Nifty Earnings Growth Projection by BofA

Analysts at BofA have projected a contraction in Nifty 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.

Primary Drivers of Change

The primary driver of this change is moderating topline growth, which contributed about half of FY24’s earnings increase. However, this momentum is expected to wane considerably in FY25. Additionally, the fading margin gains that previously bolstered earnings growth are likely to diminish as the effects of softer commodity prices become entrenched in the market.

Potential Risks

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 within the Nifty index.

BofA also indicates that 73% of Nifty’s market capitalization could see single-digit earnings growth, while 68% may experience a deceleration in earnings growth.

Market Trends

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

The analysts note that the softening of commodity prices could benefit certain sectors such as industrials, autos, and downstream energy, which together make up 15% of Nifty’s market cap. However, this decline in commodity prices may affect upstream energy and materials, which constitute 16% of the index.

BofA suggests that a 10% drop in commodity prices could lead to a 60 basis points reduction in Nifty earnings.

Interest Rate Expectations

Going forward, market participants anticipate a 50-75bp rate cut by the Reserve Bank of India by December 2025. However, BofA analysts see the potential for even deeper cuts of 100bp, which could negatively impact banks while offering a potential boon for non-banking financial companies.

Sector Contributions

When considering contributions from major sectors, financials and energy, which make up 45% of the Nifty, are likely to exert significant downward pressure on overall earnings. Meanwhile, the IT and consumer staples sectors, together accounting for 23% of the index, may experience some revival but are still expected to achieve only single-digit growth at best.

Additionally, several sectors—including telecom, metals, healthcare, industrials, cement, and autos—are projected to deliver robust earnings growth, although they hold a lower overall weight in the index, amounting to 27%.

Similar patterns are anticipated within the NSE200, where financials and energy (37% of the index) are also expected to dampen overall earnings growth. Sectors like telecom and cement may face muted growth prospects, contributing to a cautious market outlook.

Investment Strategy

BofA analysts recommend a prudent investment strategy that emphasizes sector rotation. Given the weakening earnings growth and rising operational costs, investors are advised to focus on sectors with high earnings visibility and favorable valuations, such as NBFCs, healthcare, staples, telecommunications, two-wheelers, and industrials.

Conversely, caution is warranted regarding sectors that show risks of earnings downgrades, specifically IT, metals, utilities, energy, and cement.