Q1FY25: Earnings & Economic Outlook

India’s economic resilience has outperformed other economies, as evidenced by much controlled inflation, revised upward GDP targets, record reserves, strong tax collections and fiscal discipline. Meanwhile, the markets continue to hit record highs, leading investors to question whether a market correction is imminent or if robust earnings and future growth prospects will justify the elevated valuations. Mandar Wagh examines Q1FY25 financial performances and key developments to provide insights into the future direction of the market 

India’s divergent growth trajectory compared to other emerging markets and the world’s major economies is now a well-known phenomenon. FY24 has truly been a standout year for the Indian stock market! The BSE Sensex and Nifty 50 have delivered impressive returns of around 25-28 per cent over the period. The overarching investor optimism was evident across both the broader markets and on the sectoral fronts. Consequently, India’s market capitalisation has soared to USD 5 trillion, making it the fifth-largest in the world. The market adeptly managed the turmoil triggered by fears of a potential market bubble burst, swiftly recovering and rebounding with resilience. 

Although the Indian equity valuations remain relatively high, experts believe this alone is unlikely to derail the bull market, provided they are supported by robust growth prospects in a global environment of subdued growth. Therefore, all eyes are on the ongoing Q1FY25 performances of the Indian companies, as these will provide key insights for investors in forecasting both the market’s future outlook and individual company prospects. Let’s examine the key macroeconomic factors that will significantly influence the economic environment and investment decisions, and then analyse sectoral and company-specific performances to gain a clearer understanding of the current developments. 

Comprehensive Economic Outlook 

Inflation and Interest Rates - At the outset of FY24, the Reserve Bank of India (RBI) was focused on bringing down high inflation levels within its tolerance band of 2-6 per cent. To achieve this, the RBI adopted a cautious approach to interest rates, maintaining the repo rate at 6.5 per cent. This strategy aimed to strike a balance between fostering economic growth and controlling inflation, thus supporting consumer spending and business investments while ensuring price stability. 

Throughout FY24, inflation rates moderated and fell within the RBI’s comfort zone, reflecting the effectiveness of the monetary policy measures. For fiscal 2024, inflation stood at 5.4 per cent, aligning closely with the central bank’s forecast. Looking ahead, the RBI has set an inflation target of 4.5 per cent for fiscal 2025, maintaining a steady approach towards price stability. 

GDP Growth - India’s GDP growth for FY24 has been impressively robust, with projections ranging between 6.5 per cent and 7 per cent. The Asian Development Bank’s (ADB) July report highlighted that India’s services sector continued its strong expansion into Q4FY24, with the forward-looking services PMI significantly exceeding its long-term average. This growth trajectory is bolstered by robust domestic consumption, increased government infrastructure spending, and resurgence in private investment. 

Looking ahead, the ADB has forecasted a growth rate of 7 per cent for FY25 and 7.2 per cent for FY26. Similarly, the International Monetary Fund (IMF) has recently revised its FY25 GDP growth estimate for India upward from 6.8 per cent to 7 per cent. Morgan Stanley has also conveyed optimism about India’s economic growth prospects, maintaining its GDP growth rate projections within the expected range. 

Manufacturing Activity - India’s industrial growth has significantly been driven by several key government initiatives, including Make in India, Production Linked Incentive (PLI) scheme, the emphasis on self-reliance, industrial corridors and smart cities, and infrastructure development. According to an S & P Global survey, propelled by increased new orders, rising inventories and job creation, India’s manufacturing activity surged to a 16-year high of 59.1 in March. According to data from the Ministry of Statistics and Programme Implementation, India’s Index of Industrial Production (IIP) surged 5.9 per cent year-on-year in May, up from 5 per cent in April. 

Record Reserves, Tax Collections and Fiscal Discipline - India’s foreign exchange reserves have maintained a strong upward trajectory. According to the latest data from the RBI, the country’s foreign exchange (forex) reserves surged by USD 5.16 billion, reaching an all-time high of USD 657.16 billion. This robust reserve position offers a vital buffer against external economic shocks and bolsters the stability of the Indian rupee. In May 2024, the RBI announced its approval for the highest-ever surplus transfer of ₹2.11 lakh crore to the central government. 

The government is expected to achieve a lower fiscal deficit and higher growth than initially projected in the interim budget, maintaining its focus on fiscal prudence. The fiscal deficit for the year ending in March 2025 could be 5 per cent of GDP or even lower, compared to the 5.1 per cent target set before the national elections. Additionally, both direct and indirect tax collections have remained robust in the first quarter of the current fiscal year. Net direct tax collections grew by 19.54 per cent in FY25, reaching ₹5.74 lakh crore while gross collections saw an even higher increase of 23.24 per cent, amounting to ₹6.45 lakh crore. 

Industry Performance Highlights 

Information Technology

The Indian IT services industry takes centre-stage as the April-June quarterly earnings season kicks off with the release of IT sector results. In Q1FY25, till July 22, the IT industry achieved a 4 per cent year-on-year growth in aggregate revenue and a 9 per cent rise in net profit, with most companies reporting positive results. While a majority of the leading industry players recorded single-digit growth in both top-line and bottom-line, Persistent Systems and Newgen Software Technologies distinguished themselves with impressive double-digit growth. 

