With the end of the fiscal second quarter results season, brokerage firms stated that Q2 corporate earnings scorecard was weak, but excluding commodities, it reported an in-line growth. Consumption, per analysis by Motilal Oswal Financial Services (MOFSL), has emerged as a weak spot, while select segments of BFSI are experiencing asset-quality stress. “Weak government spending (flat in H1FY25 YoY), along with excess rainfall, also hurt demand. As some of these factors self-correct in H2FY25, we anticipate a recovery in corporate earnings going forward,” it said.
Further, moving deeper in Q3, JM Financial said, the key pockets of weakness are consumer staples, consumer discretionary, smaller private sector banks, vehicle financiers, MFI and microfinance heavy NBFCs, Insurance, IT Services, Auto ER&D, CGD and Building Materials. The key pockets of strength, it added, are in PSU banks, Housing Finance, 2W/ Tractors, Metals, Textiles, Internet and Wires & Cables.
Consumer staples: Per the analysis by JM Financial, Q2 was weaker than expected for the consumer staples segment as volume growth was tepid and higher input costs impacted earnings growth. Managements remain cautious highlighting an urban slowdown and gradual recovery in rural areas. The demand environment was challenging during the period due to adverse weather conditions, including floods, heavy rains in certain areas, coupled with persistent inflation that hurt urban demand. “Demand trends in Q3 so far are not showing any signs of marked improvement. Volume trajectory is unlikely to see material uptick in H2. However, price hikes should support higher revenue growth v/s H1. Margin pressures are likely to sustain, for foods and soap players due to sharp inflation in palm oil and edible oils; and higher competition,” the report stated.
Consumer discretionary: JM Financial said that the second quarter was weaker for the larger set of consumer discretionary companies, owing to Shradh, no weddings and festivities starting from Q3 onwards. Most companies under the segment have suggested that Q3 has started on a good note though the demand isn’t as strong as they would have liked it to be. “There is hope that the coming wedding season could drive an uptick in demand. Demand in the premium and the value end is okay; however the mid-mass remains impacted leading to the overall slowdown,” it said.
Banks: MOFSL stated that the banking sector reported a lackluster quarter amid moderation in margins and a rise in provisioning expenses, particularly among private banks. NIMs contracted for several banks as cost pressures persisted due to intense competition for liabilities and continued pressure on the CASA mix. PSBs, it added, too reported a compression in margins, primarily due to the reclassification of penal interest as penal charges in other income. “Asset quality trends stood strong at PSU Banks, with PNB further reducing its credit cost guidance, while trends for private banks were mixed with higher delinquencies emanating from unsecured segments. Most private banks indicated to maintain a watchful stance on unsecured asset quality over the near term,” it said.
Insurance: According to analysis by JM Financial, Q2 was operationally weak for general insurance and steady for life insurance. General insurance firms posted modest growth in premiums hurt by low automobile sales, while demand for health insurance remained steady. Commercial lines business, meanwhile, is growing inline with economic growth. Life insurance players continued to report healthy premium growth.
NBFC: Within NBFC/HFC, various management teams highlighted the following: 1) demand outlook has weakened in the new vehicle segment amid weakening demand in the PV segment and sluggishness in last-mile delivery vehicles like LCV/SCV (due to weak consumption); 2) asset quality deteriorated across most product segments except power financiers and select affordable HFCs because of customer overleveraging, sluggishness in consumption, and floods/extended monsoons; 3) MFIs attributed ongoing slippages to low center meeting attendance and high attrition at the loan officer levels; 4) competitive intensity remained high in HFC/AHFCs, which hurt disbursement yields for the companies; and 5) competitive intensity in gold loans, from both banks and NBFCs, has moderated, and difficulty in getting unsecured credit (either personal loans or MFI loans) could result in higher demand for gold loans.
Asset management: Per JM Financial, Q2 was very strong for the asset management segment. “Expect Q3 to be steady if markets do not fall further, core earnings should be a positive surprise as revenue impact gradually follows MTM hit. Inflows remain robust despite choppy markets,” it said.
IT Services: While Q2 was largely in-line for IT services companies, and Q3 is shaping up as guided, MOFSL said that the management of IT companies continue to exercise caution as the demand from discretionary projects remains unchanged compared to previous quarters. “Furloughs are a major headwind for IT services in Q3, and are expected to be at a similar level as last year. Improvement in BFSI was unequivocal, and for the rest, demand commentary remained status quo. All companies guided towards a softer H2 as there are no signs of demand recovery except in BFSI,” said JM Financial.
