Capital goods, pharma, auto sectors shine with strong profit growth in Q1

IT Services and FMCG companies reported a slight uptick in revenue growth in Q1FY25, but their growth remains in low single digits

In the first quarter (Q1) of 2024-25 (FY25), the capital goods, pharmaceutical, and automotive sectors achieved impressive growth rates of 25-34%, leading the way. Metals, banking, insurance, information technology (IT) services, and defence manufacturers also performed well. In contrast, oil and gas, fast-moving consumer goods (FMCG), and cement companies lagged behind. Most sectors saw year-on-year (Y-o-Y) expansion in operating profit margins, driven by lower raw material and labour costs, with automotive and capital goods benefiting the most. However, oil and gas and FMCG reported Y-o-Y margin declines. The banking, financial services and insurance (BFSI) sector, along with automotive, experienced slowed growth, while IT services and FMCG saw modest revenue increases. BFSI, oil and gas, and IT services accounted for 56% of total profit in Q1FY25.

AUTOMOTIVE

·         Revenues for automotive makers came in with high single-digit growth and met expectations while operating profit exceeded expectations; profit after tax growth at over 25 per cent also stands out

·         Motilal Oswal Research believes that the April-June quarter (Q1) performance was largely driven by healthy volume growth across most segments, particularly two-wheeler, and a favourable mix

·         The operating performance was aided by stable commodity costs and favourable foreign exchange rates

·         Brokerages, however, are cautious about margins due to rising commodity costs for aluminium, lead, and rubber

·         Except for two-wheelers, brokerages are cautious about the outlook, given moderating demand in passenger and commercial vehicles and rising discounts. While tractor sales increased by low single digits, normal monsoons and higher minimum support prices are expected to improve growth in farm equipment

PHARMACEUTICAL

·         Larger generic companies either exceeded Street estimates on sales or met expectations while operating and net profits surpassed estimates in most cases

·         Revenue growth was in the high single digits, with operating profit in the mid-teens; net profit growth in Q1 is among the best across sectors

·         The 11 per cent-plus growth in the domestic market was driven by chronic therapies and seasonal gains in the acute portfolio

·         Growth in the US business (8 per cent) was due to traction in specialty products, with price erosion stabilising in the mid-single digits

·         Margins at the gross level were boosted by lower raw material costs. Margin performance was supported by a strong showing in the domestic market, an increased share of higher-margin niche products, and lower operational expenses

·         Brokerages expect the earnings growth momentum to be sustained in the coming quarters, driven by ongoing niche launches and improved operating leverage

INFORMATION TECHNOLOGY

·         The quarter saw the IT sector bounce back with median dollar revenue growth of 2 per cent after two consecutive quarters of weak top-line growth (largely below 1 per cent), says Prabhudas Lilladher Research

·         Although there was a seasonal uptick, demand remains steady across verticals and geographies

·         One key parameter showing a turnaround this quarter was headcount addition, which turned positive for many companies after multiple quarters of reductions, says Nuvama Research

·         Most IT majors, barring LTIMindtree, delivered up to a 170-basis point increase in operating profit margins due to better employee utilisation, pyramid structure, lower subcontracting costs, and operational improvements

·         Margin gains are expected to sustain for Tier-I majors for the rest of the year, according to analysts

FAST-MOVING CONSUMER GOODS

·         Revenue growth was impacted by a severe heatwave, higher food inflation, and general elections, which weighed on demand

·         Higher regional competition led to a downtrading in mass categories. This, coupled with concerns about the direct-to-consumer channel, remains a worry for most players

·         A reduction in input costs resulted in higher gross margins for most companies. However, this did not translate into operating level improvements, as some of the gains were used to cut prices, invest in product innovation, and boost advertising spending

·         Centrum Research expects volume recovery in the mass segment after the July-September quarter, driven by an uptick in rural consumption due to judicious price cuts, localised marketing spending, and increasing direct distribution/village coverage

·         The government’s focus on boosting the rural and farm economy, coupled with a normal monsoon, is also seen positively, leading to higher demand for consumer goods

RETAIL & CONSUMER

·         The demand environment in the discretionary consumption space remains weak due to a delayed wedding season and competitive pressures

·         Companies across the discretionary basket are expanding their networks and reported growth is a function of this expansion

·         In the quick-service restaurant space, most players, except Jubilant FoodWorks and Restaurant Brands Asia, saw a dip in their like-for-like sales, with dine-in trailing delivery-based sales. Recovery is expected to be gradual and more prominent in the latter half of the year

·         In the apparel retail segment, barring Trent, same-store sales growth for other listed players either dropped Y-o-Y or remained in low single digits

·         In the jewellery space, Kalyan Jewellers continues to outperform its peers. While the demand environment is healthy, and there is a revival in footfall following a reduction in Customs duty, execution amidst competitive pressures will be crucial

BANKING

·         Q1FY25 marked a slowdown in earnings growth for banks, with their combined net profit up 17.4 per cent Y-o-Y, growing at the slowest pace in the last four years

·         This slowdown is attributed to a deceleration in loan growth and a rise in deposit costs leading to margin compression

