The earnings season is here again.
Listed companies are scheduled to post their results for the September quarter in the next few weeks. The markets have been on a record run this year, but many have shared concerns that the earnings might lag a bit behind.
So, how is India Inc.'s Q2 looking? We sat down with Dharmesh Kant, head of equity research, Chola Securities, to understand what one can expect from the earnings season.
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Q2 Overview
“This earnings season is likely to be lacklustre,” says Kant, reflecting on the outlook for the Nifty 50. “As far as Nifty EPS (Earnings Per Share) is concerned, I expect a modest growth of around 5% to 6%. Last year, the EPS was about 250 for this quarter, so the best-case scenario now would be around 260 or 263.”
He highlighted that the top 500 companies delivered a muted growth of 4% to 4.5% in the previous quarter. “This includes significant contributions—over 20% growth—from the BFSI (Banking, Financial Services, and Insurance) segment and around 8%-9% from the IT segment. Beyond these sectors, however, the overall performance was lacklustre on a year-on-year basis. We're seeing a similar trend continuing in Q2,” Kant observed.
Looking ahead, Kant is cautiously optimistic. “Q3 might show some improvement, and even if Q4 performs better, we have to remember the high base effect from last year. All things considered, we are forecasting an annualised EPS growth of around 7% to 9% for the Nifty 50,” he said.
However, Kant remains positive about the future. “The market is always forward-looking. Most participants are now expecting 9% to 10% growth, down from earlier estimates of 12%-13%, but there's hope for a brighter outlook starting next year. The accommodative monetary policies being rolled out globally will eventually be followed by India. This will help maintain the upward trajectory, even if there are periods of consolidation in the meantime.”
Sectors To Watch Out For
Kant shared a mixed outlook across sectors, highlighting some headwinds while also identifying pockets of potential growth.
For the BFSI sector, he doesn't expect significant growth, primarily due to concerns around slippages in unsecured lending. “Ground-level checks suggest that collection efficiency has dropped from 98% to around 95%-96%,” Kant noted. He expects higher provisioning in this segment, which will weigh down earnings. “Banks and BFSI companies, which make up about 30%-35% of Nifty earnings, will likely be affected.”
On IT, Kant anticipates a “status quo” performance. “Managements will probably reiterate the guidance they gave in the previous quarter, with no major change in numbers,” he explained. Growth will likely remain in the low single digits, in rupee terms. “Discretionary spending, especially in the US, has been a challenge for Indian IT companies. While they're making strides in AI-driven products, the real impact will take time to show.”
The automobile sector is expected to face challenges, particularly in the four-wheeler segment. “Companies like Maruti, Tata Motors, and Ashok Leyland saw year-on-year declines in Q2. M&M fared better due to its exposure to multiple segments, but overall, we expect a decline for major passenger vehicle makers,” Kant remarked. He also highlighted that margins would be pressured by the rise in metal prices earlier this year, which will be reflected in Q2 results, along with discounts provided by automakers.
For two-wheelers, performance was mixed. “Bajaj Auto and TVS Motors did well, primarily due to strong exports, but Hero MotoCorp’s volume growth of 7.5% wasn’t impressive,” Kant explained, noting that discounts and lower operating margins could further hurt profitability.
In metals, the story is more stable, although there has been volatility. “Domestic metal companies, especially those focused on steel, haven’t benefited much, as prices didn't rise significantly in Q2,” he said. Kant forecasts growth in the range of 7%-10% for this sector.
On pharma, Kant expects steady growth of around 12%-15%, in line with expectations. He also flagged telecom, specifically Bharti Airtel, as a standout performer. “They have implemented price hikes, which should translate into double-digit growth in profitability for Q2,” Kant said.
Reliance is also on his radar, though he cautioned that the conglomerate’s multiple business vectors make it challenging to forecast. “Refining is a bit of a black box, but retail could see around 10%-11% growth, and Jio should do well due to recent price hikes,” Kant added.
Finally, construction companies, such as Larsen & Toubro, are likely to be hit by excess rainfall and flooding, which disrupt activities in many regions. “This isn't a business issue, but weather-related delays will lead to slower growth,” he said, expecting single-digit profitability growth.
See Also: Religare Broking’s Ajit Mishra Suggests Watching Out For These Cues Ahead Of Q2 Print
Railways And Defence
After an incredible year at the bourses, railway and defence stocks faced some pressure in the last quarter. Kant attributed this to a combination of price action and market expectations, rather than a decline in business fundamentals.
The analyst said that the pressure we’ve seen in the stocks isn’t surprising. Much of the previous gains were driven by overenthusiasm, as per Kant. He pointed to Hindustan Aeronautics Limited (HAL) as an example of a defence stock that remains fundamentally sound despite recent market corrections.
“HAL is trading at 38-39 times its trailing P/E multiple with an ROE of around 28%-29%. Over the last decade, its operating margin has grown from 5% to 30%-31%, thanks to its transformation from a maintenance-focused company to an original equipment manufacturer (OEM). The recent delivery of SU-30M engines to the Indian Air Force highlights this structural shift.”
Kant also mentioned Bharat Electronics Limited (BEL), another key defence player, which has similarly evolved with the government’s push for foreign technology tie-ups under the ‘Make in India’ initiative. “Both HAL and BEL are set for long-term growth due to these strategic shifts, and for investors looking at a 5 to 10-year horizon, these stocks still have a lot of room to grow.”
However, in the railway sector, Kant expressed caution. “Stocks like RVNL and RITES experienced significant valuation jumps earlier, but the recent pullback indicates those gains were primarily liquidity-driven.” He explained that while the Indian Railways’ budget is expected to see a substantial increase—potentially rising from ₹2.5-2.6 lakh crore to ₹5 lakh crore—the growth for these companies is likely to be steady but limited. “These are manufacturing-focused companies, and while projects like bullet trains and four-lane tracks offer opportunities, growth will likely remain in the 12%-15% range.”
Kant believes much of the near-term growth for railway stocks has been priced in, whereas defence stocks still have significant long-term potential.
Good Time To Enter?
Kant advises investors to be patient and wait until after Diwali to consider entering the market. “I would suggest waiting for a month. Let’s see how Q2 earnings unfold. As I’ve mentioned, I’m expecting single-digit earnings growth overall, which isn’t great for the current market levels,” he said. With the market trading at 24-25 times P/E multiple, Kant explained that the expectation is for 20% earnings growth, which is not materialising at the moment.
He predicts a potential market correction following the festive season and the conclusion of state elections. “I have a sense that after Diwali and the state elections, we will see an actual correction in the market. While the market is correcting now, there could be a build-up to Diwali, but by then, Q2 earnings, management commentary, and the global market situation will be clearer.”
Kant suggests that this correction could present a buying opportunity. “I’m looking at levels around 23,000 to 23,550 after Diwali, possibly in November or mid-December, as an attractive entry point.”
While he expects this correction to occur, Kant emphasized that liquidity inflows, particularly through SIPs, remain a factor that could defy market gravity. “One thing that’s been defying all odds is the liquidity flow into the market, especially from SIPs,” he added, leaving room for the possibility that market behaviour may not follow the usual patterns.
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