1QFY25 – Earnings held no surprise, optimism moderating

The latest earnings season (1QFY25) is almost over. the ~4% yoy growth in NSE500 profit after tax (PAT) has marginally exceeded the modest expectations of a 3% yoy growth. NSE500 revenue grew ~6% yoy. This is the slowest pace of growth since the covid affected 1QFY21. The refiners and oil marketing companies materially dragged the overall performance. Sequentially, the earnings growth slipped sharply from 4QFY24.

Negative surprises outweigh, smallcap earnings failed the optimism

As per the brokerage Emkay’s report, “the ratio of negative surprises jumped sharply, from 46% to 62% for Emkay coverage and 56% to 66% for the Nifty.” The brokerage however added that “The aggregate numbers were skewed owing to the Energy sector’s 30% YoY PAT drop on a high base. EBITDA margins fell by 20bps YoY to 15.1%, mostly due to a 388bp contraction for the Energy sector – most other sectors delivered strong margins.”

Post the earnings, the consensus Nifty50 EPS witnessed a cut of 1.7% FY25 and 1% for FY26. This is the first earnings cut (though marginal) in almost a year. The Emkay report however emphasized that “The earnings revision trend for small-cap stocks was particularly weak, with zero upgrades of >5%.

 

Lowest PAT, EBIDTA growth in four years

A report by the brokerage house Motilal Oswal’s (MOFSL) highlighted that “Nifty reported the first quarter of a single digit EBITDA growth (5%) in four years, (last time Nifty posted single digit EBITDA growth in Sep’20). Also, 4% PAT growth is the lowest since the Pandemic quarter (June’20).”

MOFSL report further emphasized that “For the MOFSL Universe, the earnings upgrade-to-downgrade ratio has turned weaker for FY25E as 46 companies’ earnings have been upgraded by >3%, while 107 companies’ earnings have been downgraded by >3%. The earnings upgrade/downgrade ratio of 0.4x was the worst since 1QFY21. EBITDA margin of the MOFSL Universe (ex-Financials) contracted 120bp YoY to 16.3%.

 

Fading tailwinds

As per nuvama’s report, “In Q1FY25, BSE500 (ex-OMC) top line and PAT each grew 8–10% unlike FY24, when PAT growth (21%) far outpaced top-line growth (8%). This is owing to fading tailwinds from lower input prices and BFSI credit costs while demand remained weak.”

“Q1FY25 top line remained soft at 8%—sub-10% for a fifth straight quarter. The weakness was led by cyclicals (industrials, and autos)—the leaders of FY24—while consumption, exporters and commodities stabilized at low levels.”

NII weakness percolates down to banks’ bottom line

As per a report by ICICI Securities, credit growth was softer than usual Q1 seasonality due to additional headwinds from muted deposits growth, elevated LDR and deceleration in unsecured personal loans and NBFC segments.

“NII weakness percolated down to the bottom-line with PAT growth of ~8% YoY. On a QoQ-basis, private banks saw NII growth of ~2.5% QoQ while operating earnings were flat and PAT declined 5% QoQ.”

·         Credit growth moderated to ~1.5% QoQ in Q1FY25.

·         Deposits growth slowed down to <1% QoQ). Deposit growth for private banks was healthy at ~17% YoY, but drag from PSU banks (up <10% YoY) slowed systemic deposits growth to ~13% YoY in Q1FY25.

·         CASA growth remains challenging (in single digit YoY) while term deposits continued to do the heavy lifting.

·         Rise in cost of deposits was calibrated, though rate hikes by SBI/HDFCB in Q1 and persistently soft deposits growth suggest risk on the upside.

·         NIM decline was contained partly due to a strong rise in yields on investment. Moderating loan growth and pressure on NIM resulted in slower NII growth. Adj. NII growth for private banks moderated to ~14% YoY (vs. ~16% YoY loan growth).

Management commentary positive

As per the Antique Stock Broking, Overall management commentary has been positive, key takeaways are: a) IT companies believe that lower inflation and interest rate could lead to improvement in the US macro environment; b) Consumer companies are seeing signs of rural recovery which may further accentuate with the above normal monsoon; c) Domestic private capex is seeing traction, particularly in the real estate; (d) Banks have tightened credit filters for unsecured lending. HDFC Bank highlighted that it will grow slower on advances as against deposits in order to bring down loan to deposit ratio.”

Investors should cut the noise and stay focused on earnings

In my view, 2QFY25 and 3QFY25 are critical for investors, especially for household (retail) investors who are predominately invested in smallcap, midcap and narrative (defense, railway, clean energy, China+1, etc.) stocks. If the earnings momentum fails to match their optimism; or headwinds develop in terms of slower global growth momentum and negative flows; these stocks could face sharper correction in 2025.

It is therefore desirable for them to stay focused on earnings and growth momentum rather than bothering about big picture things like geopolitics, the US fed monetary policy; yen carry trade etc.