The first quarter of FY25 presented a mixed bag of financial performance, reflecting a modest 6% year-over-year growth in sales and a 4% rise in profit after tax among 486 companies of the NSE500 index. And while these numbers have exceeded expectations, this growth marks the slowest pace since the pandemic-affected quarter of 2020, underscoring the challenges faced by India’s corporate sector and how the broader economic environment has exerted pressure on corporate earnings. Let’s deep dive into quarter 1 of FY25 corporate earnings.

Overview of Earnings For Q1 FY25

The 1QFY25 earnings season delivered results that were largely in line with expectations, but the contribution from OMCs significantly weighed down overall performance. Companies in sectors like Healthcare, Real Estate, Capital Goods, and Metals were the primary growth drivers, yet the negative impact of OMCs such as BPCL, ONGC, and Reliance Industries dampened the broader earnings picture. The drag from these companies led to muted growth, with Nifty EPS witnessing a downgrade of 1.7% for FY25 and 1% for FY26, reflecting the broader challenges faced by the market.

The earnings season also revealed a challenging environment for many companies, with a significant number missing analyst estimates. Specifically for motilal oswal, the beat-miss ratio was unfavorable, with 43% of companies falling short of expectations. 107 companies witnessed downgrades of over 3%, compared to only 46 companies seeing upgrades of the same magnitude. Profit margins also contracted due to ongoing challenges in cost management and pricing power across sectors.

Sectoral Outlook For Q1 FY25 Earnings

Specific sectors such as EMS, Internet companies, Financial Services, and Consumer Goods saw earnings upgrades, reflecting stronger performance prospects. In contrast, sectors like Cement, OMCs, Retail, and Metals faced notable earnings downgrades, signaling challenges ahead. Notably, Consumer Goods, Electronics Manufacturing Services, Real Estate, Defense, and Metals led the way in PAT growth, benefiting from domestic cyclicals and sector-specific tailwinds. These sectors provided a strong counterbalance, ensuring that the overall corporate earnings did not plummet. The Metals sector also exceeded expectations, reporting an 18% YoY growth, powered by companies like Vedanta, Hindalco, and Tata Steel. This sectoral strength underscores the continued importance of domestic cyclicals in supporting the broader market.

Nifty 50 Earnings & Valuation

Nifty is currently trading at a 12-month forward price-to-earnings (P/E) ratio of 20.1x, which is near its long-term average of 20.4x. This suggests that the market is fairly valued, reflecting a balanced outlook amid the current economic conditions.

Nifty 50 index also showed a modest 4% YoY PAT growth, marking the lowest increase since the pandemic's early phase in June 2020.

• The incremental earnings growth was largely driven by a few heavyweight companies. HDFC Bank, Tata Motors, ICICI Bank, Maruti Suzuki, and Tata Consultancy Services (TCS) collectively contributed 127% to the YoY earnings growth of the Nifty, highlighting the concentrated nature of this quarter’s performance.

• On the flip side, OMCs like BPCL, alongside JSW Steel, ONGC, Reliance Industries, and Grasim Industries, dragged down overall performance.

• Excluding the drag from OMCs, the earnings growth would have been significantly higher at 12%, showcasing the resilience of domestic cyclicals such as Automobiles and BFSI.

The downgrade in Nifty EPS estimates for FY25 and FY26 reflects the cautious outlook for several key sectors. The FY25 EPS was reduced by 1.7% to INR 1,115, largely due to downgrades in Reliance Industries, ONGC, and BPCL. Similarly, the FY26 EPS was trimmed by 1% to INR 1,316, as upgrades in Infosys, Coal India, Tata Motors, and Maruti Suzuki were offset by downgrades in ONGC, Axis Bank, HDFC Bank, ICICI Bank, and IndusInd Bank.

1) Banking: A Soft Quarter Amid Tepid Growth and Margin Pressures

Banking Sector: Peak Profitability Appears to Be Behind Us

• The banking sector reported a muted performance in 1QFY25, marked by tepid business growth, moderation in Net Interest Margins (NIMs), and a slight uptick in provisioning expenses, particularly among private banks. The Net Interest Income and Profit After Tax grew by 7% and 5% YoY.

• The contraction in NIMs across most banks was driven by persistent cost pressures amidst fierce competition for liabilities and a continued squeeze on the Current Account Savings Account mix.

