After a series of record highs, the Indian stock market's rally has hit a roadblock as a lackluster earnings season raises questions about its high valuations.
On July 30, the Indian stock market closed flat, with benchmark valuations nearing historical peaks. The NSE Nifty 50 index opened at 24,857.3 points, up 0.085%, while the S&P BSE Sensex index closed at 81,455.4 points, up 0.12%.
Analysts noted that investors are opting to lock in profits as the benchmark indices approach all-time highs, indicating that further gains will require strong earnings reports to fuel the market. However, this earnings season has been disappointing for Indian companies.
Media reports indicated that among the 29 Nifty 50 companies that have reported earnings so far, over 55% fell short of analysts' average expectations. This is a significant decline from the previous quarter, when 62% of companies exceeded expectations. Moreover, more than 70% of these companies reported higher-than-expected sales, suggesting that rising input costs are starting to squeeze profits.
The weak performance has raised doubts about the justification for the relatively high valuations of the Indian stock market. Data shows that the Nifty index's forward price-to-earnings ratio exceeds 20 times, a 27% premium over its historical average.
Technical indicators are also signaling potential trouble. Currently, 90% of the Nifty 50 index's components are trading above their 200-day moving average, a level that has historically indicated short-term sluggish performance. Additionally, the index's weekly relative strength index is nearing 80, a level last seen before a significant correction in October 2021.
The NSE Nifty 50 index has rebounded 11% since a major sell-off on June 4, but analysts remain cautious about the earnings season. Citigroup predicts that the total net profit of Nifty 50 companies will grow by only 2% year-over-year for the second quarter, while Motilal Oswal Securities Ltd. expects a 4% increase. In contrast, the previous quarter saw a growth of over 11%, surpassing market expectations.
Analysts attribute the slowdown in profit growth to several factors, including severe heatwaves, delayed election activities, and central bank restrictions on unsecured loans, all of which have dampened consumer spending. Vinod Nair, Head of Research at Geojit Financial Services Ltd., stated that declining demand is forcing companies to take measures to boost sales, which may harm their profits and stock valuations.
Nair said that corporate profitability in India is under pressure due to these factors.
Despite these challenges, analysts believe that the Indian stock market could potentially outperform its Asian peers for the fourth consecutive year in 2024.