To date, Tata Technologies, LTI Mindtree and Tata Elxsi are the only leading companies that have reported a year-on-year decline in net profit. Analysts anticipate that companies will not alter their guidance or commentary regarding FY25 revenue growth. Instead, discussions were expected to focus on a potential increase in demand in the second half of FY25, suggesting a more stable spending environment for FY26. In a surprising turn of events, Infosys not only reported better-thanexpected numbers but also raised its revenue growth guidance to 3-4 per cent for the current fiscal year, up from the earlier 1-3 per cent, giving investors an additional reason to celebrate. 

Global brokerage firm Nomura is optimistic about the Indian IT industry, forecasting that the April-June quarter will mark a turnaround in its sluggish revenue growth. The firm expects to see a rebound in the subsequent quarters, with margins gradually improving as large deals ramp up and hiring rises in the latter half of FY25. One positive news report that has made headlines is Wipro’s announcement of plans to hire 10,000 to 12,000 people, including both on-campus and off-campus hires, for the financial year 2025. 

Recent deal wins in the banking, financial services and insurance (BFSI) and communications sectors are projected to gain momentum this quarter, potentially improving growth rates for these segments. Brokerage houses report that while the period of severe discretionary spending cuts in the industry seems to be coming to an end, there is still limited evidence of recovery in the core business activities. With expectations that the Federal Reserve may consider interest rate cuts this fiscal year, the IT industry is likely to receive a much-needed boost. 

Banks and Financial Services 

The Indian banking industry has emerged as a leading success story, especially following the corona virus pandemic. The stellar growth has been driven by favorable hikes in interest rates for banks, heightened credit demand and expansions in loan portfolios. In the last quarter, banks continued to lead in terms of sectoral growth with no reports of revenue decline. In light of the latest results from the banking industry, all banks have reported significant double digit growth in both total income and net profit. 

In Q1FY25, the industry experienced a 33 per cent year-on-year increase in aggregate revenue and a 41 per cent surge in net profit largely due to better performance of HDFC Bank. Nonetheless, it should be taken with a pinch of salt since HDFC Bank merged with parent Housing Development Finance Corporation in July 2023, and hence its results are not comparable on a year-over-year basis. HDFC Bank saw a 2.1 per cent sequential decline in net profit. Meanwhile, Central Bank of India and Kotak Mahindra Bank led in net profit growth (due to an exceptional item), achieving impressive year-on-year growth of 90 per cent and 80 per cent, respectively. 

Foreign brokerage firm CLSA has highlighted that Indian banks are now on much stronger footing, supported by cleaner balance-sheets, robust profits and attractive valuations. CLSA also noted that the return on equity for the Indian banking sector is the highest since FY 2011. Additionally, the net NPL or net worth ratio has dropped to decade lows, thanks to improved asset quality, strengthened provision buffers and a better capital position. 

Capital market companies have also performed exceptionally well in Q1, with no instances of negative performance reported so far. Industry majors such as Angel One, Anand Rathi Wealth and Choice International posted stellar double-digit growth and have maintained an optimistic outlook for future growth prospects. Considering the performance of financial services companies, including NBFCs, industry leader Jio Financial Services fell short of market expectations. The company saw net sales rise marginally by about 1 per cent, accompanied by a 5.81 per cent year-on-year decline in net profit. Poonawalla Fincorp and Credit Access Grameen delivered impressive double-digit growth in both revenue and net profit. 

Key Developments across Industries
With the majority of companies’ financial results yet to be declared, we will now focus on important developments that will help us predict the future trajectory of the market and multiple sectors. Reliance Industries, which holds the highest weightage in Indian benchmarks, missed street estimates and reported a 5.5 per cent year-on-year decline in consolidated profit for the April-June period. The company attributed this decline to weakness in its oil-to-chemicals (O2C) division and higher depreciation costs, which offset gains in its consumer and oil and gas upstream businesses. 

Automotive

The automobile industry has experienced robust growth over the past few years but has faced turbulence recently, with the scorching heat wave impacting automobile sales. Although the total electric vehicle (EV) registrations in India reached significant milestones in FY24, the overall penetration rate remains quite low. Additionally, the electric vehicle sector has seen subsidy cuts. On a positive note, the FAME II (Faster Adoption and Manufacturing of Electric Vehicles) policy received a four-month extension, set to expire this month. 

As part of the government’s green and clean mobility strategy outlined in the interim budget, experts anticipate policy upgrades to support green mobility and EV growth. While budgetary announcements for the industry will shape its future outlook, there are current concerns due to diminishing pent-up demand and a high base. It will also be intriguing to observe investors’ reactions to Hyundai’s plan to dilute a substantial stake in its Indian unit, as well as the level of investor interest garnered by the upcoming Ola Electric IPO. 