• System-wide loan growth is expected to slow to 13% in FY25, with continued pressure on NIMs and rising asset quality stress in unsecured loans. Loan growth continues to decelerate.

• Public Sector Banks experienced mild margin compression, but new investment guidelines that led to better yields provided some support.

• Valuations remain cheap in the banking sector, but the sector lacks clear catalysts

• The sector is grappling with slowing loan growth and increasing asset quality stress, particularly in unsecured loans, suggesting that the cyclical peak in profitability may have already passed.

Non-Banking Financial Companies (NBFCs): Robust AUM Growth Amid Rising Stress

• NBFCs delivered strong performance in 1QFY25 with PAT growing by 21% YoY driven by robust AUM growth of 22% YoY.

• However, AUM growth is expected to moderate to 15-25% CAGR over FY24-26, with a decline in unsecured loan growth and reduced reliance on bank borrowings.

• Vehicle Finance disbursements remained strong, led by growth in the used segment, but caution persisted in consumer loans and MFIs due to rising stress.

• NIMs declined by 11bps QoQ, driven by yield compression and changes in loan mix, partially offset by a reduction in the Cost of Funds.

• Asset quality deteriorated, with a significant increase in net slippages, particularly in MFIs and consumer loans.

• Credit costs remain elevated, and are expected to stay high as provisioning buffers recede.

Life & General Insurance: ULIPs Drive Growth, Margins Contract

• The life insurance sector saw strong growth in 1QFY25, with an average Annual Premium Equivalent growth of 24% YoY among covered companies, led by ICICI Prudential Life Insurance (IPRU), which grew by 34% YoY. General insurance companies, particularly ICICI Lombard and Star Health, reported healthy Gross Direct Premium Income growth of 20% and 18% YoY

• This growth was primarily driven by the continued traction in Unit-Linked Insurance Plans, buoyed by robust capital markets.

• However, this led to margin compression across players, with IPRU experiencing a more pronounced decline due to higher acquisition costs.

• Despite this, the sector is expected to maintain strong APE growth, with a mid-teens CAGR projected over FY24-26, supported by regulatory initiatives and no major reforms in the FY25 budget that negatively impact the sector.

• The outlook for the general insurance sector remains positive, with expectations of steady performance driven by continued growth in premium income and improving profitability.

2) Autos: Robust Volume Growth with Optimism for Festive Season

• The auto sector exhibited strong performance with OEMs reporting approximately 10% Y-o-Y volume growth in 1QFY25.

• This broad-based growth was led by two-wheelers (2Ws), which saw around 11% YoY growth, followed by passenger vehicles at 6% YoY growth, and commercial vehicles and tractors each posting 4% YoY growth.

The demand outlook remains optimistic, particularly with the upcoming festive season expected to drive further growth, supported by a favorable monsoon and new product launches. However, the sector may face challenges in sustaining this momentum beyond the festive period.

3) Consumer, Retail & FMCG Sectors: Improving Consumption Trends

The consumer sector showed signs of recovery posting 6% YoY revenue growth in 1QFY25, up from 4% in 4QFY24. While the FMCG sector reported a 7.6% growth in sales and a 5.9% rise in PAT for 1QFY25.

• The staples segment demonstrated steady demand improvement, with rural markets showing signs of growth. Volume growth improved YoY, and further enhancement is anticipated in the coming quarters.

• The apparel and jewelry segments were particularly affected by fewer wedding dates, impacting companies like Titan, which reported only 8% YoY growth in its domestic jewelry business.

• Quick Service Restaurants also faced challenges, with weak sales growth

• Electronic retailers also had a robust quarter, supported by strong sales of cooling products during an intense summer.

• F&B companies continued their strong momentum, with organic sales growth of 10.5%, outpacing the 5.8% growth reported by Home and Personal Care companies.

• The volume growth trajectory improved sequentially, driven by better rural consumption trends, favorable macroeconomic factors, and a good monsoon.

This positive trend is attributed to better macroeconomic conditions and favorable weather, which have bolstered rural consumption. Companies with strong rural exposure are expected to benefit the most from this trend.

4) Oil & Gas: Mixed Results with OMCs Dragging Down Performance

• The oil and gas sector underperformed in 1QFY25, largely due to the disappointing results from Oil Marketing Companies.

