India Inc earnings slow down in Q1FY25 despite margin gains

After four years of high double-digit growth in profits, corporate earnings of Indian companies hit a speed bump in the April-June quarter of 2024 (Q1FY25), leading to the risk of a downward revision in India Inc profit estimates for FY25 and volatility in the equity market.

Earnings growth slowed despite companies in most non-financial sectors reporting higher operating margins from lower commodity prices and a decline in interest costs.

Sectorally, the earnings slowdown was largely led by oil & gas companies, non-bank lenders, fast-moving consumer goods, cement and iron & steel firms.

By comparison, banks, automotive companies, non-ferrous metal producers, pharmaceutical companies and capital goods companies reported strong double-digit growth in earnings for Q1FY25.

The combined net profit of a common sample of 2,909 companies that have so far declared their quarterly results for Q1FY25 is up 4.4 per cent year-on-year, growing at the slowest pace in the past six quarters.

For comparison, the combined net profit of these firms was up 40.9 per cent Y-o-Y in the same quarter last year (Q1FY24), and up 10.7 per cent Y-o-Y in the previous quarter (Q4FY24).

The companies in our sample reported a combined net profit of Rs 3.39 trillion in Q1FY25, down 4.23 per cent from a record high of Rs 3.54 trillion in Q4FY24 and Rs 3.25 trillion in Q1FY24.

The combined net sales (gross interest income in case of banks and other lenders) was up 8.3 per cent Y-o-Y in Q1FY25, an improvement from 5.7 per cent Y-o-Y in Q1FY24 and 8.1 per cent Y-o-Y in Q4FY24.

Their combined net sales grew to Rs 35.07 trillion in the quarter, compared with Rs 32.38 trillion a year ago and Rs 35.91 trillion in Q4FY25.

The corporate earnings growth in the first quarter was lower than Street expectations of overall growth in earnings in FY25.

Various brokerages expect 15-20 per cent growth in overall corporate earnings during the financial year.

For example, analysts at Motilal Oswal Financial Services expect the Nifty 50 index underlying earnings per share to grow by 16 per cent in FY25.

Analysts at Elara Securities, on the other hand, expect earnings growth to be above the trend line this financial year.

The Nifty 50 companies  combined net profit in the past five years has grown at a compound annual rate of 18 per cent, according to estimates by Motilal Oswal Financial Services.

A low single-digit rate of growth in earnings for Q1FY25 raises the risk of a downgrade in FY25 forward earnings estimates, unless corporate earnings pick up pace in the remaining three quarters of the financial year.

The numbers also show a large variance in profit and revenue growth across key sectors. For example, the non-financial companies underperformed both in terms of revenues and profit growth.

The combined net profit of 2,383 companies, excluding banking, financial services and insurance (BFSI) firms, was down 0.1 per cent Y-o-Y in Q1FY25, their worst showing in the past six quarters.

These companies' net sales were up 6.3 per cent Y-o-Y in Q1FY25, growing at the fastest pace in six quarters, but slower than the overall corporate revenue growth.

Non-BFSI companies in our sample reported a combined net profit of Rs 2.19 trillion in Q1FY25, against Rs 2.19 trillion in Q1FY24 and Rs 2.27 trillion in Q4FY24.

The earnings before interest, tax, depreciation and amortisation (Ebitda) margins for non-BFSI companies were down by 18 basis points on a Y-o-Y basis to 18.3 per cent of total income in Q1FY25.

These were still nearly 140 basis points higher than the 5-year average Ebitda margins of 16.9 per cent.

Earnings growth, however, would be in the green if oil & gas companies were excluded.

The combined net sales of companies excluding BFSI and oil & gas was 13.7 per cent Y-o-Y in Q1FY25, down from 19.8 per cent in Q1FY24, but in line with the growth rate seen in Q4FY24.

These companies reported a combined net profit of Rs 1.79 trillion in Q1FY25, up from Rs 1.58 trillion in Q1FY24 and down marginally from Rs 1.8 trillion in Q4FY24.

The combined sales of the companies excluding BFSI and oil & gas ones was up 7.2 per cent Y-o-Y in Q1FY25, growing at the fastest pace in the past five quarters.

Their combined net sales grew to Rs 19.81 trillion in Q1FY25, against Rs 18.47 trillion in Q1FY24 and Rs 20.35 trillion in Q4FY24.

Most of the incremental growth in earnings for these companies came from margin expansion and slower growth in interest costs.

Their Ebitda margins were up by 134 basis points Y-o-Y at 20.5 per cent of revenues in Q1FY25, the highest level in the past 11 quarters and 200 basis points higher than the 5-year average margins of 18.5 per cent.

A potential reversal in margin tailwinds in the forthcoming quarters raises the risk of a decline in profits, unless revenue growth picks up.

We expect the earnings momentum to sustain, but the magnitude of growth is expected to moderate to about 15 per cent over FY24-26,  wrote analysts at Motilal Oswal in a recent equity strategy report.