The June quarter earnings season makes it clear that consumption demand remains muted, which is partly the reason credit growth has been so subdued. Whether it’s fast-moving consumer goods, manufacturers and retailers of apparel, or fast food chains, they are all struggling to get customers to buy more. Hindustan Unilever managed a volume growth of 3% year-on-year (y-o-y), which was better than the 2% in the previous quarter, but sales were up only by about 4% y-o-y while operating profits were marginally lower. It’s not sales of just small-ticket items that have a low momentum, carmakers too are unable to push through large volumes except those selling premium models. At Maruti Suzuki, for instance, volumes for Q1FY26 increased by just 1.1% y-o-y. Thanks to price increases, net sales were up 8% but this was not enough to cover costs, resulting in a fall in operating profits of 11%. Intense competition is also hurting businesses. Asian Paints, for example, reported a 1.3% y-o-y decline in domestic decorative paint revenues.
IT Drag and Pressure on Core Sectors
The information technology (IT) sector is, of course, going through a very rough patch as it re-adjusts to the weak demand and the emergence of new technologies. To be sure, the deal wins were encouraging but companies have been unable to grow their revenues while pricing pressures have crimped their margins. The layoffs announced by majors like TCS, which is looking to reduce its headcount by 12,000, are a concern with experts anticipating more companies to follow suit. Since IT professionals in India are relatively well-paid, this is bound to have an impact on consumption. Manufacturers of steel and cement also haven’t fared too well. Volumes at Ultratech Cement grew by about 2% y-o-y, resulting in net sales rising just 7.4%. Consolidated sales at Tata Steel were down 3% y-o-y while revenues at JSW Steel were flat.
Weak Credit Growth, Downgrades, and a Cautious Outlook
The fact that lenders have not been able to grow their loan books meaningfully suggests customers either have no reason to borrow, or are waiting for lower interest rates, or are over-leveraged. System non-food credit stayed at around 9% levels for the quarter, with banks’ earnings coming largely from treasury income. Moreover, margins are expected to remain under pressure, as yields fall and treasury profits of this magnitude are unlikely to resurface in the coming quarters. Also, the microfinance portfolios continue to pose problems. That apart, some lenders have reported a worsening of asset quality due to unsecured loans going bad. The bigger problem for banks is that there is significant disintermediation with borrowers moving to the corporate bond market. All in all, unless there is a smart rebound in loan growth, results from banks are likely to be unexciting.
In fact, according to Jefferies, banks have been the key reason for much of the earnings downgrades for the MSCI India for FY26. Earnings estimates have been trimmed by 1.7% so far with growth now expected at 8%. However, the outlook in general is not promising as reflected in the cuts in the earnings estimates for the Nifty 50—the Nifty EPS has been cut by 2% over the past month, leaving the growth for FY26 at 10%. Management commentary, understandably, remains cautious with hopes of a demand pick-up in the second half of the year driven by the early festive season, lower interest rates, and tax cuts. However, the many macro-headwinds might make it a long winter for India Inc.