Nifty bulls who have been buying on dips are in for some bad news as India’s September quarter earnings season is leading to downgrades in earnings estimates and cuts in target prices.
According to Saurabh Patwa, Head of Research and Portfolio Manager at Quest Investment Advisors, many companies are reporting disappointing sales and profits, indicating a slowdown in the Indian economy. Sectors like consumer goods and automobiles have shown weak performance, citing sluggish demand, increased competition, and pressure on profit margins.
For example, both Reliance Retail and Avenue Supermarts reported signs of a drop in demand, with Dabur also reflecting similar trends in its latest business update. Companies in the auto and consumer sectors are facing challenges with sales volumes and shrinking profit margins, as rising prices are hurting household affordability and increasing competition from smaller players.
Kotak’s Sanjeev Prasad noted that major retailers like DMart and Reliance Retail have struggled due to fierce competition from new entrants in the market. Earnings per share (EPS) for the consumer discretionary sector have been cut by about 5-7% for FY25, as many companies are unable to pass on high input costs to customers, leading to squeezed margins in sectors like fast-moving consumer goods (FMCG) and cement.
Sunil Damania, Chief Investment Officer at MojoPMS, warned that more slowdowns could be on the way from companies yet to report their earnings. He mentioned that while a good monsoon might boost rural demand, the urban market remains challenging. Damania advises caution in the consumer sector and recommends focusing on companies with strong fundamentals that are likely to recover quickly when growth returns.
On the other hand, large private banks performed relatively well, maintaining stable net interest margins, although credit growth was moderate. IT companies posted lackluster numbers but are expected to gradually improve in the second half of the fiscal year.
Analysts caution that market sentiment is also influenced by external factors like geopolitical tensions and global monetary policy changes. If corporate earnings continue to fall short of expectations, especially if it signals a broader economic slowdown, this could negatively impact the market.
With Nifty currently trading at a forward price-to-earnings (P/E) ratio of 20, any earnings misses could pressure stock prices and lead to market corrections, particularly affecting high-P/E stocks that rely on consistent earnings growth. Kotak analysts have stated that many sectors are currently overvalued compared to pre-pandemic levels, despite slower growth rates and ongoing risks.
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