Early bird Q2 results so far: Who's shining, who's not?

While the aggregate revenue of 1,023 companies which have declared earnings so far climbed 9% year-on-year to ₹21.5 trillion, net profits dipped by 2.7% to ₹2.2 trillion, a Mint analysis showed. 

Yet, the growth in revenue is shadowed by rising uncertainties, as foreign portfolio investors (FPIs) pulled out a net ₹94,017 crore in October, reflecting concerns over volatile global conditions. As India’s economic momentum faces potential headwinds from shifting US policies, analysts are keenly observing whether these pressures could dampen the growth outlook for the coming quarters.

The analysis covered BSE-listed companies that had declared their results by Friday, and whose data was available on Capitaline’s database. The set includes 175 banking and financial services firms.

The September quarter marks the second straight quarter in which revenue growth for this set of companies showed a slowdown, from 11.6% in Q4 FY24, followed by 9.7% in Q1 FY25. This is also the lowest in four quarters. Profit growth has been on a downward track (dipping into the red in Q2) for this entire period despite a rise in revenues.

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Rajesh Bhatia, CIO of ITI Mutual Fund, pointed to modest earnings growth expectations, suggesting a 5-10% increase for India Inc. in Q2, largely driven by revenue deceleration across multiple sectors. “We’ve seen slower revenue growth, particularly in commodities and agriculture, while IT remains under stress," Bhatia noted. He also identified financial services as an undervalued space, particularly as expectations about rate cuts could put pressure on BFSI profitability.

According to the Mint analysis, banking and financial services firms spearheaded the growth, posting a remarkable 22.7% increase in combined revenue, along with a robust 26.5% rise in profits. IT firms also delivered positive results, with revenues climbing 9.3% year-on-year and profits surging 22%. Similarly, the pharmaceutical sector reported a 6.6% increase in revenue and a 13% rise in profits.

In contrast, steel companies faced challenges, experiencing a 6.4% decline in revenue and a steep 39% drop in profits.

According to Ajit Mishra, SVP of Research at Religare Broking Ltd., India Inc.’s overall earnings growth in Q2 is expected to be subdued, mainly due to the underperformance of sectors like construction and industrial commodities. “Revenue growth is projected at 5-7%, marking one of the slowest rates in recent quarters," he noted. However, he did acknowledge potential improvement in profitability margins due to reduced raw material costs and lower operating expenses.

The IT and pharma sectors, which have shown resilience this quarter, were flagged as undervalued by Mishra. “The IT sector benefits from digital transformation trends, while pharma has strong export demand and government support," he said, adding that defence, capital goods, and railways seem overvalued, driven by high demand expectations and government initiatives. “Rapid stock price growth in these areas may overestimate future growth, creating a high-risk investment scenario."

The latest Q2 results from the past week have highlighted a landscape marked by weak consumption demand, modest recovery in IT services, and stable asset quality and profitability within the banking sector, according to a Kotak report dated 27 October. “The market has rewarded earnings beats but punished earnings misses. Valuations have stayed on the higher side, with price correction following earning downgrades."

Smaller sectoral shifts have also become apparent this quarter, as Nirav Karkera, head of research at Fisdom, explained: “There are smaller sectoral trends emerging like where IT and realty seems to be putting up a relatively favourable show while consumer discretionary, capital goods, staples and automotives have not quite lived up to the previous quarters' enthusiasm. “At an aggregate level, there is a case for a series of earnings downgrades as topline and margin projections take a haircut." Karkera cautioned that despite expectations of a lackluster quarter, reported earnings pressure could extend into the next quarter, potentially triggering a wave of downgrades. “At an aggregate level, there’s a case for topline and margin projections to take a haircut," he observed.

An analysis by Motilal Oswal Financial Services Ltd found that earnings growth for the 166 companies within its universe dropped 8% YoY in Q2FY25, marking the worst in 17 quarters. This decline was exacerbated by poor performance in global commodities. The Nifty EPS (earnings per share) has been revised downward by 7% over the last six months, with estimated growth for FY25 now at a mere 5%, the lowest since FY20. “The Nifty EPS estimate for FY25 was cut by 1.2% to ₹1,059, with significant downgrades coming from BPCL, Reliance Industries, and Coal India," Motilal Oswal’s report highlighted.

As the Q2 earnings season progresses, analysts are watching for additional results, which could provide further clarity on India Inc.’s performance amid a challenging economic environment.

"Earnings this fiscal have been held back by a delayed monsoon, weak festive sales and election-related constraints that have stalled budget allocations," explained Shweta Rajani, Head of Mutual Funds at Anand Rathi Wealth.

Certain sectors, such as two-wheelers and consumer durables, are anticipated to gain traction in the second half of this fiscal year, while the metals and oil and gas sectors may continue to hinder overall earnings growth for India Inc. While she is not particularly optimistic about the pharmaceutical sector, she likes hospital and diagnostics companies.

Key earnings reports are on the horizon, starting with Dr. Reddy's Laboratories on 5 November. Following that, Tata Steel will announce its results on 6 November, with Mahindra & Mahindra scheduled for 7 November. The week will conclude with significant financial disclosures from both State Bank of India and Tata Motors on 8 November.

The market has already priced in many expectations, but the downsides haven't yet been fully considered," said Souvik Saha, investment strategist at DSP Mutual Fund.

"We should acknowledge that the festive demand hasn’t been impressive so far. Recent earnings improvements were driven by margin expansion rather than volume growth. “As raw material costs begin to rise—which is already happening—the margin gains will start to decline, and we’re starting to see this unfold," he explained.

Saha notes that we may be entering a period of consolidation, and any further corrections could enhance the attractiveness of Indian markets. He observes that quality stocks have performed well recently, while any downgrades in earnings have resulted in significant market corrections.