India Inc Reports Worst Earnings Downgrade Ratio Since FY21, Says Motilal Oswal

India Inc. reported a modest third quarter for fiscal 2025, but the earnings downgrade ratio reached its worst level since the first quarter of FY21, Motilal Oswal Financial Services Ltd. said. Valuations for small and mid-cap stocks remain expensive, prompting a preference for large-cap stocks, it said.

Small-cap valuations have been particularly disappointing, noted Gautam Duggad, head of research at Motilal Oswal Institutional Equities. The earnings miss in the small-cap space was significant, with an expected 5% decline in earnings for 125 small-cap companies turning into a 24% miss.

This weakness in small-cap earnings has persisted not only in the third quarter but throughout the first nine months of FY25. On the other hand, public sector banks have exceeded expectations.

PSU banks have benefited from lower credit costs, while private banks have seen a sharp normalisation in credit costs. Among the 25 sectors analysed, only healthcare, PSU banks, real estate, capital goods, and non-lending financials posted strong earnings, said Duggad.

Motilal Oswal’s earnings review for third quarter indicated that corporate earnings were in line with modest expectations. However, forward earnings revisions have been the weakest in recent times, with downgrades far outpacing upgrades, especially in the non-Nifty 50 universe.

Weakness in consumption and a drag from commodities have put severe pressure on earnings, even as BFSI, healthcare, capital goods, and technology sectors recorded healthy growth. After a robust 55% earnings compound annual growth over FY19-24 for the MOFSL Banking universe, the tailwind is now tapering off, with FY25 earnings growing at a more modest 14%, it noted. The projected compound annual growth for FY25-27 is 12%, with FY26 growth estimated at just 9%.

Motilal Oswal emphasised that valuations for mid and small-caps are still expensive compared to their historical averages and the Nifty 50. The Nifty is trading at a 12-month forward P/E of 19.3 times, below its long-period average of 20.5 times. Consequently, the firm continues to favour large-cap stocks, with a 76% allocation in its model portfolio.

The brokerage is overweight on consumption, BFSI, IT, industrials, healthcare, and real estate and underweight on oil and gas, cement, automobiles, and metals.