Top Indian companies registered their worst quarterly showing in more than four years for the July-September period, raising concerns that a lurking economic slowdown had begun to affect corporate earnings.
More than 50% of the 44 firms in the blue-chip Nifty 50 index (.NSEI) that have reported earnings so far have either missed analysts' estimates or reported results in line with expectations, according to data compiled by LSEG.
This is their worst performance since the March 2020 quarter at the start of the COVID-19 pandemic, when only about 20% of the Nifty 50 companies beat estimates.
Curbed government spending in April-June, due to the national elections, that spilled over into the September quarter and above-normal rains impacted earnings outcomes, analysts at Jefferies and Bernstein said.
Indian equities have dropped about 8% from their record closing high notched on Sept. 26, with October marking the worst monthly performance for the stock market since March 2020.
The selloff was also exacerbated by foreign investors moving out their investments in the wake of China's recent stimulus.
"It appears the waters may get a bit turbulent for Indian equities in the near term," said Motilal Oswal.
According to Jefferies, the current season has had the highest earnings downgrades since April-June 2020 among the 121 companies under its coverage that have reported results so far.
Motilal Oswal, meanwhile, flagged an 8% decline in earnings growth for the 166 companies it covers - the worst in 17 quarters - compared to a pre-season estimated drop of 4%.
Bernstein, however, added that investors were still considering the weakness over the past several months as an anomaly due to an elongated period of strong growth.
"Once reality hits, we expect a further but limited moderation in the Nifty from current levels."
BLIP OR APPROACHING STORM?
The monsoon or election impact may only be a part of the problem, according to Bernstein, "with a broader economic slowdown seen across IIP, eight core industries, automobile demand or diesel consumption."
Construction firms UltraTech Cement (ULTC.NS) and Larsen & Toubro (LART.NS) flagged weak demand, while banks reeled under their inability to recover unsecured loans. FMCG giants Nestle India (NEST.NS) and Hindustan Unilever (HLL.NS) also noted dull urban consumption.
Factory growth slowed to an eight-month low in September, while economic growth slowed to 6.7% in April-June. Data for July-September will be released on Nov. 30.
Bernstein moderated its year-on-year growth expectations for September earnings to 0.6% for the top 100 stocks, from its previous 9% forecast, while retaining its full-year consensus earnings growth of 10.2%.
Venkatesh Balasubramaniam, managing director and co-head of research at JM Financial, said one quarter of earnings weakness was not enough to indicate an economic slowdown, saying it was "too soon" to make that call.
"There is a possibility that government capex picks up in the second half."
Jefferies, which also noted the earnings moderation as a reflection of a cyclical slowdown, said that things could pick up in the second half of fiscal 2025.
Government spending on capex has fallen 15% in the first half, it said. With weather disruptions behind, execution and spending will rise by 25% in the second half, supporting an earnings rebound and a bounce-back in markets, it said.
