If investors were hoping that corporate earnings would offer some support to Indian equity markets, they are in for a disappointment. After a stellar FY24—largely buoyed by favourable input costs—India Inc.’s profit growth has tapered.
For BSE500 companies (excluding oil marketing firms), year-on-year profit after tax growth slowed to 8% in the December quarter (Q3FY25), aligning with muted top-line growth, according to an analysis by Nuvama Research. Most sectors outside banking, financial services, and insurance saw a sharp earnings slowdown. Revenue growth at 8% marked the seventh straight quarter of sub-10% expansion.
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In short, despite modest expectations, the Q3 earnings season was underwhelming, hurt by weak urban consumption and fading benefits from lower input costs. Consequently, earnings downgrades continued.
“Contrary to our expectations, earnings forecasts did not hold up well during the quarter,” said an Emkay Global Financial Services report dated 16 February. The brokerage highlighted that consensus Nifty earnings per share (EPS) estimates for FY26 were cut by 3.9% since 1 January.
This earnings disappointment has coincided with the rout in the Indian stock markets, as sentiment took a beating. The persistent risk of more downgrades means corporate earnings may not be able to lift spirits in the near term. Earnings outlook is threatened by both global and domestic factors, especially the latter, which was once a strong suit but is facing challenges now.
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A key concern is the potential impact of US President Donald Trump’s trade tariffs on Indian companies. There are also fears of a trade war due to reciprocal tariffs that could disrupt global supply chains and drive up operating costs.
Back home, a widely held expectation is that the income tax relief announced in the Union Budget will spur discretionary spending. But sticky retail inflation and muted household incomes could hinder the much-needed revival in consumption despite the recent interest rate cut.
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“The collective stance of the Reserve Bank of India and Union Budget is that the current growth downdraft is temporary and cyclical. Hence, cosmetic tinkering like income tax relief and rate easing are seen as sufficient redress. But that is a misjudgment as the growth dampeners are structural in nature,” said Systematix Shares and Stocks (India) in a report on 11 February.
With the household and corporate sectors under pressure, over 85% of the gross domestic product (GDP) appears to be facing considerable drag. Hence, the official growth narratives are out of sync with reality, cautioned the Systematix report. The Economic Survey 2024-25 estimated India’s FY26 real GDP growth at 6.3-6.8%.
Further, a depreciating Indian rupee, which has breached 86/USD, dulls profitability outlook for firms relying on imported raw materials. Plus, it could adversely impact India’s trade and fiscal deficit.
The latest correction shows that the Street is not fully oblivious to downside risks to earnings. Yet, against this backdrop, consensus FY25 and FY26 earnings estimates appear optimistic. There are some positives such as low leverage among Indian companies, but that is not enough for meaningful upgrades.
“The consensus is forecasting Nifty to deliver 7% earnings per share growth in FY25. This works out to an ask-rate of 12% in Q4FY25 and looks difficult given demand headwinds,” said Prateek Parekh, vice president, institutional equities, Nuvama Wealth Management.
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Meanwhile, so far in FY25, the MSCI India index has gained just 1.2%, significantly underperforming MSCI Asia Ex-Japan (+11%) and MSCI Emerging Markets (+8%). Valuations leave little margin for error—the MSCI India index trades at a one-year price-to-earnings multiple of 19x, as per Bloomberg data, a steep premium to Asian peers.