Nuvama says earnings outlook remains muted due to shrinking margins, low demand, and global risks

Nuvama warns Nifty's decline could persist, says earnings outlook remains muted

Domestic brokerage Nuvama Institutional Equities warned that Nifty 50's decline is due to weak earnings and high valuations, with global uncertainties further heightening risk concerns. The benchmark index fell 15% from its recent peak on weak earnings, persistent FII selling.

It also said that earnings outlook remains muted due to shrinking margins, low demand, and global risks and could delay a lasting market bottom. Nuvama added that a market recovery depends on earnings growth or policy support.

The brokerage noted that the ongoing correction is a result of India's weak earnings amid high valuations.

"The outlook is muted as exports uncertainty persists, credit growth is weak, household incomes are subdued, and fiscal is consolidating. Moreover, weakening equity markets are likely to trigger a negative feedback loop as well, given the dominance of wealth effect. Thus, it is quite clear that earnings support to equities is certainly behind," said Nuvama.

However, with valuation premium to EM now at a 10Y average, as a result of the market downturn, India-specific de-rating is perhaps done.

"Just as India’s isolated cyclical meltup in FY24, H1FY25 was a break from the past. We think the correction is owing to India’s earnings reconciling with not just weak top-line growth, but also its EM peers. High valuation only added to the misery. This spurred FII outflows, undermining India’s BoP and macro liquidity (LAF surplus)," said the brokerage.

The brokerage said it remains defensive on Indian markets, cutting IT to "underweight" from "neutral" and increasing consumer stock exposure.

Nuvama said it is "overweight" on consumer, private banks, insurance, telecom, pharma, cement, and chemicals and "underweight" on industrials, metals, power, IT, autos, and PSU firms.

It added that small- and mid-cap stocks remain expensive, making them vulnerable to further declines. Small- and mid-cap indices are down 24% and 20.5%, respectively, as per data compiled by LSEG.