India Inc reported revenue growth of 8 per cent YoY and PAT decline of 2.8 per cent YoY in Q2FY25 (1129 companies as of  Nov-5). But adjusted for BFSI and Power & Energy companies, which are the best and worst performing sectors respectively, revenue/PAT grew 9.4/10.8 per cent YoY for the remaining 917 companies.

While the performance of other sectors in aggregate is commendable, the weakness in segments such as FMCG, construction materials (steel and cement) and automobiles, point to a slowing demand currently. Overall, going into the second half of this fiscal, there seems to be some tailwinds for commodity and export-oriented segments as well as the infra space. But it needs to be seen if fortunes for the consumer segments will reverse.  

Strong sectors

Outside of banking, IT and Pharma are leading the sector performance, reminiscent of the post covid turnaround in FY20-21.

Banking has delivered 14/18 per cent YoY revenue and PAT growth in Q2FY25 but the climate is softening. Credit growth which drove the sector in the last year has slowed by 200-300 bps across banks. However, participation of corporate credit is increasing and there is a slowing down of unsecured credit. Interest spreads are declining as race for deposits heats up - alongside anticipated domestic rate cuts. The asset quality and credit costs are different for secured and unsecured segments with the latter facing heat from the regulator and asset quality concerns. The cost of provisions has impacted banks such as Kotak, Indusind and microfinance lenders but PSU banks, HDFC and others with minimal exposure fared better.

IT sector reported 7/11 per cent YoY revenue/PAT growth. Among key verticals , BFSI reported an uptick in deals signed, but for the other verticals, smaller contract values, lower margin cost-take out deals, and even mid-project scope reduction was reported. The expectation of a turnaround may be premature despite the moderate results reported.

Pharma continues to do well in India and US markets. But trade generics and intensifying competition in domestic markets will have a longer-term impact.

Sectors in red

Commodity costs or weak consumer demand have impacted a range of sectors other than refineries.

Refineries and oil marketing companies have been hit by refining margins and inventory losses respectively, despite sliding oil costs. The inventory losses can be short lived but the declining refining margins are a result of overcapacity in global refining which may continue in the medium term. Chemical prices have also declined impacting downstream realisations of refineries. The power and energy sector reported flat revenue growth and 51 per cent YoY PAT decline in Q2FY25 on a high base last year.

Steel and cement companies have witnessed correction in realisations, which were already at the lower end. The two sectors reported PAT decline of 46 and 49 per cent YoY on a revenue decline of 6 and 3 per cent respectively. This despite fuel and energy costs on the lower side. Profitability was impacted by weak realisations and lower scale of operations. While gross margins were relatively flat, EBITDA margins declined by 350 points for each sector impacting the PAT growth.

Auto sector which had a strong run till now reported revenue/PAT growth of 7/(-17) per cent YoY as the sector witnessed a 115-bps YoY decline in EBITDA margins. Even as commodity costs were elevated, lower volume growth hurt the sector along with promotional activities. The festive season sales (impact in Q3) could be positive, but volume growth may not see a big rebound in  FY25.

FMCG sector reported softening consumer demand across Tata Consumer, Nestle and HUL. While the rural demand regained momentum, the urban segment showed weakness. With intensifying competition limiting the price pass through and elevated commodity prices, the scope for margin contraction is also significant in the short term.

Outlook

Some factors make the outlook for 2HFY25 sanguine. The stimulus in China  and its impact can be positive for steel, refineries and other commodity companies. The global rate cut cycle can be positive for export facing sectors including IT and as and when domestic rates follow the trajectory it can be positive for domestic consumption. The infra and construction activity has slowed down owing to unusual weather, elections and slower release of government capex which can resume post monsoon. However, the beginning of a cyclical downturn in autos can continue to weigh on the sector’s numbers. The FMCG space too needs to be monitored for a reversal of fortunes.

Related Topics