Stock market correction: What Jefferies says on biggest earnings downgrades since early 2020

Jefferies' Christopher Wood in his latest GREED & fear note said the Indian stock market has had a healthy correction of late, most particularly in the small to midcap space. This, he said, is in the context of a Q2 earnings season, which has seen the biggest earnings downgrades since early 2020. 

Jefferies said its India office has cut FY25 earnings estimates for 63 per cent of the 121 Indian companies under its coverage, which have reported 2QFY25 earnings results so far, the highest downgrade ratio since early 2020.

"This seems to reflect the impact of a cyclical slowdown which has been signaled of late by Jefferies’ India office high frequency data. The Jefferies Economic Indicator (JEI), an Indian economy tracker based on 35 indicators’ monthly data, rose by 4.3 per cent YoY in September, up 1.7 ppts from a 3-year low of 2.6 per cent YoY in August but remained 0.6ppt below the calendar year-to-date levels," Jefferies said. 
 
Wood said he views the recent stock market correction as healthy, most particularly as it has impacted the most expensive part of the market, while the relatively inexpensive private sector banks have started to outperform of late amidst expectations of a potential cut in the cash reserve ratio (CRR) by the Reserve Bank of India in coming months.

In this respect, Jefferies’ Indian banking analyst Prakhar Sharma in a just published report suggested that the RBI’s change of stance on liquidity, from withdrawal to a neutral position, should abate concerns. Also the growth rates between credit and deposit growth have now converged compared with a peak gap of 400bp over the past year. This, along with better deposit growth and easier liquidity, should be supportive of banks’ net interest margins," Wood said.

Nifty has fallen 9.4 per cent from its peak reached in late September to a recent low on Monday. While the Nifty MidCap 100 Index and the Nifty MidSmall Cap 400 Index were down 10.2 per cent and 9.7 oer cent respectively from their 24 September peak to the 25 October low. 

Jefferies said the strong inflows into domestic equity mutual funds continue while total domestic flows into equities are, for now at least, still running ahead of the still expanding supply of equities as companies seek to take advantage of the high valuations. 

"While total equity supply has risen to an estimated $28 billion or US$7 billion per month over the last four months (July-October), compared with $32 billion in 1HCY24, taking the calendar year-to-date total supply to $60 billion.