Investing.com -- Indian corporate earnings growth is expected to slow to its lowest level in three years, driven by weak top-line performance, as per estimates from Morgan Stanley analysts in a note dated Tuesday.
Despite a persistent earnings upcycle that has seen double-digit growth for 16 consecutive quarters, the September quarter looks set to register a notable deceleration, with earnings growth stalling amid muted revenue expansion and a sluggish margin improvement.
Morgan Stanley's bottom-up estimates predict that revenue, EBITDA, profit before tax, and net profit for their coverage universe (excluding state-owned oil companies) will see year-on-year growth of just 4%, 6%, 5%, and 5%, respectively.
The Sensex index is expected to post revenue growth of only 1% and net profit growth of 3%, while the Nifty index is forecast to deliver revenue growth of 2% and net profit growth of a mere 1% over the same period.
This tepid performance stands in stark contrast to the double-digit growth trends witnessed over the past three years.
While earnings growth remains positive, profit margins are set to expand at a slower pace, adding to the challenges faced by Indian corporates.
Morgan Stanley analysts project that margins will increase by 50 basis points on a year-over-year basis, marking the seventh consecutive quarter of margin expansion.
However, the pace of growth is anticipated to be slower than in previous quarters.
Among sectors, defensive plays are expected to outperform, with Communication Services and Industrials emerging as the leaders in terms of revenue growth.
The Materials sector is forecast to lag behind, weighed down by declining earnings. In terms of earnings growth, Communication Services, Health Care, and Utilities are projected to lead, while the Materials and Energy sectors are expected to experience a decline.
At the stock level, Bharti Airtel (NS:BRTI), Tata Consultancy Services (NS:TCS), and NTPC (NS:NTPC) are expected to be the biggest contributors to aggregate Sensex earnings.
In contrast, JSW Steel (NS:JSTL) is predicted to be one of the poorest performers for the quarter.
Additionally, Morgan Stanley expects half of its coverage universe to report margin expansion, with Utilities and Financials likely to see the most significant improvements.
However, sectors such as government-owned oil companies and construction materials are anticipated to experience declining margins, adding to their overall challenges.
In terms of forward-looking estimates, analysts forecast three-year CAGRs for Sensex and Nifty revenues at 11% and 12%, respectively, with net profit CAGRs of 15% and 10%.
Despite this, the consensus earnings growth estimate for the Sensex for the financial year 2025 has been revised down by 3% over the past three months to 13.4%, reflecting growing caution among market participants.
Within this context, Health Care and Utilities have witnessed the most positive earnings revisions in the past three months, signaling potential upside for these sectors in the near term.
“We recommend large private banks, selected consumer and industrial stocks, and IT services shares going into earnings season,” the analysts said.
For specific companies, Bharti Airtel 's outlook is supported by expectations of future tariff hikes, while NTPC's growth is contingent on capacity additions.
However, risks such as higher capital expenditure, delays in tariff hikes, and weaker-than-expected market conditions present potential downside for both firms.
Tata Consultancy Services also presents a mixed picture, with a strong upside potential tied to its execution capabilities and favorable currency movements. However, macroeconomic headwinds, rising attrition trends, and geopolitical risks could weigh on its outlook.
JSW Steel, which is expected to report one of the weakest earnings performances, faces significant downside risks, including weaker steel prices and potential delays in its capacity expansion projects. On the upside, strong domestic demand could help offset some of these challenges.
Ultimately, while Indian corporates continue to show resilience, the outlook for the September quarter reflects growing uncertainty and the prospect of a slowdown, underscored by soft revenue growth and limited margin expansion.
Morgan Stanley’s analysts remain cautious, recommending selective exposure across key sectors as companies navigate this challenging period.