Moneycontrol Pro Panorama | Amid global mayhem, what do Q3 results foretell?

A deeper sectoral analysis reveals a mixed performance.

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Over the last few months, Indian equity markets have been gyrating in response to news on geopolitical events, unprecedented tariffs proposed between countries and trade wars that could have ramifications on India’s economy. Some of these unprecedented extraneous events have taken the investors’ focus away from the December quarter (3QFY2025) corporate results, which in the final run, will determine future stock prices.

To be sure, the broad narrative in this quarter has been one of consumption slowdown in the Indian economy, particularly urban areas, even as rural markets offered solace. The Street had already factored this into listed companies’ earnings forecast. A note on valuations by Motilal Oswal Financial Services points out that the earnings declared so far are in-line with modest expectations of tapering revenue and profit growth. The saving grace was benign costs that alleviated pain in profit margins amid the performance moderation.

Data from the Centre for Monitoring Indian Economy on non-financial companies underscores the same. Aggregate net sales growth in 3QFY2025 petered to low single-digit year-on-year (yoy) of 3.9 percent. This is down from 14 percent yoy growth in December 2023 and an even higher 30 percent in December 2022.

A deeper sectoral analysis, however, reveals a mixed performance. Sectors where growth hinges on discretionary consumption dragged the overall sales and earnings lower. Take the auto sector, where sales across segments have been coming off even through the festive season. Discounts are needed to push sales and vehicle price hikes have been relatively low suggesting weak demand.

Net revenue and profit growth, however, was mixed from firms such as Maruti, Tata Motors, Mahindra, Bajaj Auto and TVS Motor, depending on their portfolios. As a result, auto component makers’ narratives too spell slowing revenue traction in the coming quarters.

Another segment that is the victim of high inflation and demand moderation is FMCG. Flattish to paltry rise in Q3 FY2025 revenue and the consequent drop in operating profits of two mega firms-Hindustan Unilever and Nestle- testify to the pain.

Most of the consumption slowdown is attributed to less disposable incomes in the hands of the salaried class. To some extent, this is mirrored in the state of IT companies. Latest quarterly results of India’s crème-de-la-crème tech sector- Infosys, TCS, Wipro- showed moderation in sales and profit margins. Hence, the belt-tightening to trim costs has hurt salary hikes, which finally hurts demand. The pain seems to be continuing as indicated in today’s news of TCS slashing variable pay.

The results of infrastructure and capital goods firms did not lift investor sentiment. While most companies posted revenue and profit growth in mid-teens, the concern on sluggish order flows from both the government and private sectors shows that capex is struggling.

But there are some bright spots in the economy too. Real estate companies and hotel and aviation companies are screaming for additional supply on the back of soaring demand. Not only did these firms outperform sales expectations, their managements painted an optimistic outlook for the next 12-24 months. The listed companies that comprise the top five to ten firms in each of these segments perhaps cater to demand from a niche, premium clientele. The Chart of the Day tells a happy tale of premium hotels wanting to add rooms.

To be sure, a large part of the listed companies is seeing uncertain times ahead. As a result, earnings revisions so far have been weak with downgrades outpacing upgrades. “The Nifty-50 is likely to clock a modest 5 per cent earnings growth in FY2025 (following a 20 per cent+ CAGR during FY2020-2024),” forecasts the Motilal report. The drag in earnings comes largely from commodities and consumption while healthcare, banking are better off.

Will this change with the Budget offering the middle-class a bonanza by way of tax cuts? And will the Reserve Bank of India’s expected 25 basis points rate cut in its policy announcement tomorrow be the icing on the cake, spurring demand and also the market mood?

We leave you with some food for thought. Brokerages consensus indicates that the Nifty one-year-forward price-to-earnings multiple is around 20, still a tad above the historical average. Besides, over the last 12 months, the MSCI India Index (+9 per cent) has underperformed the MSCI EM Index (+12 per cent), although a ten-year average shows India’s outperformance.

Should the investors then take the risk-on or risk-off approach in equities? Don't miss this interesting FT article that takes you through the challenge of investing in equities in these extraordinarily uncertain times.

Investing insights from our research team

Swiggy Q3 FY25: Competition, expansion eat into QC business

Titan Company: Margin pressure to cap earnings growth

Power Grid Corporation: Growth to resume in the next few quarters

What would drive Protean stock upside after muted Q3 FY25 show?

Home First Finance: Growth levers in place to drive profitability, market share

Waaree Energies: Stellar Q3, but looming supply glut makes us cautious

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Weight loss drug opportunity is increasingly coming into focus for Indian pharma

Budget push for MSMEs would work, but safeguards are key

Will Trump tariff tremor quicken India-UK FTA?

Negative spillover effect of Press Note 3 persists

Evolution of gift cards in India’s digital economy

US BioSecure Act: Impact on India and biotech opportunities in supply chain shifts

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More than 50% of BSE MidCap index firms see retail stake increase in Q3

Tech and Startups

Google may supply Tensor chip in the next phase of IndiaAI Mission

Technical Picks: LAURUS LABS, KIRI INDUS, SBI, HDFC AMC.

Vatsala Kamat
Moneycontrol Pro