Indian firms seen posting faster profit growth despite global headwinds

Indian firms are anticipated to experience a faster acceleration in profit growth during the September quarter, despite facing global and local headwinds, according to insights from five brokerages. A record exodus of foreign investors from Indian stocks has sent the benchmark Nifty 50 index towards its weakest annual performance in 15 years.

Meanwhile, a 10-year low monsoon season has raised concerns over rural demand, while the conflict in the Middle East has contributed to global inflation and heightened the risk premium on emerging market economies. Resilient domestic demand in the second quarter, coupled with early festive inventory accumulation and favorable pricing in certain commodity-linked sectors, is expected to sustain earnings growth, stated Rajiv Batra, a JPMorgan analyst.

Nifty 50 companies are forecasted to see a net profit increase of approximately 20% year-over-year on average, based on broker estimates. Motilal Oswal is the most bullish among the brokers, anticipating a 27% rise in net profit, marking the fastest growth in 17 quarters. This optimism is centered on the structural growth trends of firms like Meesho, PhysicsWallah, Mahindra & Mahindra, and TVS Motor, which are driven by expanding product portfolios and recovering discretionary demand.

PhillipCapital is more conservative, projecting a modest 13% rise in profits, largely due to margin pressure and a less favorable mix of businesses outside the oil and gas sector. Tata Consultancy Services is slated to lead the earnings season later in the day. Financials are expected to be the primary drivers of earnings, with healthy loan growth, lower credit costs, and fewer bad loans at banks.

Large private banks are anticipated to witness further earnings upgrades following the Reserve Bank of India's rate hike and its adoption of a calibrated tightening approach. Effects of the ongoing US-Iran war, now in its eighth month, are likely to impact sectors such as automobiles, energy, and consumer goods, as oil from the region faces difficulties reaching India, raising costs.

Automobile retail sales have increased during the quarter due to improved product mix, pricing, and tax cuts. However, commodity headwinds may temper operating margins, particularly for upstream and oil-to-chemicals companies, while benefiting oil-to-telecom conglomerates like Reliance Industries, which is expected to navigate a softer retail performance.

The IT sector may face subdued demand as clients delay non-essential spending amid AI-driven pricing pressures. Analysts expect management commentaries to reflect the multi-faceted challenges the sector faces, encompassing geopolitical uncertainties, weak macroeconomic conditions, and the threat posed by AI.