How to Navigate the Current Indian Market Amidst Muted Q2 Earnings

13th November 2024

Ayush Agrawal

Nov 13, 2024

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Case Study

Introduction

In recent months, India's corporate sector has navigated a challenging economic landscape, with Q2FY25 earnings revealing both broad setbacks and sectoral nuances. From sluggish earnings growth and investor outflows to evolving sectoral trends, the market seems poised for caution yet holds pockets of resilience. Below, we break down the current state of India's markets and offer insights on how investors can adapt and strategize in response to these emerging dynamics.

1. Corporate Earnings: The Slowest Growth in 17 Quarters

Corporate India reported one of the weakest quarters in recent history. According to Jefferies, earnings estimates were downgraded for 63% of the companies it covers, reflecting a broad underperformance. Motilal Oswal reported that profits for 166 companies under their watch fell by 8% year-on-year, highlighting a widespread earnings slowdown.

2. Revenue Growth Stagnation

Total corporate net sales for Q2FY25 grew by only 6.5% YoY—a marked deceleration compared to previous quarters. This trend reflects broader economic challenges as global uncertainty, currency fluctuations, and muted sectoral growth weigh on revenue performance.

3. Corporate Profits: Eroded Margins and Rising Costs

Corporate profits fell by 0.6% YoY in Q2FY25, signaling the end of an eight-quarter streak of positive earnings. Many sectors, from manufacturing to FMCG, have struggled with rising raw material costs. The FMCG sector, in particular, saw input costs rise by 9% in Q2, the steepest increase in nearly two years.

4. Sectoral Insights: Banking and Financial Resilience

Amidst a lackluster earnings season, public sector banks (PSBs) reported robust growth. State Bank of India highlighted impressive performances from Punjab National Bank, Central Bank of India, and others, driven by lower provisions and credit cost reductions. Conversely, private banks exhibited moderate growth, and NBFCs encountered higher credit costs.

5. FMCG Sector: Urban Demand Weakens, Margins Squeezed

The FMCG sector has faced dual pressures from rising raw material costs and weakening urban demand—a reversal from prior quarters when rural demand lagged. Larger FMCG companies now face tightening margins and limited ability to pass on costs, impacting profitability.

6. IT Sector: A Bright Spot Amidst Global Economic Caution

In contrast to most sectors, the IT and software sector is experiencing a positive outlook, supported by increasing global discretionary spending. Mastek and Infosys have revised their growth guidance upward, reflecting a renewed wave of optimism.

7. Global Influences: FPI Outflows and Market Correction

Foreign portfolio investors (FPIs) have withdrawn substantial capital from India since September, amounting to ₹1.14 lakh crore, as China's recent stimulus measures drew funds toward its market. Additionally, the Nifty 50 index has seen a 9% correction since late September.

8. Domestic Stability: Mutual Funds as Market Stabilizers

Domestic institutional investors, particularly mutual funds, have played a stabilizing role amidst market volatility. Inflows from mutual funds continue to absorb the rising equity supply, particularly as companies tap into the market for high-valuation IPOs.

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