• While EBITDA was in line with expectations, companies like HPCL, MRPL, PLNG, and AEGISLOG missed estimates. Conversely, GAIL, GUJS, IGL, IOC, and MGL outperformed.

• PAT for the sector was 9% below estimates, reflecting a 42% YoY decline. Even when excluding OMCs, PAT was 8% below expectations, down 5% YoY.

• The sector continues to face challenges, particularly with the volatility in global oil prices and regulatory uncertainties impacting profitability.

5) IT: Revenue Growth Muted Amidst Demand Uncertainty

The IT services sector delivered a healthy performance in 1QFY25, with revenue growth of 1.2% quarter-on-quarter in constant currency terms, beating estimates. A mild recovery in discretionary spending among BFSI clients was noted, with a shift in focus towards "high-priority" transformation deals in some areas. However, overall pressure on discretionary spending persists, suggesting a cautious outlook for the sector.

• Despite this being a seasonally strong quarter, large-cap IT companies outperformed mid-caps by 70 basis points for the first time in 6 quarters. Profit margins remained stable, with a slight decline, as the impact of wage hikes (particularly at TCS) and muted growth was offset by productivity improvements.

• Headcount in the IT sector continued to decline for the seventh consecutive quarter, reflecting efforts to shore up utilization rates and preserve margins amidst limited revenue visibility.

• Among the top four IT firms, Infosys led with 3.6% QoQ growth driven by large deal ramp-ups, although its underlying guidance was less inspiring.

• TCS also posted 2.2% QoQ growth, aided by the ramp-up of the BSNL deal.

• In contrast, HCL Technologies and Wipro reported sequential revenue declines of 1.6% and 1% QoQ, respectively.

• Mid-cap IT firms showed mixed performance, with Persistent Systems leading the sector with 5.6% QoQ growth, while L&T Infotech returned to growth. However, Cyient disappointed with a 5% QoQ decline in DET revenues and a sharp cut to FY25 growth guidance.

The demand for cost-takeout deals remains robust, but the transition towards transformation projects indicates a potential shift in client priorities, which could impact future revenue streams. The outlook for the sector remains cautious, with management commentary indicating continued pressure on discretionary spending and a muted growth outlook for FY25.

6) Healthcare & Pharmaceutical Sectors: Profitability Boosted by Cost Management and Niche Product Launches

• The healthcare sector reported in-line sales in 1QFY25 with PAT exceeding estimates by 6%. The pharmaceutical sector also reported another strong quarter, with Revenue and PAT growing by 11%, and 28% YoY in 1QFY25.

• This outperformance was driven by lower raw material costs, reduced price erosion intensity in US generics, the successful launch of niche products and robust performance in the domestic pharma market.

Pharma sector is expected to maintain strong growth momentum, with aggregate EBITDA margins projected to expand to 25.6% by FY26, driving robust Revenue and PAT growth over FY24-26. The Healthcare sector is also expected to maintain its earnings momentum, although the growth rate may moderate to around 15% over FY24-26. Both sectors continue to benefit from a stable pricing environment in key markets and ongoing cost management efforts.

7) Paints Sector: Demand Slowdown Continues

• The paints sector struggled in 1QFY25, with sales growth declining by 1% YoY, impacted by weak demand in the decorative segment, price cuts in previous quarters, and product mix issues.

• Profit margins contracted largely due to negative operating leverage, despite flat gross margins.

• The sector announced price hikes of around 2% effective from July and August to counter input cost inflation.

• However, the outlook remains cautious, with concerns over moderate growth, expensive valuations, and competitive pressures.

8) Cement: Weak Pricing Weighs on Profitability

• The cement sector underperformed in 1QFY25, with EBITDA for the sector declining by 4% YoY and 25% QoQ due to weak demand and inability to implement price increases.

• This was further exacerbated by intense competition in regions like South, East, and Ahmedabad.

• While volumes increased by 2.5% YoY, weak realizations and declining operating costs weighed heavily on profitability.

• Larger players like Ultratech and Shree Cement managed to grow faster than the industry, gaining market share at the expense of smaller regional players. However, the overall sector outlook remains weak, with expectations of a back-ended recovery in 2HFY25.

9) Power: High Demand and Renewable Energy Thrust

• The power sector saw a 10% YoY increase in demand in 1QFY25, driven by a hot summer and improving industrial activity.

