Will recovery in H2 FY25 corporate earnings ease the stock market's nerves?

The Indian equity market has seen a healthy correction recently, particularly in the small and midcap space, with muted corporate earnings emerging as a weak spot. After a healthy 21% compound annual growth rate (CAGR) over FY20-24, corporate earnings moderated in H1 FY25 amid subdued government spending (flat in H1 FY25 YoY) along with excess rainfall impacting demand. Going ahead, corporate earnings are expected to recover in H2 FY25, aided by a rise in rural spending, a buoyant wedding season, and a pick-up in government spending, according to a report by Motilal Oswal Financial Services Limited (MOFSL).

“Since Aug’24, we have reduced our FY25 estimates for Nifty earnings per share (EPS) by 5%, and we now expect a modest 5% growth for Nifty earnings in FY25, the first year of single-digit growth in five years. However, compared to the muted H1, we expect corporate earnings to recover in H2 FY25 (9% YoY growth for MOFSL Universe in H2 FY25 vs. flat YoY performance in H1,” MOFSL says in a report titled - ‘India Strategy – The Winners and Laggards’.

“The correction has cooled off the valuations in largecaps, even as mid/small-caps trade at expensive multiples – Nifty50 is now trading at 19.6x FY26E EPS, while mid-cap/small-cap indices are trading at 30x/23x one-year forward P/E multiples, off from the Sep’24 highs but still rich vs. their own history as well as relative to Nifty-50,” the report notes.

The report adds that the recent correction and the consequent moderation in valuations provide an opportunity to add select bottom-up ideas. MOFSL noticed that even in a muted quarter, several companies such as SBI, L&T, M&M, Sun Pharma, and Indian Hotels delivered resilient performance. 

As per the report, the BJP’s decisive victory in the recent Maharashtra and Haryana assembly elections will boost overall sentiment. The strong mandate will help in strengthening policy momentum, expediting the key infra projects, and increasing focus on overall government. This poll result will also bolster the perception around the political capital of PM Narendra Modi, especially given the minor setback NDA suffered in 2024 Lok Sabha polls, it adds.

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