Emkay Global Financial Services reduced its Nifty target for December 2025 by 4 per cent to 25,000 from the earlier estimate of 26,000. The revision stems from underwhelming second-quarter earnings, primarily driven by weaker performance in the discretionary and staples sectors, alongside deteriorating corporate cash flows.
Despite the downgrade, the brokerage maintained a reassuring stance, emphasising that there is “no cause for panic” as it anticipates a recovery in consumption growth by FY26, driven by subsiding macroeconomic headwinds.
The brokerage pointed out that consumer companies were the main contributors to the earnings disappointment in the second quarter. Revenue growth in the staples and discretionary sectors lagged expectations, with topline growth plunging to 2.19 per cent compared to 12.35 per cent in the previous quarter.
While discretionary consumption showed a modest 6 per cent year-on-year growth, staples posted a decline of 3.1 per cent, falling short of expectations. Emkay noted that this earnings underperformance is a near-term headwind but remains optimistic about a recovery once current challenges ease.
Corporate cash flows also faced significant pressure during the second quarter. Operational Cash Flow (OCF)-to-Ebitda for the BSE-500 (excluding BFSI) fell to 71.4 per cent from 81.8 per cent sequentially, while Free Cash Flow (FCF) contracted by 51.7 per cent year-on-year. The FCF-to-profit-after-tax metric slipped to 35.9 per cent.
Sectors such as discretionary, materials, and industrials were hit hardest by the combination of weak cash flow and increased capital expenditure. However, Emkay attributed part of the OCF weakness to delayed government payments, which it expects to normalise in the second half of the fiscal year. The brokerage remained optimistic about the long-term growth prospects, citing a 16 per cent year-on-year increase in capital expenditure as a positive development.
Emkay Global retained its sectoral outlook, remaining overweight on telecom, IT, energy, materials, and utilities. It maintained a neutral stance on consumer discretionary, industrials, healthcare, and real estate, while it maintained an underweight stance on financials and staples.
In its model portfolio, the brokerage allocated the highest weightage to 'add' rated Bharti Airtel, Reliance Industries, and 'buy' rated Larsen & Toubro. Among small- and mid-cap (SMID) stocks, its top picks included Escorts Kubota, Gopal Snacks, Saregama India, Jubilant FoodWorks, and One97 Communications.
The underwhelming earnings season prompted a 2.5 per cent reduction in Nifty EPS projections, with FY25 EPS growth now estimated at a modest 8 per cent. Emkay highlighted the subdued momentum in earnings upgrades, with only 2 per cent of companies witnessing upward revisions in the third quarter compared to 24 per cent in the first half of the fiscal year.
Despite these challenges, the brokerage maintained a constructive long-term outlook, underscoring India’s macro-financial resilience and potential for a recovery in consumption growth by FY26. While the revised price-to-earnings ratio reflects the near-term challenges, Emkay rolled over its Nifty target to December 2025 with a positive view of the market's structural potential.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