• Thermal generators reported strong operating performance, benefiting from better utilization and favorable gas prices.

• However, hydro generation was weak, with NHPC reporting a 10% YoY decline in generation due to lower water levels.

• The renewable energy segment continued to grow, with 4.4GW of capacity added in 1QFY25, led by solar and wind.

• Transmission companies are optimistic about the investment opportunities in inter and intra-state networks, with Powergrid increasing its capex guidance by 20-25% for FY25/ 26.

10) Supreme Court Ruling on Mineral Rights: Potential Long-Term Concern For Metals & Mining Sectors

The recent Supreme Court ruling granting states the power to tax mineral rights and mineral-bearing lands retrospectively has introduced a new risk factor for the metals and mining sector. The ruling allows states to recover past tax dues on mineral rights from April 2005, which could lead to significant liabilities for companies in this sector.

While this judgment is sentimentally negative, companies believe the financial impact may be manageable, especially with the Court allowing staggered payments over 12 years starting from April 2026. Additionally, interest and penalties levied on or before July 25, 2024, will be waived, providing some relief.

However, the lack of clarity on the quantum of demand and the actions states may take following this ruling has led companies to explore legal options. The prospective levy of cess by states like Jharkhand could increase production costs, but companies may be able to pass these costs onto customers through higher pricing.

Inflation Eases in July 2024

The Wholesale Price Index (WPI) inflation in India eased to a 3 month low of 2% in July 2024, down from 3.4% in June 2024. This decline can be attributed primarily to lower food inflation and falling prices of crude oil and natural gas. The drop in WPI, in part, reflects a favorable base effect from the previous year and a more recent softening in food prices, which reached their lowest level in 9 months. Additionally, the prices of key energy inputs, such as crude oil and natural gas, posted their lowest growth in 3 months, further contributing to the decline.

Current data suggests a cooling of inflationary pressures. The deceleration in WPI was largely driven by a significant drop in primary food article prices, particularly vegetables and spices, although cereal and pulse prices remained firm. Moreover, the increase in prices for non-food manufacturing products, driven by sectors like edible oil and textiles, indicates that inflationary pressures in the manufacturing sector are still present.

WPI inflation might rise slightly in the coming months as the favorable base effect diminishes and global commodity prices stabilize. However, elevated food inflation remains a concern, particularly given the importance of food prices in influencing overall inflation in India.

Monsoon's Positive Impact on Kharif Sowing and Agriculture

India's southwest monsoon has performed well, with cumulative rainfall at a 5% surplus as of mid-August 2024. This is a significant improvement from the early part of the season when rainfall was below the long-term average, particularly in the northern and eastern regions of the country. The transition from an El Niño to a neutral phase has contributed to above-normal rainfall in July and August, leading to better-than-expected precipitation across most regions.

The positive monsoon has had a beneficial impact on Kharif sowing, with an overall increase of 1.4% compared to the previous year, with a 6.7% rise in pulses cultivation. Major Kharif crops such as paddy, pulses, and oilseeds have seen increased acreage, although crops like cotton and jute have experienced declines due to a shift in farmer preferences. The monsoon's favorable distribution has also improved water levels in key reservoirs, particularly in central and southern India, which had been significantly depleted in recent years.

Looking ahead, the prediction of a developing La Niña, which typically enhances rainfall in India, bodes well for the upcoming Rabi cropping season. A good monsoon not only supports robust crop production but also helps in stabilizing food prices, which have been a significant driver of inflation in recent months. The Reserve Bank of India's cautious approach to interest rates underscores the critical role of food prices in the broader inflationary outlook.

Read the previous earnings expectations & reports

1. Key Insights from Q4 FY24 Earnings for Indian Stock Markets & Sectors
2. Earnings Expectation For Sectors In Indian Stock Markets For Quarter 4 FY24
3. Stock Market Predictions For 2024
4. 2023 Recap: Indian Stock Market Performance, Indian Economy & Wright Portfolios Performance in 2023
5. Q3 Earnings - How Are Indian Companies Performing? What To Expect From Different Sectors
6. Comprehensive Q2 Indian Stock Market Analysis: Earnings, Market Valuation, Volatility, Trends & More
7. Analyzing The Indian IT Sector's Earnings Season: Q1 FY24 Report Card