Corporate earnings growth in India shows signs of contraction

Indian markets may be in for a phase of earnings contraction coupled with above average valuations, say analysts.

Earnings growth in India is showing signs of contraction, with EPS growth expected to moderate to 5-10 per cent in Q4 compared to the robust 25 per cent experienced between April and December 2023, says Vinod Nair, Head of Research, Geojit Financial Services.

During this period of above-average valuation and economic slowdown, adopting a targeted approach focusing on individual stocks and industries is essential, he said.

“We are particularly inclined towards domestically driven sectors such as FMCG, Infrastructure, Cement, and Telecom due to their stable demand outlook for FY25 and the potential for reduced operational costs,” he said.

Additionally, defensive sectors like IT and Pharma offer resilience over the medium to long term, owing to their stable margin projections, lower input costs, and potential gains from a stronger dollar.

“We assess that the market is marginally overvalued, as India’s valuations have contracted YTD from a one-year forward P/E of 23x to 20x. The timing and extent of future interest rate cut will play a pivotal role in shaping stock momentum for the remainder of the year. It is imperative to closely monitor potential delays in rate cuts and any deceleration in earnings growth”, he said.

V. K. Vijayakumar, Chief Investment Strategist, Geojit Financial Services said the March inflation print coming at 3.5 per cent on an annual basis against the expectation of 3.4 per cent will certainly constrain the ability of the Fed to cut rates. This acceleration in price rise from 3.1 per cent in January and 3.2 per cent in February to 3.4 per cent in March has dashed hopes of a rate cut in June.

This year began with market expectations of six rate cuts. Now the expectation has come down to a maximum of three, perhaps two. Even now a total of 50bp rate cut is possible this year and these will be backloaded, he said.