D-Street's cooling earnings momentum set to challenge stock rally
Strategists predict lackluster profit growth for companies in the NSE Nifty 50 Index in the three months ended June. Citigroup Inc. sees their aggregate net income rising just 2% from last year, while Motilal Oswal Securities Ltd. pegs the number at 4%. In the prior quarter, the expansion was more than 11%, outpacing forecasts.
That’s not enough for analysts struggling to justify an 11% recovery in the Nifty from the June 4 selloff, which was triggered after India’s ruling party lost a majority in parliament and shocked investors. The earnings slowdown is caused in part by a severe heat wave, drawn-out election activity, and central bank curbs on unsecured loans, all of which have dampened consumption.
“The initial expectation for the earnings season is subdued,” said Vinod Nair, head of research at Geojit Financial Services Ltd. He sees profitability of Indian companies coming under pressure as flagging demand forces firms to take steps to boost volumes, which will likely hurt their bottomline and stock valuations. “The period of margin expansion appears to be concluding,” Nair said.
Energy, banks and commodity companies are expected to have a rough quarter, and drag down the Nifty’s aggregate performance. HDFC Bank Ltd. and Bank of Baroda Ltd. posted a sequential drop in credit growth, suggesting that lenders who have the highest weighting in the index are struggling to keep up the rapid expansion seen in recent years.
Local stocks need consistent earnings growth to justify the high valuations. At over 20
