Short call: India Inc's earnings squeeze while valuations plays 'catch me if you can'; Zomato, Glenmark in focus

As global markets pivot back to expecting a Fed rate cut in the upcoming September meeting, the conversation has shifted to predicting just how deep those cuts might be in 2024.

As we close the books on Q1 earnings, India Inc. might be in for a reality check. BSE500 companies (minus OMCs) have clocked in sub-10% PAT growth for the fifth straight quarter. And even with a helpful base, the numbers barely moved the needle.

The bigger worry? The narrowing scope for margin expansion for most companies. Analysts at Nuvama Institutional Equities articulate this beautifully. According to them, margins are likely to hit more bumps than boosts. Besides, with BFSI credit costs normalizing and input prices levelling out, there's little wiggle room for margin expansion. Companies are already operating at peak efficiency, so any meaningful profit growth now hinges on a serious top-line revival, they add.

And just when you thought a consumption boost could ride in to save the day, it turns out that might not happen either. Private sector wage growth has slipped to 8% year-on-year, a 10-year low (excluding the COVID dip). With wage growth dragging down household incomes, corporate earnings might face some heat in the quarters ahead.

Add to this the high valuations of Indian equities, and you're looking at a market where prices might be running ahead of fundamentals. The non-institutional investors have been holding the fort, but the question is: how long can they keep it up?

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With concerns that this market exuberance could vanish in the blink of an eye if an unexpected crisis hits, many are keeping their guard up.

US recession: To worry or not to worry?

After US recession fears shook stock markets around the globe just two weeks ago, the latest batch of US economic data has market watchers hitting the brakes and reigniting optimism for the world's largest economy. World markets are now buzzing with hopes that the Federal Reserve might just pull off a soft landing, easing worries of a looming US recession.

Goldman Sachs, for instance, quickly reversed course on its recession forecast. The brokerage firm has now dialled back its US recession probability to 20%, a sharp turn from the recent hike to 25% (up from the initial 15%), thanks to new labour market data that prompted a fresh look at the economic outlook.

As global markets pivot back to expecting a Fed rate cut in the upcoming September meeting, the conversation has shifted to predicting just how deep those cuts might be in 2024. All eyes are on one man-Fed Chair Jerome Powell-who's set to take center stage at the Jackson Hole meeting later this week.

With optimism flowing over the possibility of imminent Fed rate cuts, global markets have shaken off the recent jitters. This renewed confidence has also buoyed Indian benchmarks over the past two days, even as valuation worries continue to loom large for investors.

Also Read | RBI paper calls for cautious monetary approach as food inflation bites

Glenmark Pharmaceuticals (Rs 1,630, +4.1%)

Shares surged after its US subsidiary launched Olopatadine Hydrochloride Ophthalmic Solution 0.1% (OTC) for eye allergies, in the US.

Bull Case: Q1 FY25 results marked a strong turnaround, driven by powerhouse domestic formulations and a stellar performance in the Europe market. Motilal Oswal upgraded its FY25 and FY26 earnings estimates by 11% and 17%, respectively. The reasons? A niche US respiratory pipeline, domestic market outperformance, and a trim in R&D spending. Watch out for the respiratory product Ryaltris - sales are set to soar, with $80 million expected in FY25.

Bear Case: Nuvama flags a slowdown in Abbreviated New Drug Application (ANDA) approvals and lingering USFDA regulatory risks that come with the generics game. The US market is feeling the squeeze, and the Asia market is staying quiet.

Zomato (Rs 262.17, -1%)

UBS Securities was the second brokerage that assigned a price target of over Rs 300 for Zomato, lifting its shares in early trade. Soon, profit booking trickled in, pulling the stock to end in the red.

Bull Case: Zomato’s on a roll, grabbing market share across Southern cities, traditionally Swiggy’s stomping ground. With valuations lower than the average Indian consumer/retail peers, it’s a steal. Plus, the quick commerce business, Blinkit, is on the fast track to strong growth.

Bear Case: But the quick commerce space is heating up. Morgan Stanley warns that Zomato must hold onto its crown for the long haul. The push for market leadership could slow down profitability plans for Blinkit.

(Inputs from Neeshita and Vaibhavi)