Earnings Growth in India Projected to Slow: A Shift in Market Dynamics

India’s Earnings Growth Forecast Slows to 12-14% CAGR Amid Economic Volatility

India’s corporate earnings growth is expected to slow to a compound annual growth rate (CAGR) of 12-14% by FY26, signaling a deceleration from the robust post-pandemic recovery. Motilal Oswal Private Wealth highlights key factors contributing to this trend, including global economic uncertainties, moderating domestic demand, and rising interest rates.

Factors Behind the Growth Slowdown

1. Global Economic Headwinds
   Persistent challenges like geopolitical tensions, volatile commodity prices, and fluctuating foreign investment inflows are straining corporate earnings. India’s dependency on global markets for exports and foreign capital amplifies these challenges.

2. Interest Rate Pressures
   The Reserve Bank of India’s focus on inflation control has kept borrowing costs high, affecting sectors like real estate, automotive, and consumer discretionary. This, in turn, reduces corporate profitability as companies struggle with rising input costs.

3. Moderating Domestic Consumption
   While India remains a consumption-driven economy, high inflation and slowing wage growth have curtailed consumer spending, particularly in urban areas. Sectors like FMCG and retail are experiencing slowed revenue growth compared to previous years.

Key Insights from the Motilal Oswal Report

1. Sectoral Outlook

   • Financial Services: Expected to remain resilient due to healthy credit growth and improved asset quality. However, net interest margins may compress.
   • IT and Tech Services: Faced with a slowdown in the global demand for outsourcing, IT services companies are likely to experience subdued growth.
   • Manufacturing and Exports: Weakened by global demand fluctuations, especially in textiles and pharmaceuticals.

2. Equity Market Performance
   The broader Indian equity market remains optimistic but with increasing polarization. Large-cap companies dominate growth, while mid- and small-cap segments face headwinds due to limited investor interest and profitability challenges.

3. Opportunities Amidst Volatility
   Despite the challenges, sectors like renewable energy, electric vehicles, and digital infrastructure offer significant potential. Government incentives under schemes like PLI (Production-Linked Incentives) and thrust on green energy projects present long-term growth opportunities.

Investor Implications

1. Diversified Portfolios
   Investors are advised to maintain diversified portfolios, combining large-cap blue-chip stocks with selective mid-cap opportunities in high-growth sectors.

2. Focus on Fundamentals
   Stock selection based on strong management, consistent earnings history, and low debt levels is crucial. Value investing may take precedence over growth investing in volatile markets.

3. Debt Market Considerations
   With interest rates likely to stabilize or peak, the debt market offers attractive returns, particularly through bonds and debt mutual funds.

Conclusion

While the projected slowdown in earnings growth might be concerning, India’s economic fundamentals remain robust. Long-term investors can capitalize on structural trends and policy initiatives that support sustainable growth. Strategic allocation across sectors and asset classes will be vital in navigating the anticipated volatility and ensuring steady returns.

For more insights, explore the full Motilal Oswal report