Corporate earnings across India have demonstrated broad-based growth, though market sentiment remains tempered, particularly concerning midcap and smallcap stocks. The latest earnings season saw a significant boost from the metals and oil & gas sectors, but underlying fundamentals across a wider range of industries have likewise remained robust.
Gautam Duggad, of Motilal Oswal, highlighted the strength of the recent earnings cycle, stating, “Metals and oil & gas gave an additional kicker, but even ex-commodities, earnings growth stood at 12%.” He noted this marks the sixth consecutive quarter of high earnings growth, accelerating from 10% to 16% over the period. According to Duggad, 19 out of 27 sectors analyzed delivered double-digit growth.
Strong performance was observed in the auto, capital goods, Non-Banking Financial Companies (NBFCs), and Public Sector Undertaking (PSU) banks. Lending NBFCs experienced nearly 30% growth, whereas non-lending NBFCs grew by 35%. PSU banks also exceeded expectations, delivering 18% growth compared to anticipated figures of 5-6%. The IT and retail sectors also demonstrated healthy growth, contributing to the overall positive trend.
A notable recovery was observed in the smallcap segment, with Duggad reporting that smallcaps posted close to 30% growth after five quarters of stagnant or negative performance. Midcaps, excluding commodities, grew by 20%, slowing the pace of earnings cuts, according to his analysis.
Despite the positive earnings trends, Duggad cautioned that India has underperformed in dollar terms over the past 15-18 months. He indicated that largecap stocks are currently fairly valued, but midcaps and smallcaps require more selective investment strategies. The midcap index is currently trading at a multiple of 28 times earnings, while the smallcap index is at 24 times.
Duggad identified volatility stemming from global trade dynamics, disruption in the IT sector, and the impact of Artificial Intelligence as key factors influencing market sentiment. However, he also pointed to the positive impact of fiscal and monetary policies implemented by the government and the Reserve Bank of India (RBI), particularly in the auto and consumer staples sectors.
Addressing concerns surrounding IT valuations, Duggad acknowledged the uncertainty, stating, “We upgraded IT in November, yet Infosys dropped 15-17% shortly after. It has now retraced to around 1300. Short-term levels remain uncertain.”
Duggad further explained that the financial, consumer, and IT sectors collectively account for 60% of Nifty profits. With these sectors exhibiting growth rates of only 3-10%, the overall Nifty growth of 7-8% is largely concentrated in a limited number of stocks. He emphasized that broader market coverage reveals a 16% growth rate, underscoring the significant opportunities available in mid- and smallcap stocks, characterizing the current market as “a stock-picker’s market.”