Jefferies downgrades earnings forecasts as Nomura predicts Q3 FY25 slowdown. Nifty 50 falls 6.2% as foreign investors sell over $10B

In October, India’s NSE Nifty 50 Index fell by 6.2%, marking its worst monthly decline since March 2020, due to increased foreign outflows. According to Jefferies Financial Group, earnings estimates for fiscal 2025 have been reduced by 2.2% during this reporting season. Despite this drop, the Nifty is still up over 10% for 2024 and is on track for its ninth consecutive year of gains, largely thanks to more than $50 billion in share purchases by domestic institutions.

Joanne Goh from DBS Bank believes that domestic liquidity will continue to support the market, with earnings growth expected to be around 15% and the Sensex potentially reaching new highs. Even with the recent decline, the Nifty 50 is still the most expensive stock index in emerging Asia, trading at over 21 times its 12-month forward earnings, compared to a five-year average of 19.4 times. Brian Kersmanc from GQG Partners pointed out that some sectors preferred by global investors have become overvalued.

Foreign investors are pulling back from India’s stock market, selling more than $10 billion in shares in October, which is pushing the benchmark index closer to a technical correction. After being a popular investment destination due to strong economic growth and rising corporate profits, India’s attractiveness is diminishing as equity valuations reach some of the highest levels globally and economic growth slows down. Additionally, Chinese stocks are bouncing back after recent stimulus measures. Analysts believe that while foreign selling might slow down, investors will likely stay cautious, expecting both earnings growth and valuations to decrease further.

Jefferies Downgrades Earnings Forecasts Amid Economic Slowdown Impacting Top Indian Companies

The slowdown in the economy is putting pressure on India’s top companies. Global brokerage firm Jefferies has made its biggest cut in earnings estimates for companies in the past four years.

Jefferies has downgraded earnings estimates for about 60% of 98 companies it analyzed for FY25, marking the largest downgrade ratio since early 2020. According to Jefferies, “above-average rainfall and lower government spending have impacted the companies’ results.”

While a clearer trend in declining corporate earnings will likely be visible in the December quarter results, some signs of a slowdown are already apparent. Jefferies estimates that the earnings per share (EPS) growth of Nifty companies will be around 10% this financial year.

Jefferies analyzed the September results of 98 companies and downgraded earnings estimates for 63% of them, while upgrading estimates for 32%. The biggest cuts in EPS forecasts have been for companies in sectors like cement, oil, financials, auto, and consumer goods.

The economy’s slowdown is affecting urban demand, which in turn is impacting companies. After recent results, many company leaders mentioned weakened consumption in products ranging from food items and shampoos to cars and motorcycles.

India’s diesel market is slowing, with flat October sales of 7.64 million tons, the slowest since 2020, while gasoline sales rose 8.4% to 3.4 million tons.

Contrary to the Reserve Bank of India’s optimistic outlook, Nomura Global Market Research expects India’s economic growth to slow in the third quarter of FY25. The decline in tax revenue growth last month has also raised concerns about economic weakness. The increase in GST collections in September was just 6.5%, the slowest in 40 months.

Recently, Nifty has dropped 8.8% from its peak, while mid-cap and small-cap indices have fallen by 7.3% and 4.5%, respectively. According to NSE provisional data, global funds have sold stocks worth Rs 1.25 lakh crore since September 27, while domestic institutions have been net buyers of stocks worth Rs 1.20 lakh crore during the same period.

Despite a recent selloff, MSCI India trades at 22 times forward earnings, above its two-decade average, while retail interest rises with 30M new accounts in eight months.

India’s retail loan defaults are rising due to aggressive lending, affecting stocks of lenders like Kotak and IndusInd, which report stress in unsecured loans. Smaller lenders face sharper declines, and analysts warn of ongoing challenges if demand doesn’t improve. In August, personal loan growth fell to 14% from over 30% a year ago, with Ujjivan Small Finance Bank and IIFL Finance anticipating continued difficulties. Microfinance stocks like Fusion Finance and Spandana Sphoorty have dropped over 60%, hurting consumer demand for large purchases.