India's largest paint maker, Asian Paints Ltd., recently experienced a sharp 10% drop in share price after disappointing second-quarter results. This decline, further spurred by downgrades from Goldman Sachs and JPMorgan, underscores a growing trend in India’s $4.6 trillion stock market: investors are becoming less forgiving of companies that miss earnings expectations.
“This is the largest correction for earnings misses in the last seven quarters,” noted Souvik Saha, a strategist at DSP Mutual Fund, highlighting signs of a slowing demand environment and an emerging urban slowdown.
In the current reporting season, Nifty 50 Index companies with net income misses saw their stock prices drop by a median of 1.9%, compared to declines of 1.3% in each of the previous two quarters. Bloomberg data reveals an even sharper average decline of 2.9%, up from around 1% previously.
With profit downgrades and weak consumer demand, investor anxiety has intensified, especially with elevated valuations and ongoing global fund outflows. The Nifty recorded its worst monthly performance in over four years in October. Asian Paints shares, along with those of companies like Bajaj Auto, IndusInd Bank, and Avenue Supermarts, plummeted following earnings misses.
Sectors like railways and defense, previously seeing strong gains, have suffered deeper losses, with small- and mid-caps cooling significantly more than larger companies. The Nifty 50 Index remains the priciest in emerging Asia, trading at over 20 times its 12-month forward earnings, above the five-year average of 19.4.
In this changing market landscape, fundamentals and valuations have come into sharper focus, with so-called quality stocks starting to reverse their recent underperformance. Kotak Institutional Equities analysts noted a shift from “rewarding good news and ignoring bad news” to “rewarding good news and punishing bad news,” as expectations around future returns shift.
Despite the current softness, Saha suggests this may be a consolidation period, with further declines potentially making Indian markets more attractive.
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