Editorial. Subdued performance – The Hindu BusinessLine
Second quarter earnings of India Inc show that post-pandemic buoyancy is waning. Listed companies benefitted from the pandemic, using the disruption in the unorganised sector and in medium and small businesses to grow their market share. The generous liquidity supplied by the RBI coupled with low interest rates also helped, fuelling leveraged domestic consumption and increasing demand. But all that’s petering out.
A host of factors including geopolitical tensions, slowing global growth, shift in consumer preferences and tighter financing conditions have begun to hurt listed companies. An analysis of around 1,130 companies which have declared their results for the second quarter of FY25 so far reveals that year-on-year revenue growth was the slowest in the last four quarters, at 8 per cent. Of greater concern is the 2.8 per cent decline in net profit compared to the corresponding quarter last year. If stocks in the BFSI sector are excluded, net profit has declined 12.8 per cent. The headline numbers have been primarily marred by the weakness in oil and gas and commodity companies. Reliance Industries’ O2C (oil to consumer) segment and the large PSU oil refiners were hurt by weak gross refining margins as crude oil prices fell 20 per cent in the quarter on excess supply and weak global demand. Profitability of steel and other metal producers was also hit due to weakness in global prices. Larger FMCG producers reported decline in profitability due to lower urban demand and changing consumer preferences.
The automobiles sector witnessed a slowdown in passenger vehicle demand, forcing players to offer lucrative discounts to customers and eroding profitability. Two-wheeler volumes, however, remained healthy due to rural demand and exports. Many private sector banks reported sharp compression in net interest margin as they focused on deposit mobilisation and raised interest rates on deposits. Many NBFCs reported lower business growth as well as deterioration in asset quality, as RBI began cracking down on sharp practices. While IT companies reported stable growth on a sequential basis, the outlook remains cautious, given the uncertainty around North American markets.
Growth challenges for Indian companies are likely to persist through FY25, as global demand could remain muted owing to geopolitics and a slowing Chinese economy. Slowing domestic credit growth, especially in personal loans, indicates that urban demand is being hit by high interest rates. Investors need to temper their return expectations from equities. A raging bull market over the last two years has taken valuations to very high levels. Though the Nifty50 has declined around 7 per cent from its recent peak, its price-earnings multiple of 23.4 on a trailing basis is still very expensive compared with other emerging markets. With the Nifty Midcap 100 index trading at a PE multiple of 43.7 and the Nifty Smallcap 100 index trading at 31, there appears to be froth left in many segments.
