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India’s earnings growth mojo over emerging market peers is waning
Source: Live Mint
For India Inc., the first half of FY25 (H1FY25) presented significant challenges, as earnings growth momentum faced a combination of unfavourable factors. Government spending, particularly capital expenditure, moderated due to the general elections. Urban consumption weakened amid elevated inflation and tight monetary policy, while muted incomes eroded purchasing power and also led to a decline in household savings. Together, these factors contributed to subdued earnings growth for Indian companies in H1FY25.
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As a result, India’s advantage of robust corporate profit growth compared to its emerging market peers has diminished (see chart). Shrinking margin tailwinds have triggered earnings per share downgrades, and the Indian rupee’s steep decline against the US dollar has further clouded profitability for companies reliant on imported raw materials.
Adding to these pressures, the global macroeconomic outlook remains uncertain due to ongoing geopolitical tensions. Rising US bond yields and concerns over potential trade policy shifts under a Donald Trump presidency also weigh on global growth prospects.
“The corporate earnings and market outlook is currently increasingly sensitive to the economic growth outlook. Corporations have largely exhausted the profit margin levers and are thus dependent on the broader economic growth for earnings delivery,” said Nomura Global Markets Research report dated 15 January.
“We think corporate earnings are unlikely to outpace nominal gross domestic product growth materially in the near-term. Our bottom-up analysis of Nifty50 stocks suggests a 3-6% (downside) risk to earnings for FY26/27F,” added the report.
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Until recently, India’s relatively stronger macroeconomic stability had been a unique selling proposition, attracting foreign inflows into the country’s stock markets despite rich valuations. However, foreign institutional investor (FII) inflows into Indian equities have become increasingly erratic. Sustained FII outflows could weigh heavily on equity market sentiment and place additional pressure on the Indian rupee.
“Post-covid, despite FII inflows, FIIs’ Indian equity ownership has dropped, but India is a current account-deficit country and needs FII flows to fund it and secure macro stability (balance of payment, liquidity adjustment facility surpluses),” said a Nuvama Research report dated 14 January.
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Looking ahead, government spending is widely expected to revive in H2FY25. Strong agricultural output and a robust monsoon could bolster rural demand, partially offsetting muted urban consumption.
The December quarter (Q3FY25) earnings and management commentaries will provide crucial insights into whether these factors are materializing as anticipated. However, with the Street’s elevated earnings growth expectations, meaningful upgrades seem improbable. On the contrary, the risk of earnings downgrades persists, even though significant balance sheet stress is unlikely.
