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The second quarter of fiscal year 25 (Q2FY25) in India witnessed a disappointing performance in corporate earnings, signaling a potential economic slowdown. While some brokerage firms report that excluding commodities, earnings growth was in line with expectations, a closer examination reveals a concerning picture. The most significant weakness lies in consumption, particularly among urban consumers. Reports from Motilal Oswal Financial Services (MOFSL) and JM Financial highlight a notable reduction in spending across various categories, ranging from essential goods like food and personal care items to discretionary purchases. This decline is attributed to economic uncertainties and the rising cost of living, forcing consumers to curtail their expenditures.
This downturn in consumer spending is further compounded by a reduction in government expenditure, particularly impacting cyclical sectors that have been significant drivers of earnings in recent years. These sectors, including automotive, engineering, defense, infrastructure, real estate, and energy, have experienced a slowdown due to the decreased government investment. Vipul Bhowar, Senior Director Listed Investments at Waterfield Advisors, notes that managements across these sectors have confirmed this trend during their earnings updates. The confluence of weak consumer demand and reduced government spending creates a significant headwind for overall economic growth.
The sectoral performance paints a varied, yet largely concerning, picture. MOFSL's analysis of 25 sectors reveals that a significant majority underperformed expectations. Only a small fraction exceeded estimates, while the majority were in line or significantly below projections. Similarly, JM Financial's analysis of 157 companies shows that a considerable percentage (44%) missed expectations, highlighting the widespread nature of the earnings shortfall. This widespread underperformance across multiple sectors reinforces the severity of the economic slowdown and raises questions about the sustainability of the current growth trajectory.
A closer look at specific sectors reveals further details. The banking sector experienced a soft quarter, characterized by margin moderation and rising provisioning expenses, especially for private banks. The auto sector, while showing some signs of improvement in rural demand due to a healthy monsoon and festive season, still faces challenges. The consumer sector faced headwinds due to adverse weather conditions and persistent inflation, impacting volume growth. The oil and gas sector significantly underperformed expectations, with several key companies missing their EBITDA and PAT targets. While the technology sector displayed healthy performance, with modest revenue growth, the outlook remains somewhat guarded, suggesting continued uncertainty.
The healthcare sector, however, presented a more positive picture, with in-line sales and profits and better-than-expected EBITDA, primarily driven by factors such as increased contributions from limited competition products and steady growth in chronic therapies. Despite this, the overall picture remains less than optimistic. Despite projections by MOFSL for future growth in specific sectors like financials and metals, the current economic climate suggests a challenging road ahead. The widespread weakness in consumption, coupled with reduced government spending and the general downturn across various sectors, signifies a need for policy intervention and careful monitoring to prevent a deeper and more prolonged economic slowdown.
The current downturn is, according to several analysts, part of a natural economic cycle rather than a structural issue. However, the severity and breadth of the current slowdown necessitate a vigilant approach. The ongoing uncertainty surrounding consumer spending, government policies, and global economic conditions pose significant risks. The coming quarters will be crucial in determining whether this slowdown is truly cyclical or if deeper structural issues are at play. Careful observation of key economic indicators, along with proactive policy responses will be essential to navigate this challenging economic climate and foster sustainable growth in the Indian economy.
Further research is needed to fully understand the underlying causes and potential long-term impacts of this earnings shortfall. Factors such as inflation, global economic conditions, and government policies will need to be carefully analyzed to provide a comprehensive understanding of the current situation. The interconnectedness of global and domestic economies also plays a critical role in shaping the future trajectory. The response of businesses to these challenges, their adaptability, and their investment strategies will be crucial for overcoming the present challenges and ensuring long-term stability and growth.
Source: Q2FY25 review: Corporate earnings scorecard weak, what’s the big worry?