Q2 FY25 to see slowest earnings growth in 17 qtrs as high base, demand slump take toll

Moderation in earnings growth for India Inc comes after four consecutive years of healthy double-digit growth.

With information technology major TCS kickstarting the quarterly earnings season, analysts across the board have flagged concerns regarding a moderation in earnings growth as companies struggle with the burden of a high base, faltering demand, and easing margin tailwinds. Among sectors, BFSI names are yet again expected to lead earnings growth, followed by information technology and chemical companies that are likely to showcase green shoots of recovery. On the other hand, profits are likely to decelerate in the autos, commodities, and industrials sectors.

Brokerages predict Q2 earnings growth to slip to a post-COVID low, with firms such as Motilal Oswal Financial Services, Nuvama Institutional Equities, and Axis Securities forecasting profit growth to moderate sharply to around 2 percent for the July-September period. This marks the slowest earnings growth for Nifty companies in 17 quarters, MOFSL highlighted. However, this moderation in earnings growth for India Inc comes after four consecutive years of healthy double-digit growth.

In the last two financial years, an intriguing shift has emerged in the dynamics between revenue and earnings growth, largely shaped by global macroeconomic factors. According to MOFSL, FY23 witnessed a significant impact on margins for India Inc as commodity prices soared due to the Russia-Ukraine conflict, resulting in only 11 percent earnings growth despite a substantial 24 percent rise in revenue.

Conversely, FY24 marked a reversal of this trend, with declining commodity prices facilitating a strong recovery in margins. As a result, earnings growth for India Inc jumped to 30 percent, driven by a modest 4 percent increase in revenue. For FY25, MOFSL projects a more balanced outlook, expecting earnings growth to align more closely with revenue trends.

Moreover, Nuvama warned that unlike FY24, it will be volumes rather than prices that will drag the topline slowdown for India Inc, mainly for domestic-oriented sectors such as autos, consumer services, and metals, as opposed to global sectors such as chemicals, IT, and commodities.

Mapping out the earnings growth moderation amid the elevated valuations of most pockets in the market, Nuvama also flagged concerns regarding downgrades for India Inc. According to expectations, the brokerage estimates Nifty earnings per stock to grow at a mere 3 percent for the first half of FY25, posing a serious downgrade risk to FY25 consensus estimates of 13 percent growth, which, according to Nuvama, warrants caution amid elevated valuations.

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Along those lines, Axis Securities also believes that the market positioning shift towards large caps from the broader market in the last month was on expected lines, with sector rotation being clearly visible.

Going ahead, Axis also sees a near-term consolidation in the market, with the breadth likely to narrow further and the focus remaining on sector rotation. Keeping this in view, the broader market may see some time correction in certain pockets in the near term, and flows are likely to shift to large caps, Axis Securities said. In this regard, the brokerage also believes that commentaries on margins and the guidance for FY25 will remain critical.

However, with all said and done, MOFSL is of the view that some early signs of recovery in rural consumption, coupled with a good monsoon season, augurs well for rural income, demand, and food inflation. "Corporate commentary from various sectors indicates that rural demand may be bottoming out," MOFSL said. This, along with potential rate cuts by the RBI, could lift sentiment in the second half of the fiscal, the firm believes.