Ingenious Growth to Contract to 10% in FY25 from 18% in FY24: BofA By Investing.com

Investing.com — Analysts at BofA projected a contraction in earnings growth, forecasting a decline to 10% in FY25 from 18% in FY24.

This expected slowdown is driven by a combination of factors that reflect the evolving dynamics of the Indian equity market.

The main driver of this change is the moderation in headline growth, which contributed about half of FY24 earnings growth.

However, this momentum is expected to decline considerably in FY25. Additionally, it is likely that the decline in margin gains that previously supported earnings growth would diminish as the effects of lower commodity prices become entrenched in the market.

There are also potential risks associated with other income streams as the prevailing high interest rate environment and robust equity market performance in FY24 may pose challenges to companies in the Nifty index.

BofA also indicates that 73% of the Nifty market cap could see single-digit growth in earnings, while 68% could see deceleration in earnings growth.

This trend is not limited to the Nifty; Broader market patterns reflect similar concerns, with 52% of NSE200 sectors expected to see weaker growth and 78% likely to experience earnings deceleration.

Analysts note that lower commodity prices could benefit certain sectors such as industrials, autos and downstream energy, which together account for 15% of the Nifty’s market capitalization.

However, this drop in commodity prices may affect upstream energy and materials, which make up 16% of the index.

BofA suggests that a 10% drop in commodity prices could lead to a 60 basis point cut in Nifty gains.

Going forward, market participants anticipate a rate cut of 50-75 bps by the Reserve Bank of India by December 2025.

However, BofA analysts see the potential for even deeper cuts of 100bps, which could have a negative impact on banks while providing a potential upside for non-bank financial companies.

When factoring in contributions from major sectors, financials and energy, which account for 45% of the Nifty, are likely to exert significant downward pressure on total earnings.

Meanwhile, the IT and consumer staples sectors, together accounting for 23% of the index, may experience some revival but are still expected to post single-digit growth at best.

In addition, several sectors, including telecom, metals, healthcare, industrials, cement and auto, are expected to generate robust earnings growth, although they hold a smaller overall weighting in the index at 27%.

Similar patterns are anticipated in the NSE200, where financials and energy (37% of the index) are also expected to moderate the overall earnings growth. Sectors such as telecom and cement may face subdued growth prospects, contributing to a cautious market outlook.

BofA analysts recommend a cautious investment strategy that emphasizes sector rotation.

In view of declining revenue growth and rising operating costs, investors are advised to focus on sectors with high earnings visibility and favorable valuations such as NBFCs, healthcare, commodities, telecom, two-wheelers and industrials.

Conversely, caution is advised in sectors that pose earnings downside risks, particularly IT, metals, utilities, energy and cement.