Underwhelming Earnings May Play Spoilsport For Indian Stocks' Record Rally

The Indian stock market may soon hit a speed bump following its recent record run as investors focus shifts from sentiments to fundamentals. Analysts believe that earnings are not keeping up with the stocks' rally, with most sectors showing a decline in their earnings upgrade.

The earnings revisions across the last two months have been a mere 0.6%, and the last month has seen a decline, Bernstein said in a recent note. Seven of the 13 sectors showed a decline in the previous three months, and the average of earnings revision is barely 1%, it noted.

Furthermore, only 39% of the NSE Nifty 200 universe has seen earnings upgrades in the last three months, whereas 77% have seen positive price movements, according to the brokerage.

The scope for an earnings downgrade is increasing given that most of the drivers have already been played out, said Ganeshram Jayaraman, managing director and head of Avendus Spark Institutional Equities.

The challenge with markets today is that there are plenty of conundrums, he told NDTV Profit. "On one hand, the big picture in India is quite good, but the multiples are quite expensive and can present earning challenges."

Kotak Institutional Equities anticipates a 1.8% year-over-year decline in net income for the first quarter of fiscal 2025 within their portfolio, primarily due to a sharp decline in the net income of oil marketing companies.

Sensex's first-quarter net profits are expected to increase 8.1% year-on-year, but decline 8.4% sequentially, Kotak said. Profits for the Nifty 50 are likely to be flat year-on-year, but decline 10.7% sequentially, the brokerage said.

Tata Consultancy Services Ltd. will kickstart the earnings for the Nifty 50 companies this week, followed by HCL Technologies Ltd.

Asia's third-largest stock market recorded its best run for the year in June, as the benchmark gauge—the NSE Nifty 50—hit a fresh record 40 times so far in 2024. While the Nifty 50 rose by 11.7% during the year, the 30-stock Sensex climbed 10.5%. In June, both indices rose by about 7.3% each.

The broader market has seen an even more significant jump, as the Nifty Smallcap 250 and Midcap 150 have returned 26.3% and 24.8%, respectively, so far during the year.

The Nifty 50 remains the fourth-best-performing exchange among its Asian peers, with Pakistan's KSE 100 leading the pact by climbing nearly 31%.

While earnings expectations have moderated for calendar year 2024, actual results have outpaced forecasts, according to Vinod Nair, head of research at Geojit Financial Services.

Expectations for the first quarter remain subdued; however, recent high-frequency economic indicators and strong macro suggest a diminishing likelihood of weak corporate results, he said. "Nonetheless, any such outcome could potentially dampen the ongoing market rally in the short term."

Institutional investors are increasingly pivoting towards value buying over growth stocks, said Nair.

After two consecutive months of outflows, foreign portfolio investors made a net infusion of Rs 26,565 crore into equities last month, as per the data from National Securities Depository Ltd.

While global funds have been net buyers, the inflows may not be the highest among emerging markets. "However, the long-term outlook remains positive, providing reassurance about the stability of FPI flows in India," Vipul Bhowar, director of listed investments at Waterfield Advisors, said earlier.

However, the upcoming budget on July 23 could weigh strongly on investors' sentiments with its continued focus on infrastructure and additional boost to improve the consumption sector.

According to reports, the government is considering consumption-boosting measures worth more than Rs 50,000 crore in the upcoming budget. For the first time in seven years, tax cuts for lower-income individuals are part of the Modi government's first budget in their third term.

These measures could provide a strong case for the markets to move higher in the second half of the year.

The outlook hinges significantly on the budget outcome, ongoing industrial policy, and potential interest rate cuts, rather than solely on earnings growth, Nair of Geojit said. "Large caps are anticipated to maintain strong performance, whereas midcaps might face challenges due to heightened premiumisation pressures."