India Inc. Faces Mounting Earnings Downgrades As Growth Slowdown Weighs

India's top companies are facing acute pressure as economic slowdown has taken a toll with Jefferies cutting earnings estimates by the highest in over four years.

Analysts attribute this weak quarter as the primary cause of the selloff in the domestic stock market with the benchmark indices nearing the correction territory.

Global brokerage firm Jefferies has cut fiscal 2025 earnings estimates for over 60% of the 98 companies it covers which reported second quarter earnings. This is so far the highest downgrade ratio since early 2020, Jefferies said in a note on Oct. 30. "Above normal rains and weak government spending has impacted earnings outcomes," Jefferies said.

A clear trend should emerge in the December quarter but some intrinsic slowdown appears likely, it said. Jefferies now expects Nifty fiscal earnings per share growth at 10%.

For the 98 September 2024 quarter results that Jefferies analysed from their coverage universe, earnings downgrades (63%) were more than earnings upgrades (32%). Meaningful earnings per share downgrades were seen in most cement, oil & lending financials, mid-caps, auto and consumer staples players, it said.

The rising downgrades come as a result of a slowing economy with companies facing severe pressure from weakening urban demand. In recent post-earnings commentaries, heads of these companies have rued the slowing consumption of essentials such as food and shampoo to cars and bikes.

Contrary to the Reserve Bank of India's optimistic forecast, Nomura Global Markets Research believes that India's economic momentum is set to slow down in the third quarter and will probably continue to be weak until the December quarter.

However, "there is no case of structural slowdown in India," according to Manish Dangi, co-founder and chief executive officer, Mosaic Asset Management.

There is little doubt that India is slowing rapidly in last couple of months and it appears to be cyclical, Dangi told NDTV Profit in an interview. All signals from both industrial and consumption are showing weakness right now, according to Dangi.

Last month's decline in tax revenue heightened worries about a faltering economy. In September, the Gross Goods and Services Tax collection increase hit a 40-month low of 6.5%. The most recent reading showed a fall in the output growth of the eight core industries.

"This is probably the worst earnings cycle that we have seen going into Diwali in a long, long time," according to Rahul Arora, chief executive officer at Nirmal Bang Institutional Equities

"What is very evident is that the rural economy is in a mess." Hindustan Unilever Ltd. coming with 2–3% volume growth, a low number from two-wheeler manufacturers, and even certain consumer discretionary companies are taking a bit of a knock, Arora said.

The Nifty corrected by 8.8% from the recent peak, while the mid- and small-cap indices corrected by 7.3% and 4.5%, respectively, from their recent peaks.

Global funds have sold stocks worth over Rs 1.25 lakh crore since Sept. 27, according to provisional data from the National Stock Exchange. Domestic institutions have been net buyers of shares worth Rs 1.20 lakh crore during the same period.

Domestic stocks were "tactically" downgraded to 'neutral' from 'overweight' by Goldman Sachs within its Asia/emerging market allocation, due to slower economic growth and corporate profits.

Arora still doesn't think that the markets are going to fall off a cliff. "Somewhere around 22,000, we will find a floor on the Nifty 50," he said. However, the move to 26,000 will "be a very challenging one".

Indian stocks have not yet fully priced in the extent of the slowdown that could be on the cards despite the benchmarks seeing the worst session in over four years, according to Bernstein Research. The brokerage expects "further but limited moderation" in Nifty from current levels to 23,500 which remains their year-end target.