·         Many banks also reported an increase in bad loans and higher provisions on a sequential basis in Q1

·         Banks’ operating expenses, particularly employee costs, grew slower than their revenues, thereby boosting gross margins

·         Operating expenses increased by just 7.4 per cent Y-o-Y in Q1, compared to a 20.2 per cent Y-o-Y growth in total revenues

·         On the downside, banks experienced a hit on net interest margins as interest expenses were up 27.6 per cent Y-o-Y, much faster than their gross interest income

·         Margins and earnings are likely to remain under pressure from faster growth in interest expenses and a sequential rise in bad loans

FINANCE & INSURANCE

·         Non-banking financial companies (NBFCs) lagged in Q1FY25 with a 0.6 per cent Y-o-Y decline in net profit

·         Insurance and asset management companies (AMCs), on the other hand, reported double-digit growth in earnings, albeit on a low base

·         Non-bank lenders suffered from a decline in margins due to higher funding costs and a slowdown in loan growth

·         Insurance and AMCs, however, benefited from a revival in premium or income growth and gains from rising asset prices, resulting in higher margins

·         The combined net profit of NBFCs, insurance companies, and AMCs was up 4.9 per cent Y-o-Y in Q1, slower than the 40.2 per cent Y-o-Y growth seen in the fourth quarter of 2023-24

·         Non-bank lenders also lost market share to commercial banks, raising concerns about their growth momentum

·         The combined gross interest income for finance and insurance companies was up just 8.9 per cent Y-o-Y in Q1FY25, slower than banks’ revenue growth

·         The Street, however, remains bullish on insurance and AMCs but cautious on retail non-bank lenders such as Bajaj Finance

OIL & GAS

·         It was a challenging quarter for oil and gas companies, with a sharp decline in margins and profits across the board, except for GAIL (India)

·         The combined net profit of oil and gas companies was down 35.8 per cent Y-o-Y in Q1FY25, their worst performance in over two years, largely due to a sharp decline in margins from higher crude oil prices and their inability to raise fuel prices

·         Reliance Industries’ (RIL’s) standalone net profit was down 8.8 per cent Y-o-Y, while Ebitda fell 27.5 per cent Y-o-Y in Q1FY25, and net sales were down 20.7 per cent Y-o-Y. The decline in its oil-to-chemical division’s earnings was partially offset by improved performance in its consumer businesses

·         RIL’s consolidated net profit was up 12.6 per cent Y-o-Y, thanks to a relatively better performance by its telecommunications and retail businesses

·         Public sector oil-marketing companies such as IndianOil and Bharat Petroleum reported a sharp decline in net profit due to deteriorating margins and revenue contraction Y-o-Y

·         Oil and Natural Gas Corporation also experienced a decline in margins, leading to a 32.1 per cent Y-o-Y drop in consolidated net profit in Q1FY25

·         Most analysts remain cautious on the sector due to limited volume and revenue growth and margin uncertainty

CAPITAL GOODS & INFRASTRUCTURE

·         Capital goods manufacturers, as well as construction and engineering, procurement, and construction companies, reported double-digit growth in net profit in Q1FY25, thanks to higher margins and revenues. However, Larsen & Toubro’s margin performance in the infrastructure segment remained weak, impacted by orders won during the pandemic when commodity prices were lower

·         The sector’s revenue growth moderated, and the combined sales of capital goods, construction, infrastructure, and defence manufacturers increased by 10.9 per cent Y-o-Y in Q1FY25, growing at the slowest pace in the last nine quarters

·         Companies in the power sector, such as NTPC, Tata Power, and PowerGrid, reported moderation in revenue and profit growth in Q1FY25

·         PowerGrid’s net profit increased by just 3.5 per cent Y-o-Y, while its net sales declined by 0.4 per cent year-on-year in Q1FY25

·         NTPC performed better with low double-digit growth in net sales and net profit, but its margins declined in Q1FY25

·         Tata Power also experienced a hit on margins, with net profit declining Y-o-Y in Q1FY25 despite higher revenues

·         Brokerages remain optimistic about power companies due to gains from higher capital expenditure in thermal and renewable energy projects

METALS & MINING

·         Q1FY25 was a mixed quarter for the metals and mining and cement sectors, with gains for non-ferrous producers from higher metal prices, while others suffered from low price realisations and weak volume growth

·         Metals and mining companies’ combined net profit increased by 14.9 per cent Y-o-Y in Q1FY25, driven by companies such as Vedanta, Hindalco, and NMDC

·         Their combined net sales, however, increased by just 1.4 per cent Y-o-Y in Q1, reflecting a poor demand environment for industrial metals in the economy

·         Despite a marginal improvement in operating margins in Q1, the combined net profit of cement makers decreased by 30.1 per cent Y-o-Y, largely due to poor volume growth

·         Cement companies’ combined net sales were up 1.6 per cent Y-o-Y in Q1FY25, growing at the slowest pace in at least the past five years

·         Brokerages remain bullish on metals and cement producers, anticipating gains from higher capital expenditure, recovery in domestic demand, and higher price realisation