India Inc’s earnings juggernaut, which took off after Covid, is showing signs of losing speed. After strong double-digit growth from FY21 to FY24, profit growth has dwindled to low single digits in Q1 FY25. An analysis of results from over 1,715 companies for April-June 2024 shows their revenues expanding by 8.4 per cent compared to 10.1 per cent, 7.1 per cent and 6.2 per cent in the previous three quarters. This could be explained by slower decision-making during the general elections.

Even the lower revenue growth did not trickle down to the bottom-line. Growth in net profits (adjusted for one-off items) slowed to an anaemic 1.6 per cent in Q1 FY25, from 16 per cent, 24 per cent and 52 per cent in the previous three quarters. A surge in prices of fuel, metals and industrial feedstock led to a spike in production and operating costs this quarter, denting profit growth. The sectoral performance offers pointers to uneven growth in the economy. Banking provided a big lift to the overall numbers, with total income expanding at over 22 per cent and profits at 14 per cent. The rest did not measure up. Engines of the core economy such as steel, cement and metals saw 2-6 per cent contraction in sales. Sectors that are proxies for fixed investments such as realty (16 per cent growth in sales), capital goods (14 per cent), infrastructure (9 per cent) grew much slower than the previous quarter too. If this was on account of pause in decision-making due to the general elections, one can expect a pickup this quarter onwards.

More worrying is consumer-facing sectors displaying a mixed trend. Essentials such as FMCGs, retail trade, apparel, healthcare, etc., managed a slight pickup in revenue and profit growth, as the rural consumer loosened her purse strings. Sustenance of this growth would depend on the monsoon doing better this year. But discretionary spending which has been powering consumption since Covid, seems to be stalling now. Hospitality, e-commerce, alcohol, aviation and entertainment saw 8-10 percentage point dip in sales growth. Profit growth across sectors was also sharply polarised with declines in refineries, steel, metals and oil and gas, only partly offset by strong growth in logistics, textiles, capital goods, durables and construction. After flaring up in April/May 2024, prices of natural gas, crude oil and metals cooled off in July. But hostilities in the Middle-East can stoke these prices. This casts doubts on whether margins and earnings growth can revert to FY24 levels.

Overall, the earnings report card for Q1 does not provide fuel for the stock market even to sustain at current levels, forget moving higher. The Nifty50 price earnings (PE) of 23 is beginning to look out of sync with the likely profit growth this year. The broader universe of small- and mid-cap stocks is looking positively frothy with the Nifty500 PE at 26. Analysts have been pegging their Nifty targets to earnings growth of at least 10 per cent for FY25, but Q1 numbers make them look lofty.

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