Earnings pressure in Q2FY25 reflects slowing growth across sectors – ETCFO-OxBig News Network

The Q2FY25 performance of India Inc has revealed broad-based earnings pressure, with a 6% contraction marking the first earnings decline in seven quarters. This downturn was largely driven by weak performance in commodity-oriented sectors, slowing consumption, and moderation in domestic cyclical sectors like autos and banks, according to an Elara Securities report. EBITDA margins contracted by 242 basis points (bps) year-on-year, as misses outnumbered beats across sectors.

The commodities sector underperformed in Q2FY25, with cement and steel recording significant declines. Cement prices dropped for the third consecutive quarter, shrinking EBITDA per tonne by 29% year-on-year, while weak flat steel prices impacted steel company margins. Meanwhile, the oil and gas sector faced a 43% earnings decline, affected by lower gross refining margins, LPG under-recoveries, and weaker oil-to-chemical earnings. However, improved aluminum margins offered a partial offset, supported by higher global pricing trends.

Domestic cyclical sectors, including autos and banks, exhibited signs of stress. While two-wheeler demand benefited from the festive season, overall auto demand remained muted. Banks faced slowing loan growth, particularly in unsecured retail credit, alongside rising credit costs and asset quality concerns. The consumption sector delivered mixed results, with rural demand recovering but urban demand faltering. FMCG companies faced challenges in balancing pricing actions against rising input costs.

Mid-cap companies emerged as the top-performing category, with a 10% revenue increase to Rs 6.25 lakh crore in Q2FY25. Large-cap companies reported slower growth, with sales rising just 6.5%, while small-cap firms showed a 5% increase. Fund managers linked the disparity to the relative strength of mid-cap companies, which benefited from government contracts and infrastructure spending.

Outlook for H2FY25

Despite the Q2 slowdown, a recovery is anticipated in H2FY25. Government capital expenditure, robust festive demand, and stabilizing commodity prices are expected to support earnings growth. The cooling of input costs for steel and cement could also aid profitability in the coming quarters. However, analysts have revised FY25 earnings estimates downward, projecting 6% growth for the Elara universe, compared to the initial expectation of 13%.
The Nifty 50 declined 10% from its peak, with the midcap and small-cap indices showing sharper corrections.

Sluggish revenue growth in September 2024, particularly among large-cap firms, has raised concerns about the broader economic outlook. A recent analysis of sales data from 100 companies indicated a marginal slowdown in overall sales growth to 5.6%, with top firms growing at a slower pace of 3.2%.

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