India Inc feels the pinch! Earnings downgrades in Q1 highest since June ’20

Corporate India logged its least flattering earnings expectations since the immediate aftermath of Covid shutdowns, with the June quarter upgrade-to-downgrade ratio plunging to 40% in an apparent reflection of demand moderation across swathes of the consumption economy.

That's the lowest reading since June 2020 for the ratio that captures expectations of earnings by analysts covering a particular company.

Data from Refinitiv showed 393 companies saw earnings downgrades after the June 2024 quarter results, while 247 companies saw upgrades. Notably, 250 companies had their earnings downgraded by over 3%, whereas 128 companies had upgrades exceeding 3%.

However, many believe that the June quarter will be a temporary setback in India's long-term growth story.

Private capex took a backseat as fresh investments waited for clarity on government formation and policies before proceeding further, due to the general elections.

"Lower commodity prices, including cement and metals, have impacted the profitability of commodity players while the general elections in April and May 2024 slowed down the ordering and execution of government projects and PSU-led capex, affecting the revenues and profitability of companies catering to government and PSU requirements," said Nishit Master, portfolio manager, Axis Securities PMS.

Earnings Downgrades

“We anticipate that the adverse impact of elections will gradually diminish from September 2024 quarter onwards, with December 2024 and March 2025 being completely normal and having strong earnings growth,” he added.

Among Nifty companies, 27 saw downgrades, while 19 received upgrades. The Nifty EPS estimate for FY25 was reduced by 1.7-2%. Companies like JSW Steel, Tata Steel, Titan Company, Reliance Industries, Indu- sInd Bank, and Asian Paints experienced earnings downgrades of more than 5%. On the other hand, Bharti Airtel, Adani Ports, SBI Life Insurance, Coal India, Bajaj Finserv, and Kotak Mahindra Bank saw earnings upgrades of more than 2%.

“The earnings upgrade to downgrade ratio of 0.4x was the worst since June 2020 quarter,” said Gautam Duggad, head of institutional research, Motilal Oswal Financial Services. “We anticipate the earnings momentum to continue; albeit, the magnitude of its growth is likely to moderate to 15% over FY24-26.”

The banking sector reported a soft quarter amid tepid business growth, NIM moderation, and a slight increase in provisioning expenses.