Moneycontrol Pro Panorama | Valuations soar amid slowing earnings growth

While the Q1 results have established a moderation in earnings growth in the near term, investors are expecting positive internal triggers.

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Investing in Indian equities is getting more complex and challenging. On the one hand is the unabated flow of money from domestic retail investors into equity markets that is making valuations zoom. On the other hand, is a slowdown in the robust earnings momentum seen after the pandemic.

The subdued June 2024 (Q1) results mark the beginning of what could be a dull and unexciting year for earnings in fiscal FY2025. Illustrating this is the 4 percent year-on-year (yoy) earnings growth clocked by Nifty 50 companies for Q1, 1 percent growth by 263 companies under Motilal Oswal Financial Services’ coverage and a 4 percent decline in 159 companies covered by Jefferies India.

One could seek comfort in that the earnings drag came mainly from large oil marketing companies that bore the brunt of fluctuating crude oil prices. Take these out of the basket and, the Q1 earnings growth is about 10-12 percent yoy, which too is much lower than the strong 20-30 percent growth seen in most quarters in the last 12-18 months.

The upshot: earnings downgrades and a cut in estimated earnings for FY2025 by several research houses. The Chart of the Day in today’s edition highlights that with a higher number of downgrades compared to upgrades in the June quarter, the ratio of upgrades/downgrades is the worst seen in Indian equities since Q1 FY2021.

But the mojo on the Street continues. The Nifty has risen 13 percent since January and returned 187 percent since April 2020 (the pandemic low). That the lesser known small-and mid-caps have returned far more than the benchmarks is also known. Equity markets have displayed resilience through adverse domestic and global developments, be it sticky food inflation, heat waves, high interest rates, turmoil in the Middle East and consequent supply and trade disruptions.

Ironically, valuations are rising. Madhuchanda Dey from MCPro Research points out that Indian markets are now trading at 22 times one-year forward earnings (for the Nifty) – slightly costlier than the 10-year average of 20.4 times. Meanwhile, earnings growth is likely to stutter. “Nifty earnings that grew at a CAGR of 17 percent between FY22 to FY24 are likely to decelerate to 14 percent in the coming two years,” she says.

However, while the Q1 results have established a moderation in earnings growth in the near term, investors are expecting positive internal triggers from interest rate cuts, improving rural sentiment, and decent macroeconomic conditions. Adding heft to the positives is the International Monetary Fund’s revision of India’s growth projection for 2024-25 to 7 percent in its ‘World Economic Outlook’ report. Risks to Indian equities, therefore, could emanate from geopolitical developments.

“The India growth story warrants a buy on decline rather than a sell on rally,” says Dey while also pointing out that the markets have seen higher valuations during earlier peaks.

Investing insights from our research team

KEC International: Expect recovery in the second half of current fiscal

Voltas Q1: RAC demand hots up, other businesses turn around

CDSL: Robust earnings performance justifies stock rally

Tracker

Pro Economic Tracker: Auto sales, power demand in slow lane, steel consumption shows an uptick

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Is India’s medical delivery fit enough to take on an Mpox outbreak?

Large hospital chains withstand seasonal slowdown better in June 2024 quarter

Investors pile back into equities amid ‘full recovery’ in market confidence (republished from the FT)

Eknath Ranade: Architect of unity behind the Vivekananda Rock Memorial

Personal Finance

Nippon India MF launches Nifty 500 Equal Weight Index Fund: Should you invest?

Markets

India-focused offshore funds, ETFs continue to shine, reflect investor confidence 

Technical Picks: Mahindra and Mahindra, State Bank of India, Voltas, and DLF (These are published every trading day before markets open and can be read on the app).

Vatsala Kamat
Moneycontrol Pro