A Jefferies India note recently lowered FY25 earnings estimates for nearly two-third of the companies under its coverage that have come out with September quarter results so far, its steepest downgrade ratio since 2020.
The note said the earnings downgrades have been a result of a cyclical slowdown in the economy, resulting in a cut of FY25 EPS estimates for 63% of the 121 companies under the coverage that have reported results. Jefferies in its note now projects earnings of Nifty 50 companies to grow at only 10% for the fiscal.
The broader stock market has been under selling pressure from foreign investors and the earnings growth concerns may now dampen India's equity outlook in the very short term. Global funds have sold shares worth nearly $11 billion in October, as a result of which Nifty 50 fell 6.2% last month, its worst show since March 2020. However, for the year, the Nifty is still up 11%.
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The Trump victory too is anticipated to put pressure on Asian equity markets overall, with the outlook on China getting more uncertain. China's top legislative body on Friday took some measures to increase debt ceiling for local body governments in an effort to provide some economic push, but stopped short of announcing any fiscal stimulus.
“While the selling by foreign investors may not remain as severe, they will stay on the cautious side,” Bloomberg News quoted Rajat Agarwal, an Asia equity strategist at Societe Generale SA.
Consumption trend, seen in automotive and FMCG earnings too shows that urban India may be cutting back on spending as affordability becomes a factor of concern.
A CNBC-TV18 analysis too showed FY25 EPS estimates for 143 out of the NSE 200 companies that reported September quarter results have seen a downgrade for 86 of them. Steel, energy and power companies are among the leading names in this list of companies that have seen a sharp fall in the full-year EPS estimates in the last one month.
Goldman Sachs too turned neutral on India from Overweight, last month, citing slowing economic growth and high valuations as key concerns.
Jefferies' updated India strategy takes a cautiously optimistic view on equities, observing that supply has started to match the strong domestic demand. In recent months, equity supply has increased to roughly $7 billion per month, totalling around $60 billion year-to-date (YTD).
However, on a longer term, Jefferies remains bullish on India, and expected a $10 trillion equity market capitalisation by 2030. Aashish Agarwal, Jefferies' India head said in September that the valuations look steep as India offers growth visibility, and the emergence of the retail investor has lent further strength to domestic stock markets.
"Investors are finding India expensive because they are examining the same companies they have examined for the past decade. Foreign institutional investors have traditionally invested in the financial sector, consumer staples, discretionary and tech services. Different sectors will drive India’s growth over the next 20 years. These sectors will include infrastructure, hard assets, hospitals, hotels, airports, ports, manufacturing and so on. They are not necessarily expensive because their growth is still ahead of them," Aashish Agarwal added.
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