Equities

India's Nifty 50 Faces 2% Profit Growth, Tests Stock Rally

Nifty 50 earnings growth forecasted at 2%-4%, down from 11% last quarter, amid weak demand and high valuations.

By Athena Xu

7/10, 22:14 EDT
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Key Takeaway

  • Indian equities face a challenging earnings season with Citigroup forecasting just 2% profit growth for Nifty 50 companies.
  • High valuations and weak demand, especially in energy, banking, and commodities sectors, could pressure stock performance.
  • Despite potential earnings slowdown, robust economic growth and strong local mutual fund inflows may help Indian stocks outperform Asian counterparts.

Earnings Season Expectations

Investors in Indian equities are bracing for a potentially disappointing earnings season, as strategists predict modest profit growth for companies in the NSE Nifty 50 Index for the quarter ending in June. Citigroup Inc. forecasts a mere 2% increase in aggregate net income from the previous year, while Motilal Oswal Securities Ltd. estimates a slightly higher 4% growth. This is a significant slowdown compared to the more than 11% expansion seen in the prior quarter, which had exceeded forecasts.

The subdued earnings outlook is partly attributed to several factors, including a severe heat wave, prolonged election activities, and central bank restrictions on unsecured loans, all of which have dampened consumer spending. "The initial expectation for the earnings season is subdued," said Vinod Nair, head of research at Geojit Financial Services Ltd. He noted that Indian companies' profitability is under pressure as weak demand forces firms to take measures to boost volumes, potentially hurting their bottom lines and stock valuations. "The period of margin expansion appears to be concluding," Nair added.

Energy, banking, and commodity sectors are expected to face a challenging quarter, which could drag down the overall performance of the Nifty. Notably, HDFC Bank Ltd. and Bank of Baroda Ltd. reported a sequential decline in credit growth, indicating that lenders, who have the highest weighting in the index, are struggling to maintain the rapid expansion seen in recent years.

Valuation Concerns

The high valuations of local stocks necessitate consistent earnings growth to be justified. The Nifty is currently trading at over 20 times one-year forward earnings, representing a 27% premium to its historical mean, according to data compiled by Bloomberg. This has raised concerns among analysts who are finding it difficult to justify the 11% recovery in the Nifty since the June 4 selloff, which was triggered by the ruling party's loss of a majority in parliament.

However, technology companies, which constitute 13% of the Nifty 50, may help offset the slowdown in the banking sector. Nomura Holdings Inc. recently stated that the slowdown in the tech sector likely bottomed out in the quarter through June and is unlikely to worsen further. Motilal Oswal has upgraded software exporters to overweight from underweight. Tata Consultancy Services Ltd. is set to announce its results on Thursday, marking the start of the earnings season, followed by HCL Technologies Ltd. on Friday.

Market Performance and Outlook

Despite the anticipated earnings slowdown, Indian stocks are on track to outperform their Asian counterparts for the fourth consecutive year, as per Bloomberg data. Robust economic growth, strong local mutual fund inflows, and steady earnings have made India a preferred market for outperformance for the remainder of 2024, according to a recent Bloomberg survey.

The main equity indexes have reached new highs, buoyed by Prime Minister Narendra Modi's return, which reassured investors of continued pro-growth policies. Expectations that the government will use a $25 billion dividend windfall from the central bank to boost consumption and infrastructure spending in the upcoming budget have also supported these gains. "There will be a sustained focus on infrastructure, capex, and manufacturing, which will occupy center stage," wrote Gautam Duggad, head of research at Motilal Oswal.

However, a slow start to the earnings season for the new fiscal year ending March 2025 could lead to a period of consolidation for local equities, according to Citigroup. "I will not be surprised if earnings growth for this year comes down to just mid-single digit if the June quarter reflects weak demand and margin compression for companies," said Dhananjay Sinha, co-head of equities at Systematix Group. "It will become a struggle to get strong returns from the market that investors have been accustomed to."

Street Views

  • Vinod Nair, Geojit Financial Services Ltd. (Bearish on Indian companies):

    "The initial expectation for the earnings season is subdued... The period of margin expansion appears to be concluding."

  • Motilal Oswal Securities Ltd. (Neutral on software exporters):

    "We have upgraded software exporters to overweight from underweight."

  • Dhananjay Sinha, Systematix Group (Bearish on Indian market returns):

    "I will not be surprised if earnings growth for this year comes down to just mid-single digit if the June quarter reflects weak demand and margin compression for companies. It will become a struggle to get strong returns from the market that investors have been accustomed to."

Management Quotes

  • Gautam Duggad, Head of Research at Motilal Oswal:

    "There will be a sustained focus on infrastructure, capex, and manufacturing, which will occupy center stage."