Motilal Oswal: Q3 Earnings Downgrade Ratio Hits Lowest in 19 Quarters

As the Q3FY25 earnings season concludes amid a challenging macroeconomic environment, India Inc. has largely delivered stable results. With no significant surprises, either positive or negative, analysts believe the numbers were mostly in line with market expectations.

As expected, the BFSI sector led the pack, followed by IT, telecom, healthcare, and capital goods. However, overall corporate performance was impacted by fluctuations in commodity prices, driven by global uncertainties.

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While sectors like BFSI, technology, and real estate drove earnings growth, globally cyclical industries—including oil & gas, cement, and chemicals—witnessed a downturn. Motilal Oswal highlighted a negative beat-miss ratio, with several earnings estimates revised downward for FY26E. Meanwhile, Emkay Global suggested that earnings may be approaching a bottom, with early signs of a potential recovery emerging.

"Earnings for the Nifty50 grew 5% year-on-year, aligning with our estimates. The overall performance was weighed down by global commodity-linked sectors such as metals and oil & gas. Excluding these, the MOFSL Universe and Nifty recorded earnings growth of 10% and 7%, compared to our expectations of 11% and 7%, respectively," stated Motilal Oswal in a report.

Large-cap firms delivered stable results, with earnings growth of 5% YoY in line with expectations. Small-cap companies, however, saw a broad-based decline in earnings. Interestingly, mid-cap companies outperformed, reporting better-than-expected earnings growth of 26%, primarily driven by financials.

Challenges Weigh on Markets

Global uncertainties—including the potential return of Donald Trump to the White House—along with sluggish domestic economic indicators and stock valuation concerns, significantly impacted corporate earnings. This cautious investor sentiment was reflected in benchmark indices, with the Nifty50 declining by over 4.4% year-to-date.

The top 50 companies recorded a 5% YoY profit after tax (PAT) growth, marking the third straight quarter of single-digit profit growth since the pandemic. The earnings downgrade ratio, which compares the number of downgrades to upgrades, stood at 0.3x—the weakest since Q1FY21.

Outlook for Indian Inc.

Despite persistent challenges, including subdued consumption levels and volatile commodity prices, analysts remain watchful of the road ahead.

After posting a strong 55% CAGR in earnings over FY19-24, the MOFSL banking universe now anticipates a slowdown, with FY25 earnings expected to grow at a still-solid but more moderate 14%. The projected CAGR for FY25-27 stands at 12%, with FY26 growth estimated at just 9%.

Current FY26 corporate earnings forecasts may still be overly optimistic given the prevailing macroeconomic conditions. However, the recent market correction has already factored in potential disappointments, suggesting that future earnings revisions may not significantly impact sentiment further, according to analysts.