Indian Earnings Growth Projected to Reach Three-Year Low, According to Morgan Stanley

Indian corporate earnings growth is projected to experience a slowdown, hitting its lowest level in three years, primarily due to weak top-line performance, according to estimates from Morgan Stanley analysts.

Despite a consistent earnings upcycle that has delivered double-digit growth for 16 consecutive quarters, the upcoming September quarter is anticipated to show a significant deceleration in growth. This is attributed to muted revenue expansion and sluggish improvement in profit margins.

Morgan Stanley’s estimates indicate that revenue, EBITDA, profit before tax, and net profit for their coverage universe (excluding state-owned oil companies) will exhibit year-on-year growth rates of just 4%, 6%, 5%, and 5%, respectively.

The Sensex index is expected to see only 1% revenue growth and 3% net profit growth, while the Nifty index is forecasted to achieve 2% revenue growth and a mere 1% increase in net profit during the same period. This modest performance contrasts sharply with the double-digit growth trends experienced over the prior three years.

Although earnings growth remains positive, the expansion of profit margins is anticipated to occur at a slower pace, adding to the challenges faced by Indian businesses. Analysts project that margins will grow by 50 basis points year-on-year, continuing a trend of margin expansion for the seventh consecutive quarter. However, this growth rate is expected to be slower compared to earlier quarters.

In terms of sector performance, defensive stocks are likely to outperform, with Communication Services and Industrials predicted to lead in revenue growth. The Materials sector, on the other hand, is expected to lag, mainly due to declining earnings. In regard to earnings growth specifically, Communication Services, Health Care, and Utilities are forecasted to excel, while the Materials and Energy sectors are projected to face declines.

At the stock level, Bharti Airtel, Tata Consultancy Services, and NTPC are expected to significantly contribute to the overall earnings of the Sensex. Conversely, JSW Steel is predicted to be one of the weakest performers for the quarter.

Additionally, analysts expect that half of the coverage universe will report margin expansion, with Utilities and Financials likely to see the most substantial improvements. However, sectors such as government-owned oil companies and construction materials are expected to encounter declining margins, compounding their difficulties.

Looking ahead, analysts forecast three-year compound annual growth rates (CAGRs) for Sensex and Nifty revenues at 11% and 12%, respectively, with net profit CAGRs of 15% and 10%. Nonetheless, the consensus earnings growth estimate for the Sensex for fiscal year 2025 has been reduced by 3% over the past three months, now at 13.4%, indicating increasing caution among market participants.

In this context, Health Care and Utilities have seen the most favorable earnings revisions recently, indicating potential growth in these sectors. Analysts recommend investing in large private banks, select consumer and industrial stocks, and shares of IT service companies as the earnings season approaches.

Certain companies, such as Bharti Airtel, have a promising outlook due to anticipated future tariff hikes, while NTPC’s growth relies on capacity additions. However, risks remain, including higher capital expenditures, delays in tariff increases, and weaker-than-expected market conditions.

Tata Consultancy Services presents a mixed outlook, showing strong growth potential linked to its execution capabilities and favorable currency movements, while facing macroeconomic headwinds, rising attrition rates, and geopolitical risks.

JSW Steel, predicted to have one of the weakest earnings performances, faces significant risks from declining steel prices and possible delays in expansion projects. Nevertheless, strong domestic demand could mitigate some of these challenges.

In conclusion, while Indian corporations have shown resilience, the outlook for the September quarter suggests increasing uncertainty and the likelihood of a slowdown, highlighted by soft revenue growth and limited margin expansion. Analysts at Morgan Stanley remain cautious, advising selective exposure in key sectors as companies navigate this challenging landscape.