India Inc's Q2FY25 numbers show growing dependence on BFSI sector

Corporate India now seems more dependent than earlier on a good showing by the banking, financial services and insurance (BFSI) sector to prop up overall earnings, with the sector’s share in India Inc profits reaching 38.2 per cent in the July-September 2024 quarter (Q2FY25), the highest since 2012. 

This was also significantly higher than the sector’s 23.6 per cent average contribution to overall corporate profits in the past 10 years, excluding the Covid-19 period, when the BFSI share rose sharply amid a shutdown of most non-financial economic activities. For context, the sector had accounted for 57.2 per cent of all corporate profits in the April-June 2020 quarter (Q1FY21). 

During Q2FY25, while the combined profit of the sector rose 15.3 per cent year-on-year from Rs 1.08 trillion to Rs 1.24 trillion, that of non-BFSI companies declined 4.2 per cent Y-o-Y from Rs 2.1 trillion to Rs 2.01 trillion. The overall net profit of the 3,515 companies in our sample grew 2.4 per cent Y-o-Y during the quarter.

 

The BFSI sector, also a key revenue driver for the country’s corporate sector, accounted for 24.2 per cent of the combined revenues (including other income) of all listed companies in our sample in Q2FY25 — up from 22.4 per cent a year ago, and the highest level in over a decade, excluding the Covid-19 lockdown period. Before the pandemic, the BFSI sector accounted for around 19 per cent of all listed companies’ combined revenues. 

Analysts attribute BFSI companies’ rising share in corporate revenues and profits to this sector’s consistent double-digit growth, unlike other sectors of the economy. “Credit growth has consistently been in double digits for over three years now, even as most key non-financial sectors like information technology (IT) services, fast-moving consumer goods (FMCG), oil & gas, power, metals and cement are growing in low single digits since last year. This has made BFSI a big outperformer, and this shows in the sector’s growing contribution to corporate growth,” says G Chokkalingam, founder and chief executive, Equinomics Research. 

The combined net sales of non-BFSI firms in our sample rose just 4.6 per cent Y-o-Y in Q2FY25, the slowest pace in three quarters. By comparison, BFSI firms’ combined net sales grew 13.5 per cent Y-o-Y in the quarter. 

Other analysts, meanwhile, caution that the BFSI sector’s growing heft raises downside risks for India’s overall corporate sector. Dhanajay Sinha, co-head of research and equity strategy at Systematix Institutional Equity, says: “BFSI gained from three major tailwinds in the past three years — a sharp decline in interest cost after the pandemic, strong double-digit growth in retail lending, and an improvement in asset quality. With these tailwinds now over, lenders now face a slowdown in credit growth, higher borrowing costs, and a rise in bad loans.” 

The earnings headwinds do reflect in BFSI companies’ numbers. For example, the rate of banks’ gross interest income growth, at 13.1 per cent in Q2FY25, was the lowest in the past nine quarters, and less than half the 28.5 per cent Y-o-Y growth seen in the same quarter of FY24. Their interest expenses grew faster than interest income for seven quarters in a row, leading to a contraction in net interest margins. 

A bigger worry is a reversal in the non-performing loan cycle leading to a rise in bad loans. Provisions for bad loans by 33 listed banks in our sample grew 24.9 per cent in Q2FY25 — the fastest pace in the past 17 quarters. 

Earlier, banks had reported a Y-o-Y decline in provisions for bad loans during 13 quarters between Q2FY21 and Q3FY24, greatly boosting their net profits. Banks account for nearly 75 per cent of the BFSI sector’s overall revenues and profits. 

If the BFSI sector is hit by an earnings slowdown, other non-BFSI sectors could find it difficult to pick up the slack. At present, the oil & gas sector is distant second in profits, with a share of 10.7 per cent in corporate profits. It is followed by IT services (9.5 per cent) and metals & mining (7.2 per cent).