In a recent GREED & fear note, Christopher Wood of Jefferies reported that disappointing results from India Inc. in the July-September quarter prompted the steepest earnings downgrades since early 2020. The brokerage indicated that it revised down its FY25 earnings estimates for 63 per cent of the 121 companies within its coverage that have recently released quarterly results.
This earnings downgrade underscores challenges stemming from a cyclical economic slowdown. Despite the short-term headwinds, Jefferies remains cautiously optimistic, maintaining a long-term bullish outlook on India's equity market.
Jefferies slashed FY25 earnings per share (EPS) estimates for 63 per cent of the 121 companies that reported September quarter results. This broad-based reduction reflects a slowing economic environment, supported by Jefferies’ India office’s high-frequency data. The Jefferies Economic Indicator (JEI), which tracks the Indian economy using 35 monthly data points, rose by 4.3 per cent year-on-year in September—an improvement from the three-year low of 2.6 per cent in August but is still 0.6 percentage points below the year-to-date average.
Jefferies now projects that Nifty 50 companies’ earnings will grow by only 10 per cent in FY25, indicating cautious sentiment about the near-term economic trajectory.
Wood noted that the Indian stock market has recently experienced a healthy correction, particularly within the small- and mid-cap segments. This adjustment came amidst Q2 earnings season downgrades, the largest since early 2020. He viewed this correction as a positive development, as it primarily affected overvalued areas of the market, while relatively undervalued private sector banks have started to show outperformance. Expectations of a potential cash reserve ratio (CRR) cut by the Reserve Bank of India (RBI) in the coming months have supported this trend.
Jefferies’ banking analyst, Prakhar Sharma, suggested that the RBI’s shift from a liquidity withdrawal stance to a neutral position should ease concerns surrounding bank performance. Credit and deposit growth rates, which had a peak gap of 400 basis points over the past year, have now aligned. This alignment, alongside improved deposit growth and more manageable liquidity conditions, is expected to bolster banks’ net interest margins.
Jefferies pointed out that foreign investor activity has been a key pressure point for the broader stock market. October saw significant selling from global funds, amounting to nearly $11 billion, contributing to the Nifty 50's 6.2 per cent decline, its worst monthly performance since March 2020. Despite this, the index has still managed an 11 per cent gain for the year so far.
Jefferies highlighted that strong domestic inflows into equity mutual funds have persisted, with current domestic flows still outpacing the growing equity supply as companies capitalise on high valuations.
Jefferies’ updated strategy on Indian equities is marked by cautious optimism. While earnings growth concerns and foreign outflows may pressure the market in the short term, domestic investor participation remains robust. Notably, the supply of equities has risen to approximately $7 billion per month, accumulating to about $60 billion year-to-date. This has started to match the strong domestic demand, signalling a more balanced market.
Despite current challenges, Jefferies maintains a bullish long-term view on India. The investment bank reiterated its forecast of India reaching a $10 trillion equity market capitalization by 2030. Aashish Agarwal, head of Jefferies India, emphasised that while current valuations appear steep, they reflect India’s strong growth visibility. He credited the emergence of retail investors for bolstering domestic markets, noting that many foreign investors may find India expensive due to examining legacy sectors such as financials, consumer staples, and tech services.
Agarwal pointed out that the next phase of growth would be driven by sectors such as infrastructure, manufacturing, hospitals, and transport hubs like ports and airports. He argued that these areas still have significant growth potential and are not yet overvalued.
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