India Inc’s Q2 has been tepid. Is a recovery in sight?

India Inc. faced another challenging quarter in July-September as corporate earnings continued the recent trend of lukewarm performance. This was particularly evident in revenue growth, which hit a four-quarter low, dragging down net profit expansion for the fifth consecutive quarter, a Mint analysis showed.

The combined revenue of the 2,996 BSE-listed companies that were part of the analysis rose 8.1% year-on-year (y-o-y), slower than 9.5% in Q1. As a result, net profit growth slowed to 8.9% from 9%. The banking, financial services, and insurance (BFSI) sector was again a saving grace: without it, revenue growth decelerated to 4.6% from 6.3%, and net profit growth edged up from 3.3% to a still-dismal 4.4%.

Against all odds, mid-sized players (revenue ₹1,000-10,000 crore) bucked the trend. Despite being vulnerable to risks, they reported double-digit growth in both revenue and profit, ahead of both larger and smaller peers.

Kinjal Shah, senior vice president and co-group head of corporate ratings at Icra Ltd, expects an improvement in corporate performance in the rest of the fiscal year, with increased government spending, a pick-up in private capital expenditure, and improved rural demand driven by kharif output and farm cash flows. The ongoing quarter will get a leg-up from the festive season sales, but a rise in input costs could bring profit margins under pressure, Shah said. 

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A mixed bag

While the BFSI sector has boosted overall corporate performance in recent quarters, its positive impact was weaker in Q2. “Banking was a mixed bag: ICICI Bank and Federal Bank performed well, but industrials and non-banking finance companies (NBFCs), especially microfinance, disappointed due to higher provisioning and weaker asset quality,” said Sunny Agrawal, head of fundamental equity research at SBICap Securities Ltd.

Most of the 18 broad sectors reported robust profit growth exceeding 10%. However, seven sectors recorded profit declines: automobiles (2.1%), agriculture and allied activities (6.1%), chemicals (6.4%), media and entertainment (16.7%), power (21%), construction and real estate (39%), and oil and gas (48%).

Shah noted that consumer- and commodity-oriented sectors, like fast-moving consumer goods (FMCG), consumer durables, gems and jewellery, and retail, saw improved discretionary spending, boosted by the onset of the festival and wedding seasons as well as increase in realisations for products.

Costs surge

An analysis of expense patterns shows that while aggregate spending held steady at 82% of revenue in the first two quarters of 2024-25, input costs reached a four-quarter high in Q2. Raw material expenses,  as a percentage of revenue, climbed to 38.4%, from 37.7% a year ago and 37.8% in Q1.

In absolute terms too, the growth in raw material costs has picked up on a y-o-y basis, from a 2.3% rise four quarters ago to a 6.5% rise now, but the impact on corporate profitability has been varied. Small and micro-sized companies bore the brunt of these rising input costs, experiencing a significant decline in earnings in Q2. Consumer-centric and commodity-oriented sectors have been particularly hard-hit, with consumer durables, hospitality, capital goods, and chemicals all seeing double-digit rises. 

Employee costs, as a percentage of revenue, also saw a slight increase—from 8.1% to 8.3% in the past two quarters, though the pace of growth slowed in 12 of the 18 sectors.

Margin pressures

This has slightly put pressure on margins. Aggregate net profit margins—or net profits as a share of revenue—dropped after two consecutive quarters of growth; it was up on a y-o-y basis. Operating margins increased marginally to 28.6% in Q2, reaching an over three-year high. It was up around 71 basis points on a yearly basis. 

“Considering the raw material prices are on an uprise, the incremental margin increase is lower on a quarter-on-quarter basis,” said Shweta Rajani, head of mutual funds, Anand Rathi Wealth Ltd.

After a subdued period analysts expect a potential uptick in the second half of the fiscal year, following the conclusion of general and major state elections that had dampened both government expenditure and private consumption. However, persistent cost pressures will challenge companies' ability to maintain profitability. 

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