A tepid Q2 for India Inc: Will Q3 earnings turn the tide? Here’s what analysts are saying

The ongoing Q2 earnings season, now past its midpoint, paints a bleak picture for India Inc. Data shows that 309 companies in the Nifty 500 index reported a combined 3% dip in consolidated net profit for the quarter ending September 2024, while gross sales saw a modest 7% increase to date. Some analysts also suggest that the actual performance of India Inc. has fallen short of projections.

Across sectors, weaknesses are clear, though industrials, large finance, infrastructure, pharmaceuticals, and telecom have performed relatively well. In contrast, FMCG, automotive, cement, IT, metals, and energy sectors have shown the weakest performance. Within FMCG, Nestle posted a 0.9% dip in net profit at ₹899.49 crore for Q2FY25, whereas ITC achieved nearly 2% growth in net profit, reaching ₹4,992.87 crore in the quarter under review.

Summarizing key insights from the Q2 earnings, Himani Shah, Co-Fund Manager at Alchemy Capital Management, noted, “Consumption remains weak, with manufacturing and investments also experiencing a cyclical slowdown. EMS (electronics manufacturing services) and pharma have comparatively outperformed. We believe that after the Maharashtra state elections in November 2024, there could be a surge in public and private investments.”

Jathin Kaithavalappil, Assistant Vice President at Choice Broking, added, “Over the past three years, we’ve seen robust growth, with GDP rising by 7% and earnings up by 20%, fueling a strong market rally. However, earnings growth in Q1 of FY2025 was modest, and in Q2, even with bank contributions, earnings growth stalled at 0%. It seems the market is moderating expectations, factoring in likely flat or weak earnings growth for the third and fourth quarters.”

Despite these challenges, the NSE Nifty50 benchmark equity index has gained nearly 8% in the current financial year as of November 5, 2024.

Shah of Alchemy Capital Management anticipates that government capital expenditure (capex) could accelerate following the November state elections. 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, high capacity utilization suggests potential for private sector capex growth.

Vinod Nair, Head of Research at Geojit Financial Services, pointed out, “The Q2 preview was weak, and actual performance fell short of forecasts.” He expects Q3 to perform better than Q2, supported by a rebound in government spending, which had slowed during the national and state elections in 2024.

“A decline in global inflation may benefit Indian corporations that faced EBITDA contraction in H1 due to high inflation and reduced realizations. Still, the recovery in business activity is expected to be gradual, given the slow pace of global and urban demand,” Nair added. Kaithavalappil from Choice Broking cautioned that growth in Q3 results is likely to remain nearly flat.