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Earnings review – A modest 3QFY25; Earnings downgrade ratio worst since 1QFY21!

Valuations still expensive for SMIDs; prefer large-caps

* A third consecutive quarter of low single-digit earnings growth: This market correction has coincided with a slowdown in earnings growth, as the Nifty-50 has managed only 4% PAT growth in 9MFY25 (following a healthy 20%+ CAGR during FY20-24). The 3QFY25 corporate earnings scorecard was modest, driven once again by BFSI, with positive contributions from Technology, Telecom, Healthcare, Capital Goods, and Real Estate.

* BFSI drives with PSU Banks benefitting from lower credit costs: The aggregate earnings of the MOFSL Universe companies were in line with our estimates and increased 6% YoY (vs. our est. of 7% YoY). Earnings for the Nifty-50 rose 5% YoY (vs. our est. of +5%). The aggregate performance was hit by global commodities (i.e., Metals and O&G). Excluding the same, the MOFSL Universe and Nifty posted 10% and 7% earnings growth vs. our expectations of +11% and +7%, respectively. The earnings growth was driven by BFSI (+11% YoY) with PSU Banks (+24% YoY vs. our est. of 13% growth) leading the charge. Technology (+9% YoY), Telecom (profit of INR9b vs. a loss of INR35b), Healthcare (+25% YoY), Capital Goods (+20% YoY), and Real Estate (+60% YoY) also contributed to the growth. Conversely, earnings growth was hindered by global cyclicals, such as O&G (OMC’s profit declined 18% YoY), which dipped 11% YoY, along with Cement (-55% YoY), Chemicals (-12% YoY), and Consumer (-5% YoY).

* A third successive quarter of single-digit growth for Nifty-50: Nifty delivered a 5% YoY PAT growth (vs. our est. of +5%). Nifty reported a single-digit PAT growth for the third successive quarter since the pandemic (Jun’20). Five Nifty companies – Bharti Airtel, SBI, ICICI Bank, Hindalco, and Reliance Industries – contributed 111% of the incremental YoY accretion in earnings. Conversely, Coal India, ONGC, Tata Motors, JSW Steel, and IndusInd Bank contributed adversely to the earnings.

* Large-caps in line, mid-caps deliver a beat, while small-caps report a big miss: Within our MOFSL coverage universe, large-caps (84 companies) posted an in-line earnings growth of 5% YoY. Mid-caps (87 companies) stood out and delivered 26% earnings growth (est. of 17%), led by Financials (PSU Banks and NBFCs), Commodities (Metals and O&G), and Retail. Small-caps (121 companies) experienced a broad-based miss as earnings dipped 24% YoY (est. of: -5%) with 56% of our coverage universe missing the estimates. Conversely, within our largecap and mid-cap universe, 29%/43% of the companies missed the estimates.

* The beat-miss dynamics: The beat-miss ratio for the MOFSL Universe was unfavorable, with 44% of the companies missing our estimates, while 28% reported a beat at the PAT level. For the MOFSL Universe, the earnings upgradeto-downgrade ratio has turned weaker for FY26E as 37 companies’ earnings have been upgraded by >3%, while 137 companies’ earnings have been downgraded by >3%. The earnings upgrade/downgrade ratio of 0.3x was the worst since 1QFY21. Further, the EBITDA margin of the MOFSL Universe (exFinancials) expanded slightly by 40bp YoY to 17.4%, primarily aided by the Healthcare, Telecom, and Infrastructure sectors but hurt by the Cement, Consumer, Automobiles, and Chemicals sectors.

* Report card: Of the 25 sectors under our coverage, 3/12/10 sectors reported profits above/in line/below our estimates. Of the 292 companies under coverage, 81 exceeded our profit estimates, while 129 posted a miss, and 82 were in line.

* The 9MFY25 snapshot: The MOFSL Universe delivered a 2.3% YoY earnings growth in 9MFY25. Excluding Metals, and O&G, it reported an 11.8% YoY earnings growth. We categorized the coverage stocks based on market capitalization criteria into large-cap, mid-cap, and small-cap segments. Notably, our large-cap universe saw a 2.6% YoY earnings growth in 9MFY25, while mid-cap delivered an 8.4% YoY growth, and small-cap posted a decline of 17.9% YoY in 9MFY25. For 4QFY25, we estimate a modest earnings growth for the MOFSL and Nifty Universe, at 4.5% and 4.0%, respectively.

* FY26E earnings highlights: The MOFSL Universe is likely to deliver sales/EBITDA/ PAT growth of 7%/15%/19% YoY in FY26. The Financials, Oil & Gas, and Metals sectors are projected to be the key growth engines, with 13%, 24%, and 37% YoY earnings growth, respectively. However, we foresee downside risks to our earnings estimates for FY26E/27E.

