While the fiscal second quarter earnings season came to a close, brokerage firms said that the Q2 corporate earnings scorecard was weak, but excluding commodities, it has reported an in-line earnings growth. “Consumption has emerged as a weak spot, while select segments of BFSI are experiencing asset quality stress. Weakness in government spending has also been one of the factors driving moderation in earnings. After a flat H1FY25, as the government spending revives in H2FY25, this should augur well for corporate earnings along with a good kharif crop and improving rural demand,” stated a report by Motilal Oswal Financial Services (MOFSL).
With earnings being primarily driven by cyclical sectors such as automotive, engineering, defense, infrastructure, real estate, and energy in recent years, these sectors experienced significant growth; however, Vipul Bhowar, Senior Director Listed Investments, Waterfield Advisors, said that the current reduction in government expenditure within them has led to a slowdown in earnings. “Managements, during their earnings updates, have indicated that urban consumers are cutting back on spending across various categories, including essentials like food and personal care products, as well as discretionary items due to economic uncertainties and rising costs of living. In conclusion, the notable downgrades in earnings forecasts in India can be attributed to several factors: weak consumer demand, cyclical economic conditions, decreased government spending, and adverse weather. This current downturn is part of a natural economic cycle, rather than a structural issue, and it is expected to improve in the coming quarters,” he added.
Key sectoral performance
Of the 25 sectors under the coverage of MOFSL, the brokerage firm said that 4 sectors reported profits above estimates, 12 posted profit in line with the estimates and 29 others recorded profits below estimates. Of the 275 companies under coverage, 97 exceeded profit estimates, 104 posted a miss, and 74 were in line, it added.
Another report by JM Financial stated, “Q2FY25 earnings so far have made investors jittery and we have seen stocks of companies reporting weak earnings/ weak outlook correcting. Based on the analysis of 157 companies who have reported out of the JM Financial coverage universe of 275 companies, we come to the following conclusions: (1) 44 per cent (69 companies) missed expectations, 41 per cent (65 companies) beat expectations while 15 per cent (23 companies) were inline. (2) 27 per cent (43 companies) have reported weaker revenue growth than expected. (3) There is a slowdown in urban demand seen across FMCG, retail, auto and mall operators. (4) Chemicals and consumer durables have also seen a moderation in demand. (5) MFIs and select private sector banks/ NBFCs witnessed stress in their unsecured book.”
Here is an analysis by MOFSL on key sectors:
1) Banks: The banking sector reported a soft quarter amid moderation in margins and a rise in provisioning expenses, mainly for private banks. NIM contracted for several banks as cost pressures persisted amid intense competition for liabilities and continued pressure on CASA mix. Public sector banks (PSBs) delivered a solid beat led by lower than expected provision costs.
2) Autos: After several quarters, rural demand showed some positivity, spurred by a healthy monsoon, the recent festive season, and the upcoming marriage season, which should benefit 2Ws and tractors.
3) Consumer: The demand environment was challenging due to adverse weather conditions, including floods and heavy rains in certain areas, coupled with persistent inflation that impacted urban demand. Volume growth across most companies was discouraging after seeing a slight pickup in Q1FY25.
4) Oil & Gas: EBITDA was below estimate (down 33 per cent YoY), with HPCL, BPCL, IOC, CSTRL, GUJS, IGL, MAHGL, OINL, MRPL, PLNG, and AEGISLOG missing estimates. Adjusted PAT was 12 per cent below (down 42 per cent YoY).
5) Technology: The IT services companies (MOFSL Universe) reported healthy performance, with a median revenue growth of 2 per cent QoQ CC in Q2FY25. While results were encouraging, the outlook remained slightly guarded, signaling persisting uncertainties. This indicates that despite client pessimism bottoming out, a solid lift-off in discretionary spending has yet to emerge.
6) Healthcare: MOFSL’s coverage companies (excluding hospitals) reported in-line sales/PAT while EBITDA was better than our estimates. The profitability was driven by: a) increased contribution from limited competition products, b) steady growth in chronic therapies, and c) ongoing higher inventory levels for raw materials at industry level, which benefited formulators.
Going forward, Motilal Oswal stated that its universe is likely to deliver sales growth at 6 per cent, EBITDA growth at 5 per cent and PAT rise of 4 per cent YoY in FY25. “The Financials and Metals sectors are projected to be the key growth engines, with 13 per cent and 20 per cent YoY earnings growth, respectively. Ex-OMC’s, the MOFSL Universe is expected to post 10 per cent YoY earnings growth in FY25,” it added.
