakness in the commodity sector, slowing consumption, and challenges in domestic cyclicals such as autos and banks.

The report noted that while the performance of non-commodity sectors improved by 11%, it was still far from the high double-digit growth seen in recent quarters. The EBITDA margin for Elara’s coverage universe stood at 14.2% in Q2, reflecting a contraction of 242 basis points YoY.

According to the brokerage, key sectors like autos and banks showed signs of weakness. Autos saw muted demand (except for two-wheelers during the festive season), while margins remained stable due to operating leverage and raw material costs.

Banks faced slowing loan growth, particularly in unsecured retail credit, rising asset quality stress, and higher credit costs. Consumption was mixed, with rural demand gradually recovering while urban markets weakened. FMCG growth fell short of expectations, with pricing actions counterbalancing rising input costs.

"Elara coverage universe saw a decline in its beat-to-miss ratio, dropping from 1x in Q1 to 0.7x in Q2FY25. Mid and small caps recorded a higher proportion of misses, while large caps had an equal number of beats and misses. Sector-wise, banks and real estate outperformed with a higher percentage of beats, whereas utilities lagged with the lowest beat percentage," said the brokerage.

Earnings visibility weakens, but H2FY25 offers hope of a rebound

The Nifty 50 has declined 10% from its peak, with FY25E earnings estimates revised lower by 3%. For its coverage universe, the brokerage cut FY25E earnings by 6.7%, now projecting a 6% growth versus 13% at the start of the financial year. Mid- and small-caps have also seen sharp downgrades.

The revisions reflect a consumption slowdown and weak government spending in H1FY25. However, the brokerage expects a recovery in H2FY25, supported by higher government capex, strong festival season-driven demand in auto and retail, and a benign crude oil environment aiding earnings growth.

Meanwhile, domestic brokerage Motilal Oswal Financial Services (MOFSL) said that while the stocks under its coverage universe delivered a flat YoY growth in earnings in H1FY25, it expects MOFSL earnings to report a growth of 9% YoY, led by BFSI, Metals, Telecom, Technology, and Healthcare sectors.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.