What’s driving India’s market volatility?

Indian markets are currently undergoing significant changes, with broader economic shifts impacting sectoral performances. Notably, recent downgrades to earnings per share (EPS) forecasts for the fiscal year 2025 (FY25) have generated market caution. Bloomberg’s FY25 EPS projection saw a sharp 40% drop in October, reversing an earlier upgrade in September, which indicates a potential slowdown in growth. This trend has caused volatility in the equity market and contributed to the selling activity by foreign portfolio investors (FPIs).

One of the key factors behind this earnings downgrade lies in the consumption pattern across India’s urban and rural areas. While rural consumption has shown incremental growth, urban consumption has faced a slowdown. Management commentary from various companies points to challenges in sustaining urban demand, whereas rural areas display gradual recovery. Some financial segments, especially banks and non-bank financial companies (NBFCs), also show stress points, which may further hinder consumer spending and loan growth.

Additionally, the construction sector—a cornerstone of India’s economy—has witnessed stagnation, contributing to this market downtrend. Given that construction and allied sectors contribute about 20% of India’s corporate revenue, a slowdown here casts a wide impact across related industries. The recent report on the earnings of 435 companies, which make up a significant portion of listed market capitalization, showed a modest revenue growth of just 8.3%, as sectors tied to construction and industrial commodities barely managed to grow.

Sector-Specific Trends in Q2 FY25

1. Industrial Commodities: The industrial commodities sector saw low revenue growth of around 1%, largely weighed down by coal. Coal revenues dropped by approximately 6-7% due to reduced demand in coal-based power generation. Furthermore, monsoon effects dampened power demand, impacting power-related revenues.
2. Construction-Linked Sectors: Steel and cement industries, integral to construction, faced challenges. Steel revenues fell by 2-3%, a drop attributed to the influx of cheaper imports, primarily from China. In the cement industry, revenue growth remained minimal as the sector dealt with high comparative figures from last year and weak pricing due to slower government spending following elections.
3. Petrochemicals and Agriculture: Revenue in petrochemicals remained flat due to monsoon-related issues. Agriculture saw a significant 20-22% revenue drop as raw material prices decreased. These declines have contributed to the earnings downgrades, with impacts extending across the broader industrial and construction supply chains.
4. Exports and Pharmaceuticals: While domestic sectors faced hurdles, exports provided some relief, particularly in pharmaceuticals. Exports, which form around 22% of the sample set, achieved a 5% growth rate. Pharmaceuticals, in particular, recorded an 11% increase in revenue, driven by sustained demand in regulated markets and alleviated pricing pressures in the U.S.
5. IT Services: IT services showed modest growth, with revenue up by 3-4%. This sector, which provides around 70% of segment revenue, experienced constrained growth as clients in financial services remained cautious with IT spending. Nonetheless, IT saw an EBITDA margin expansion of 110-130 basis points, attributed to improved employee utilization rates and reduced attrition.
6. Consumer Discretionary: Sectors within consumer discretionary, such as two-wheelers, textiles, and telecom, reported strong growth. Two-wheeler manufacturers benefited from rural demand recovery, posting growth rates of 15-16%. Textiles achieved volume-driven growth, while telecom revenues climbed 12-13% due to recent tariff hikes. Consumer products, spanning staples to discretionary items, saw an impressive revenue jump of 15%.
7. Profitability and Margins: Overall profitability for companies in the study sample grew, with an estimated EBITDA margin increase of 70-90 basis points year-on-year. IT, pharmaceuticals, telecom, and discretionary consumer products were top contributors to this margin growth. The industrial sectors, however, including steel and cement, reported margin contraction due to higher raw material costs, notably iron ore, and competitive pricing pressures.

Market Impact and Outlook

The recent downgrades and sectoral underperformance have influenced FPIs to reassess their investment positions, leading to significant outflows in October. Analysts attribute these outflows to FPIs seeking better returns in global markets and uncertainties stemming from economic policies, geopolitical tensions, and fluctuating commodity prices.

However, domestic institutional investors (DIIs) have stepped in, offering some relief by purchasing equities and stabilizing the market. Sectors such as pharmaceuticals and consumer discretionary, supported by stronger consumption patterns, have demonstrated resilience, which could mitigate some negative impacts in the short term.

Conclusion

In summary, while certain sectors like IT, pharmaceuticals, and consumer discretionary are showing steady growth, others linked to construction and industrial commodities face stagnation. The upcoming quarters will be crucial as economic policies, government spending, and consumer trends play out. Investors should watch for potential recovery in rural consumption and policy developments to drive future growth.

Market this week

Source: BSE and NSE

• Indian equity indices closed the Muhurat Trading session on November 1 with solid gains, with Nifty finishing at 24,300.
• The Sensex rose 335.06 points (0.42%) to close at 79,724.12, and the Nifty advanced 99 points (0.41%) to 24,304.30.
• Market breadth was positive, with 2,904 shares advancing, 540 shares declining, and 72 shares remaining unchanged.
• Top Nifty gainers included M&M, ONGC, Adani Ports, Bharat Electronics, and Eicher Motors, while Dr. Reddy’s Labs, HCL Tech, Britannia, Tech Mahindra, and Wipro led the laggards.
• All sectoral indices ended in positive territory, with the Auto index up by 1%.
• The BSE midcap and smallcap indices also saw gains, rising 0.7% and 1%, respectively..

Weekly Leaderboard

Source: BSE

Stocks that made the news this week:

• Cipla shares surged 10% after the US FDA classified the company’s Goa manufacturing facility as ‘Voluntary Action Indicated’ (VAI), allowing it to move forward with the launch of its key chemotherapy drug, Abraxane. A VAI status is favorable for Cipla, as it indicates regulatory compliance, enabling the company to proceed with drug launches as planned.
• Dabur India shares dropped over 2% in early trading on October 31, following its Q2FY25 earnings report, which showed a 17% YoY decline in net profit to Rs 425 crore. The FMCG giant’s performance met Street expectations, although it fell short compared to the Rs 515 crore profit recorded in the same period last year.
• GR Infra rose 4% after signing an EPC contract for a significant infrastructure project worth Rs 1,885.63 crore in Maharashtra. The project includes building a 9.34-kilometer access-controlled ring road in Pune, spanning from Kalyan/Rathwade village to Shivare/Kusgaon village.