No meaningful rally likely until India Inc's growth picks pace, say market experts

Earnings drag during Q2 was primarily led by oil refining and marketing companies followed by MFIs

Although Indian markets posted their second consecutive weekly gain last week, the benchmarks continue to remain 9 percent off its September peaks. Steep earnings downgrades following Q2 results, rampant foreign outflows amid renewed Chinese optimism, and strengthening dollar have kept investor sentiment bogged down lately. In order for a meaningful bull run to resume, India Inc's earnings growth needs to make a comeback or investors should reset their high expectations from corporate India, said market experts.

Hemant Shah, fund manager at Seven Islands PMS told Moneycontrol that it will another 2-3 quarters for Indian markets to see a meaningful recovery. He highlighted that valuations are currently stretched, with equities trading at 14 times FY27 profit estimates. "At these levels, it’s unrealistic to expect FIIs or mutual funds to make a significant comeback," he said.

Aishvarya Dadheech, Founder and CIO, Fident Asset Management concurred to this view and said that markets would remain on the sidelines for another month or two, with Q3 results as a potential catalyst for any upward movement.

During the July-September period, India Inc saw the slowest profit growth since June 2020 quarter due to sluggish revenue growth, rising interest rates, and depreciation costs. Moneycontrol data revealed that net sales growth of 694 listed entities stood at 8.04 percent in Q2FY25, down 8.04 percent from previous quarter, whereas net profit rose by a modest 3.9 percent, down from 15 percent growth seen in previous quarter.

Earnings drag during Q2 was primarily led by oil refining and marketing companies followed by micro-finance institutions, while metals, PSU banks, IT services, and pharma's performance largely impressed the Street.

According to JM Financial analysts, around 66 percent of companies in their coverage experienced EPS cuts for FY25, with midcaps and smallcaps seeing the highest proportion at 76.7 percent and 64 percent, respectively. For FY26, more than 60 percent of companies have faced EPS downgrades, with largecaps and midcaps leading the cuts at 70 percent and 69 percent, respectively.

Going ahead, the Street is still forecasting mid-teens growth from Nifty in the second half of FY25 and FY26. However, further downgrades appear likely as current growth expectations remain lofty, said analysts at Nuvama Institutional Equities.

Given this scenario, Sandeep Bagla, CEO at Trust Mutual Fund stressed on the need for a reality check. He suggested that either investor expectations must adjust to reflect market realities, or corporate earnings need to accelerate significantly for fresh buying interest to revive Indian markets. Until then, a sustained recovery may remain elusive.

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