* MOFSL Universe experienced a cut of 1.8%/2.3% for FY26E/FY27: Our MOFSL Universe witnessed a cut of 1.8% for FY26, led by Metals, Private Banks, Consumers, Cement, and Automobiles. Further, our small-cap and mid-cap universes experienced a bigger cut at 5.9% and 3.4%, respectively. The large-cap universe witnessed a cut of 1.2%.

* Nifty EPS cut by 1.4%/1.8% for FY26E/FY27E: The Nifty EPS estimate for FY26 was cut by 1.4% to INR1,203, largely owing to ONGC, HDFC Bank, JSW Steel, Axis Bank, and SBI. FY27E EPS was also reduced by 1.8% to INR1,373 (from INR1,398) due to downgrades in SBI, HDFC Bank, ONGC, Tata Steel, and Reliance Industries.

* The top earnings upgrades in FY26E: Bharti Airtel (9.2%), Hindalco (4.2%), Tata Motors (4.1%), Kotak Mahindra Bank (3.6%), and Maruti (3.5%).

* The top earnings downgrades in FY26E: JSW Steel (-9.5%), Tata Consumer (-6.5%), Tata Steel (-5.9%), Trent (-5.5%), and Dr. Reddy’s Labs (-5%).

* Key sectoral highlights – 1) Banks: The banking sector reported another soft quarter amid moderation in margins and sustained higher provisioning expenses, mainly for the private banks. NIM continued to dip amid cost pressure, while the competition for deposits continued to remain intensive for banks, and the CASA mix continued to deteriorate. Public sector banks too experienced some NIM compression, albeit very limited. 2) Autos: The 3Q performance was weak with a 2% YoY dip in profit. Management commentary on FY26 demand was uncertain, with signs of moderation across segments, while the commentary appeared more optimistic about rural demand outpacing urban demand. 3) Consumer: The sector continued to report weak performance, with the profit of our consumer universe posting a decline of 5% YoY. Challenging demand conditions coupled with margin pressures meant that management commentaries did not offer much respite either. 4) Oil & Gas: Revenue came in line with our estimate (flat YoY). Adjusted PAT was 7% below est. (down 11% YoY). Adjusted PAT, excluding OMCs, was in line (down 8% YoY). 5) Technology: The IT Services companies under our coverage presented a mixed picture in a seasonally weak quarter, with a median revenue growth of 1.8% QoQ CC in 3QFY25 (vs. 2.0%/1.2%/0.7% in 2QFY25/1QFY25/4QFY24). Guidance upgrades by major companies were disappointing. 6) Healthcare: The sector stood out once again with a solid 25% earnings growth (est. 19% YoY). Overall performance at the aggregate level was driven by: 1) a sustained contribution from niche products in the US generics segment, 2) a demand tailwind in chronic therapies, and 3) elevated inventory levels of raw materials, which helped keep their prices in check. The aggregate performance was partly hit by reduced support from the acute therapies.

PAT growth YoY in 3QFY25 (%)

* Our view: The 3QFY25 earnings are in line with modest expectations; however, forward earnings revisions are the weakest in recent times, with downgrades far outpacing upgrades, especially in our non-Nifty 50 universe. Weakness in consumption coupled with a drag from commodities has put severe pressure on earnings even as BFSI, Healthcare, Capital Goods, and Technology have recorded a healthy print. After a healthy 55% earnings CAGR over FY19-24 by the MOFSL Banking universe, the tailwind is now tapering off with FY25 earnings growing at a healthy but relatively modest 14%, while FY25-27E CAGR is projected at 12% (within which FY26E growth is estimated at a mere 9%). The expectations for FY26 corporate earnings (19% for the MOFSL Universe and 15% for the Nifty-50) are still somewhat elevated, in our opinion, given the underlying macro-micro backdrop and are thus ripe for further downgrades. The recent correction in broader markets factors into some of the potential disappointments in earnings ahead. That said, the valuations for mid and small-caps are still expensive vis-àvis their history as well as vs. Nifty-50. The Nifty is trading at a 12-month forward P/E of 19.3x, below its long-period average (LPA) of 20.5x. Thus, we continue to remain biased toward large caps with a 76% allocation in our model portfolio. We are OW on Consumption, BFSI, IT, Industrials, Healthcare, and Real Estate, while we are UW on Oil & Gas, Cement, Automobiles, and Metals.

PAT growth YoY in 9MFY25 (%)

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