The Wire Staff 
New Delhi: Tepid earnings, combined with rising US bond yields and a surge in primary market issuances, have led to a significant correction in Indian equity markets. Investors have seen nearly Rs 50 trillion in wealth erode over the past seven weeks, according to a Mint report.
The earnings trajectory of India’s Nifty 50 companies has taken a hit, with estimates for FY25 revised downwards by 7% over the last six months. Analysts now project earnings growth for FY25 at just 5%, marking the weakest performance since FY20.
The September quarter (Q2FY25) witnessed a subdued 4% year-on-year (y-o-y) growth in operating profits for India Inc – the slowest in at least four quarters. This was accompanied by a modest 6% y-o-y revenue growth and operating profit margins contracted for a sample of 2,626 companies (excluding banks, financials, and oil marketing firms), according to a report in the Financial Express.
According to Kotak Institutional Equities, the weak Q2 performance reflects a broad-based slowdown in the economy. “Companies have broadly disappointed versus modest expectations on net sales, EBITDA and net profits,” the firm noted in a report. EBITDA is short for earnings before interest, taxes, depreciation and amortisation.
Higher input costs further squeezed margins, with the raw materials-to-sales ratio rising by 22 basis points y-o-y for the aggregate sample. Some companies, like Asian Paints, faced pressure from increased spending to maintain market share, while others, such as JSW Energy, dealt with lower short-term sales and reduced tariffs.
Notable laggards include Tata Steel (-3.2% y-o-y sales decline), Dabur India (-5%), and Ashok Leyland (-9%), reflecting weak volumes and muted demand. Meanwhile, Dr. Reddy’s Laboratories (+16.5% y-o-y) and Larsen & Toubro (+21% y-o-y) were among the few standout performers.
Also read: FPI Outflows from Indian Markets in October are Globally the Highest, Financials Hit Hard
The Nifty and Sensex, which hit record highs on September 27, have since fallen into correction territory. The Nifty dropped 10.4% to 23,532.7 and the Sensex declined 9.76% to 77,580.31. Broader indices have also been hit, with the Nifty Midcap 150 and Nifty Smallcap 250 falling 10.7% and 10.1%, respectively, from their September highs.
Foreign institutional investors (FIIs) have been net sellers, offloading shares worth Rs 1.16 trillion over the past month and a half. While domestic institutional investors (DIIs), led by mutual funds, purchased Rs 1.33 trillion, the supply from large Initial Public Offerings (IPO) and Qualified Institutional Placements (QIP) exceeded demand. IPO is the process by which private companies sell their shares to the public intending to raise equity capital from public investors while while QIP is a way for companies listed on Indian stock exchanges to raise money by selling shares or other securities to qualified institutional buyers.
Despite the correction, analysts caution that Indian equities remain expensive. The Nifty trades at 18.64 times one-year forward earnings, above its five-year average of 18.21 times. Valuations in the small- and mid-cap segments are even more stretched.
Ashish Gupta, CIO of Axis Mutual Fund, highlighted the disproportionate supply-demand dynamics, noting that recent equity issuances have significantly outpaced mutual fund inflows. “If FIIs keep selling the way they have since October, DII inflows though necessary would be unable to absorb the supply, subjecting the markets to ‘vagaries of foreign flows’,” Gupta told Mint.
Adding to the pressure, US bond yields have climbed, diverting foreign money from emerging markets like India to safer US assets. The 10-year US Treasury yield has risen by 73 basis points since September, despite the Federal Reserve cutting rates, driven by inflation fears and fiscal deficit concerns.
While analysts do not rule out a potential rebound in the near term, the consensus is that it may lack durability. “We could get a bounce, but it wouldn’t be a durable one,” Shankar Sharma, founder of GQuant Investech, told Mint.