A lukewarm second quarter for India Inc: will third quarter results turn the tide? This is what analysts say

The ongoing second quarter earnings season, now past the midpoint, paints a bleak picture for India Inc. Data shows that 309 companies in the Nifty 500 index reported a combined decline of 3% in consolidated net profit for the quarter ended September 2024, while gross revenue fell, recording a modest increase of 7% year to date. Some analysts also suggest that India Inc.’s actual performance. fall short of expectations.

Weaknesses are evident in all sectors, although industrials, major financials, infrastructure, pharmaceuticals and telecoms have performed relatively well. In contrast, the FMCG, automotive, cement, IT, metals and energy sectors showed the weakest performance. Within FMCG, Nestle posted a 0.9% decline in net profit to ₹899.49 crore for Q2FY25, while ITC posted nearly 2% growth in net profit to ₹4,992.87 crore in the quarter under review.

Summarizing key insights from the second quarter earnings results, Himani Shah, co-fund manager at Alchemy Capital Management, noted: “Consumption remains weak, with production and investment also experiencing a cyclical slowdown. EMS (electronic manufacturing services) and pharmaceutical companies have performed relatively better. We believe that there could be an increase in public and private investments after the Maharashtra state elections in November 2024.”

Jathin Kaithavalappil, Assistant Vice President at Choice Broking, added: “Over the past three years, we have seen robust growth with GDP growing by 7% and profits increasing by 20%, leading to a strong market rally . However, earnings growth in the first quarter of fiscal 2025 was modest, and in the second quarter, even with bank contributions, earnings growth remained at 0%. It appears the market is tempering expectations, taking into account likely flat or weak earnings growth for the third and fourth quarters.”

Despite these challenges, the NSE Nifty50 benchmark stock index has risen almost 8% in the current fiscal year as of November 5, 2024.

Shah of Alchemy Capital Management expects that the government’s capital expenditure (capex) could increase after the state elections in November. The investment-to-GDP ratio has recovered to 31% in FY24, and corporate balance sheets are robust, with low debt-to-equity ratios and high returns on equity. According to RBI data, the high capacity utilization points to potential for growth in capital investment in the private sector.

Vinod Nair, head of research at Geojit Financial Services, noted: “The outlook for the second quarter was weak and actual performance fell short of expectations.” He expects the third quarter to outperform the second quarter, supported by a recovery in government spending that had slowed during the 2024 national and state elections.

“A decline in global inflation could benefit Indian companies that faced a contraction in EBITDA in the first half of the year due to high inflation and lower realizations. However, recovery in business activity is expected to be gradual given the slow pace of global and urban demand,” Nair said. Choice Broking’s Kaithavalappil warned that growth in third-quarter earnings is likely to remain broadly flat.