Analysts sound caution on India Inc's earnings growth amid market pullback

We remain Neutral India equities, which is relatively insulated from tariff concerns, but faces headwind from negative earnings revisions, wrote analysts at Standard Chartered in a recent note.

Analysts have started sounding warning bells as regards India Inc.’s earnings growth potential in the quarters ahead even as indices have come off recent lows. 

 

As an asset class, analysts at Standard Chartered have downgraded equities across all major regions, including India, to 'neutral' as policy uncertainty (regarding US tariffs) and a high level of volatility is resulting in a poor risk-reward. They expect the Nifty50 index to hit the 26,000 mark in 12 months, which is around 7 per cent higher from the current levels. 

“We remain Neutral India equities, which is relatively insulated from tariff concerns, but faces headwind from negative earnings revisions. We remain underweight ASEAN, as the redirection of China exports is intensifying competition for domestic ASEAN businesses and further weakening earnings momentum,” wrote Daniel Lam, head of equity strategy at Standard Chartered in a recent coauthored note with Fook Hien Yap, Michelle Kam and Jason Wong.  Click here for a detailed graphic on Standard Chartered's earnings estimates 

 

  A Business Standard analysis for 175 companies that announced their January–March 2025 quarter (Q4-FY25) results shows a modest 3.8 per cent year-on-year (YoY) rise in combined net profit (adjusted for exceptional items). This was the slowest pace of growth in the last 17 quarters.  READ ABOUT IT HERE

 

Net sales increased by 8.5 per cent YoY for the period under review, slightly outperforming the 8.1 per cent growth recorded in the sequential quarter (Q3FY25), but significantly lower than the 11 per cent growth seen in the corresponding quarter of the last fiscal (Q4-FY24).

 

Complacency creeping in

 

Others such as Sanjeev Prasad, managing director and co-head of Kotak Institutional Equities, too, believe that the markets are being too optimistic in their earnings estimates of India Inc., have become complacent.

 

“Consensus earnings estimates for fiscal 2025-26 (FY26) and FY27 have seen downgrades in a few sectors and companies. We assume there will be more, as global and domestic growth slowdowns hit revenues. For now, we model 12 per cent growth in the net profits of the Nifty-50 Index for FY26,” Prasad wrote in a recent note co-authored with Suvodeep Rakshit, Anindya Bhowmik and Sunita Baldawa.

 

The markets at this stage, Prasad believes, may be too bullish on revenues of export-oriented sectors such as automobiles, IT services, potentially pharmaceuticals and specialty chemicals in light of high levels of uncertainty on global gross domestic product (GDP) growth and tariffs in the US. 

High tariffs in the case of automobiles, KIE believes, will adversely affect the revenues of automobile companies such as Tata Motors, among others. Very few Indian companies, the note said, have operations in the US and will be at a severe disadvantage versus automobile companies with manufacturing facilities in the US, in case the US were to continue with the current tariffs on automobiles and components. 

 

A delayed decision-making of the clients of IT services companies may affect the revenues of the companies in this space. Valuations of IT stocks, Prasad cautioned, are well ahead of pre-pandemic levels, when growth rates were meaningfully higher. 

 

“They certainly do not factor in a deep slowdown or recession in the US. A deep slowdown or a recession in the US will affect both revenues and profitability negatively,” the note said. 

 

That apart, the markets may also be overly optimistic on profitability of companies in the consumption sector by assuming that the companies will be able to retain the benefits of lower raw material prices.

 

“The Street is banking on companies being able to retain a meaningful portion of the assumed decline in raw material prices. Even assuming prices of agricultural products were to decline along the expected lines of the Street and prices of crude oil and related inputs were to stay at current low levels, it remains to be seen if the companies can retain the benefits of lower raw material prices,” the note said.