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India's Q3FY25 earnings season has fallen short of expectations, failing to provide the much-needed support to the struggling Indian equity markets. While FY24 saw stellar growth largely driven by favorable input costs, this momentum has significantly waned. Analysis by Nuvama Research reveals that for BSE500 companies (excluding oil marketing firms), year-on-year profit after tax growth slowed to a mere 8%, mirroring the muted top-line growth of 8%. This represents the seventh consecutive quarter of sub-10% revenue expansion, highlighting a concerning trend of slowing economic activity. The underwhelming performance stems from a confluence of factors, primarily weak urban consumption and the dissipation of benefits from previously lower input costs. This has led to a continuation of earnings downgrades, further dampening investor sentiment.
The disappointment extends beyond the immediate Q3 results. Emkay Global Financial Services' report from February 16th noted that consensus Nifty earnings per share (EPS) estimates for FY26 have been slashed by 3.9% since January 1st. This downward revision underscores a broader pessimism regarding future earnings prospects. The confluence of this earnings disappointment and the ongoing stock market downturn reflects a deepening sense of unease among investors. The persistent threat of further downgrades suggests that corporate earnings are unlikely to offer a significant boost to market sentiment in the short term. The outlook is clouded by both global and domestic headwinds, the latter being particularly concerning given India's previously strong domestic economic performance.
External risks include the potential ramifications of US trade tariffs under the Trump administration and the broader fear of escalating trade wars. These conflicts could severely disrupt global supply chains and inflate operating costs for Indian companies. Domestically, while the Union Budget's income tax relief was intended to stimulate discretionary spending, its impact is likely to be muted by persistent retail inflation and sluggish household incomes. Despite recent interest rate cuts, a meaningful revival in consumption remains elusive. Systematix Shares and Stocks (India) articulated a critical perspective in their February 11th report, arguing that the government's approach of 'cosmetic tinkering' through tax relief and rate easing is insufficient to address the underlying structural issues hindering growth. They highlight that the current growth slowdown is not merely cyclical, but reflects deeper structural problems.
The report further emphasizes that over 85% of India's GDP is facing considerable headwinds, contradicting the official growth narratives. The Economic Survey 2024-25 projected India's FY26 real GDP growth at 6.3-6.8%, a figure that appears increasingly optimistic in light of the current economic realities. Adding to the challenges is the depreciating Indian rupee, which has surpassed 86 per US dollar, negatively impacting the profitability of companies reliant on imported raw materials. This also threatens India's trade and fiscal deficits. The recent market correction indicates that investors are increasingly aware of the downside risks to earnings. Despite this, consensus FY25 and FY26 earnings estimates remain optimistic, suggesting a potential disconnect between market sentiment and the underlying economic fundamentals.
While some positives exist, such as the relatively low leverage among Indian companies, these are insufficient to warrant significant earnings upgrades. Prateek Parekh, vice president of institutional equities at Nuvama Wealth Management, points out that the consensus forecast of 7% EPS growth for Nifty in FY25 necessitates an improbable 12% growth in Q4FY25, given the prevailing demand headwinds. The overall picture suggests a considerable disconnect between official optimism and the on-the-ground realities faced by both corporate and household sectors. The confluence of weak consumption, global trade uncertainties, a depreciating rupee, and structural economic challenges paints a complex and concerning picture for the Indian economy and its stock markets, challenging the prevailing optimism reflected in many official forecasts. The sustained weakness necessitates a deeper analysis of structural issues to accurately assess the true trajectory of India's economic growth.
Source: India Inc’s Q3 earnings fail to ease the stock market’s pain