More Q3 earnings misses than hits by India Inc add pressure to markets

Earnings upgrade-to-downgrade ratio worst in 22 quarters, says Motilal Oswal

Stock market bears have another reason to push prices lower.

 

The earnings upgrade-to-downgrade ratio after the December 2024 quarter (Q3FY25) is the worst in more than five years (22 quarters).

 

According to an analysis by Motilal Oswal Financial Services (MOFSL), the ratio stood at 0.3x, the lowest since Q1FY21.

 

This means that for every company whose projected earnings (for FY26 or FY27) were upgraded, nearly four companies saw their earnings downgraded.

 

“The earnings upgrade-to-downgrade ratio has weakened significantly for FY26E, with 37 companies’ earnings upgraded by over 3 per cent, while 137 companies’ earnings were downgraded by more than 3 per cent,” MOFSL stated in a recent report.

 

These downgrades follow a higher proportion of companies missing estimates compared to those beating them.

 

Approximately 44 per cent of the companies covered by MOFSL failed to meet expectations, while only 28 per cent reported a beat at the profit after tax (PAT) level.

 

The Nifty 50 companies reported single-digit PAT growth for the third consecutive quarter since the pandemic.

 

Five Nifty companies — Bharti Airtel, State Bank of India (SBI), ICICI Bank, Hindalco, and Reliance Industries — accounted for the majority of the incremental earnings accretion.

 

Overall, the Nifty earnings per share (EPS) estimate for FY26 was cut by 1.4 per cent to ₹1,203, primarily due to downgrades in ONGC, HDFC Bank, JSW Steel, Axis Bank, and SBI.

 

The FY27E EPS estimate was also reduced by 1.8 per cent to ₹1,373, driven by downgrades in SBI, HDFC Bank, ONGC, Tata Steel, and Reliance Industries.

 

On a sectoral basis, banking, financial services, and insurance (BFSI), technology, telecom, healthcare, capital goods, and real estate sectors performed better. However, aggregate performance was impacted by the global commodities sector, particularly metals and oil & gas.

 

In terms of market segments, largecap companies (84 in total) delivered in-line earnings growth of 5 per cent year-on-year (Y-o-Y).

 

Midcap companies (87 in total) stood out, achieving 26 per cent earnings growth. In contrast, smallcap companies (121 in total) experienced a broad-based miss, with earnings declining by 24 per cent, according to MOFSL.

 

So, will the weak earnings report card in Q3FY25 further weaken stock prices? 

“The recent correction in broader markets factors into some of the potential disappointments in earnings ahead. The valuations for mid and smallcaps are still expensive vis-à-vis their history as well as versus the Nifty 50 index. The Nifty is trading at a 12-month forward P/E of 19.3x, below its long-period average (LPA) of 20.5x,” noted the brokerage.