Corporate earnings vs valuations: Will FY26 deliver the much-needed catch-up?

Indian stock market today: After several years of strong growth, India Inc. is set to wrap up FY25 with a subdued performance, weighed down by a slowdown in consumption and weakness in commodities, resulting in Nifty 50 companies reporting a single-digit year-on-year (YoY) profit after tax (PAT) growth for the third consecutive quarter in Q3 FY25. This marked the weakest earnings expansion since the pandemic-induced slowdown in June 2020, as per analysts.

For 9MFY25, Nifty 50 has recorded just 4% PAT growth, and analysts expect another quarter of moderate performance for the January-March period. Weaker-than-expected earnings have been the primary driver behind the prolonged sell-off seen in the Indian stock markets over the last 30 years.

The muted financial results have also prompted analysts to revise earnings per share (EPS) projections downward, leading to lower target multiples as they factor in sluggish revenue growth, margin pressures, and cautious management commentary for the coming quarters.

Moreover, subdued earnings failed to justify the premium valuations of many stocks, leading foreign investors to withdraw billions from Indian markets since October, sending both Nifty 50 and Sensex into correction territory

As India enters FY26, investors expect a rebound in earnings, with FY25 serving as a favourable base that would optically support growth calculations. Market experts believe that a shift in government focus from capex to consumption, along with potential interest rate cuts by the central bank to revive domestic demand, could support corporate earnings in the coming fiscal year.

Domestic macro indicators, such as easing inflation, which fell to 3.61% in February 2025—comfortably below the RBI’s 4% target—have also strengthened expectations of further rate cuts by the RBI. However, they also cautioned that global factors, such as trade wars and U.S. economic policies, will influence the earnings of Indian companies, particularly in sectors like IT and pharma, which have considerable exposure.

FY26 earnings recovery could make valuations more attractive: Experts

Harshal Dasani, Research Analyst at Invasset PMS, noted that the Nifty 50 currently stands at 23,600 with a trailing P/E ratio of 20.8, implying an EPS of around 1,134.6.

"Analysts project a modest 3.8% EPS growth for FY25, taking it to 1,177.7, but expect a sharper rebound of 18.3% in FY26, lifting EPS to 1,393.2. This would bring the forward P/E down to 16.9—below the historical average of 18-20—suggesting valuations could look more reasonable by FY26 if earnings meet expectations," he said.

Recent data supports a gradual recovery, with Nifty 50 companies reporting 4.4% year-on-year profit growth in Q3 FY25, slightly improving from 4.2% in Q2. Dasani highlighted that fiscal discipline, with India’s FY25 deficit targeted at 4.4% of GDP, along with policy support such as tax cuts, should aid corporate earnings in FY26. However, he cautioned that near-term risks persist.

Overall, while short-term disappointments are possible, the medium-term outlook suggests corporate earnings could catch up with valuations by FY26, provided macro stability and policy support continue. Dasani advised investors to stay cautious in the near term but remain optimistic over the longer horizon.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.