Auto: Q2 was weak for PVs and CVs, owing to muted demand and channel inventory correction. 2Ws and tractors, however, did well owing to a favourable base and recovery in rural demand. JM Financial report stated, “Expect H2 to be better than H1 for PVs and CVs owing to festive and wedding related demand. Expect demand momentum to continue in 2Ws and tractors on the back of rural demand revival and wedding related demand. Similarly, for globally exposed auto ancillary companies, H2 is expected to be better than H1, in terms of volumes and margins.”
Infrastructure: Execution was weak across companies impacted by a heavy monsoon, lower executable order backlog and lower labour availability in some cases. “Companies expect execution to pick up in H2. Highway ordering was weak in H1, given muted awarding from NHAI. However, companies expect awarding to pick up significantly in Q4. Diversified EPC companies witnessed strong order inflows in H1 and momentum is expected to continue in H2 as well,” JM Financial said.
Real Estate and Hotels: In the real estate sector, housing demand continues to remain strong and there are no concerns except in lower ticket size segments. Given the strong pipeline and regulatory issues getting resolved especially in Bengaluru, JM Financial said, new project launches are expected to pick up in H2FY25. Meanwhile in hotels, demand tailwinds in the sector remain intact on the back of steady economic growth, expanding middle class, demand-supply gap, and potential recovery in foreign tourist arrivals.
Metals: Q2 was weak for metals driven by falling steel/metal prices and per JM Financial, Q3 is expected to be stronger given price increases by companies and subdued coal prices will boost margins sequentially. MOFSL report said, “In the ferrous metals space, companies pointed to 1) a steady decline in coking coal costs; and 2) the development of captive raw material mines. A strong performance from Indian operations due to better domestic demand should aid volumes in H2, but weak NSR would keep growth under check. Companies believe that global uncertainties might pose challenges to international steel, base metal, and raw material prices in the short term. In the non-ferrous space, management guided the CoP to increase, led by mounting scarp prices and rising domestic auction of coal, which will lead to margin softness in H2FY25.”
Telecom: The combined revenue/EBITDA for the three private telcos grew 8 per cent/10 per cent sequentially, driven by around 9 per cent QoQ ARPU uptick on partial flow-through of tariff hikes and robust 70 per cent incremental margins. However, MOFSL said, there was some offset from elevated subscriber churn after the tariff hikes. “We expect full flow through of tariff hike by Q4FY25 and subscriber churn to normalize in the next few months. Among three private telcos, Bharti was once again the biggest gainer in Q2FY25, with ~90bp QoQ revenue market share (RMS) gains and ~40bp QoQ subscriber market share (SMS) gains,” it said. Telecom tower industry, meanwhile, is currently witnessing moderate level of tenancy and tower additions after recording robust tenancy and tower additions in FY24 on account of Jio and Bharti’s 5G rollouts (largely completed by FY24 end).
Chemicals: JM Financial said, “In case of agrochemicals, crop protection demand is expected to improve in CY25 as destocking has largely ended. However, pricing pressure on account of Chinese dumping is expected to continue for the foreseeable future. Ex-agrochemicals demand recovery is being seen in patches. In the case of carbon black, industry will continue to remain in short supply while the prices are expected to improve in CY25 for oilfield chemicals.”
Healthcare: In Healthcare, MOFSL said, companies indicated sustained growth momentum in the chronic category of therapies in the DF segment for the quarter. At the same time, management also highlighted the adverse impact of the weak season in acute therapies. Notably, the margins remained elevated due to lower raw material prices as per management. Diagnostics companies reported a strong performance in a seasonally strong quarter, with most companies reporting an in-line quarter or a beat. For hospitals, Q2 revenue growth was healthy for most except Max/GPT which operate at optimum occupancy in most hospitals. In the pharmaceuticals category, domestic business delivered healthy growth in a seasonally strong Q2. “Q4 is a weak quarter for acute sales. US sales were more driven by gRevlimid supplies, which vary across most companies. H2 is better for US business due to the ‘flu season.’ Margins expansion continues for most coverage companies. API pricing environment has remained stable sequentially and is expected to remain stable ahead,” stated MOFSL report.
Logistics: Demand activity was subdued in the logistics sector, primarily owing to a slowdown in consumption, heavy rainfall across the country, high inflation impacting MSME customers, and e-commerce volumes during Q2FY25. MOFSL said, “Management anticipates improved operational performance with the onset of the festive season, particularly with reduced fuel charges and stable operating costs. In the long term, companies are optimistic about sector growth, driven by e-way bills, GST implementation, expanded routes on the Dedicated Freight Corridor (DFC), and enhanced connectivity of major ports, which are expected to encourage businesses to move towards the organized sector.”
Source: The Financial Express