Power

There has been a pronounced government focus on power, renewable energy, and notably, solar energy. In the interim budget, the finance minister announced the PM Surya Ghar Yojana, with an allocation of ₹75,021 crore. This scheme aims to provide solar power to 10 million households and create 17 lakh direct jobs across the solar value chain. The government’s efforts are directed towards ensuring last-mile connectivity and providing electricity access to all unconnected households in both rural and urban areas. 

Additionally, electricity demand growth has remained robust in the first quarter of 2025 due to solid economic activity, intense heat waves and continued electrification. Analysts predict the continuation of strong financial performance by power companies, bolstered by budgetary support for the industry. The data centre market is poised for substantial growth, driven by rapid digital transformation, artificial intelligence (AI) solutions and supportive government policies. Data centres, with their heavy use of electricity, are significantly contributing to the increased demand for power. 

Agriculture and FMCG

Food inflation surged to 9.4 per cent year-on-year in June, the highest in six months. Rising food inflation underscores the vulnerability of the Indian economy to price fluctuations, driven by weather conditions, agricultural productivity and supply chain disruptions. The March quarter (Q4FY24) experienced low reservoir levels and heat waves, affecting the overall demand. However, the agriculture industry is expected to rebound amid forecasts for an above-normal monsoon, with strong investment demand led by public investment. 

Policymakers have concentrated on farmers and inclusive development to address economic and social challenges. This focus has led to new announcements and subsidies designed to offer relief to the agricultural sector and foster overall development. The recent Union Budget announcements, with a substantial allocation of ₹1.52 lakh crore for agriculture and allied sectors, position the sector for remarkable growth. It outlines initiatives focusing on sustainable practices, digital infrastructure, and increased production. 

Additionally, a comprehensive review of agricultural research will be undertaken to boost productivity and develop climateresilient crop varieties, with 109 new high-yielding, climateresilient varieties set to be introduced. The Budget also proposes the creation of large-scale vegetable production clusters near major consumption centres to improve the supply chain. 

Additionally, optimistic management commentary from companies on the FY25 demand outlook, fuelled by anticipated rural recovery, has improved the prospects for the FMCG industry. 

Pharmaceuticals

Pharmaceutical and healthcare companies are experiencing consistent and robust growth due to the essential nature of healthcare, which ensures steady 

demand regardless of economic conditions. Technological advancements including artificial intelligence, machine learning, digital therapeutics, nanotechnology, telecare and bioprinting are revolutionising the pharmaceutical and healthcare industries. These innovations are driving the sector to new heights, enabling more efficient, precise and accessible healthcare solutions. The US healthcare system has been grappling with a critical issue: a surge in drug shortages. 

Stricter audits have uncovered quality control lapses among companies that heavily supply the US market. Shortages of raw materials, coupled with business decisions to discontinue less profitable drugs, particularly older generics, have compounded the problem. Historically, drug shortages have often translated to price hikes, as limited supply drives up demand, giving pharmaceutical companies an opportunity to raise prices for scarce medications. Given the substantial US dependence on medication and intermediate supplies from India, domestic manufacturers and suppliers are well-positioned to leverage this situation. 

Although there were no specific announcements in the Union Budget for the pharmaceuticals industry, the budget introduced measures to power innovation, research, and development through the Anusandhan National Research Fund. This fund, with a substantial financing pool of ₹1 lakh crore, aims to support basic research and prototype development. By spurring private sector-driven research and innovation on a commercial scale, it will significantly benefit the highly research-driven drug and pharmaceutical industry. 

Railway, Defence and Energy 
Railway, defence and energy sectors, particularly green and renewable energy stocks, have experienced unprecedented rallies driven by robust government support, significant budgetary allocations, and a strong focus on the ‘Make in India’ policy. Despite many stocks in these sectors being potentially overvalued and facing the risk of correction, the strong financial performance of companies and budgetary support may help sustain their upward momentum. In the interim budget, the finance minister announced an 11.1 per cent increase in capital expenditure (capex) for the fiscal year 2024-25, with ₹252,200 crore allocated to the railways. 

The government also revealed a substantial allocation of ₹6.21 lakh crore for the Ministry of Defence, aimed at enhancing self-reliance and boosting exports. This provides an opportunity to strike a balance between boosting consumption and maintaining robust capital expenditure in the upcoming budget, particularly given the RBI’s record-high surplus transfer of ₹2.11 lakh crore to the central government. Surprisingly, the government proposed no change to the capital expenditure target, maintaining it at ₹11.11 lakh crore for this fiscal year as announced in the interim budget in February. There were no new developments regarding the railway and defence sectors,leading to heavy selling pressures on stocks within these sectors on the budget day. 

Click to download PDF  - Quarterly Results Performance 

Conclusion
The recent budget has delivered positive surprises on fiscal consolidation but has been less favourable regarding capital gains. It maintains a steady focus on infrastructure spending and supporting the rural/agricultural economy. Key highlights include a strong emphasis on employment generation in the formal sector, especially, manufacturing, and promoting farm prosperity, both crucial for boosting the economy's long-term growth potential. Despite higher budgeted revenues, the focus on roads, railways, and defence sectors continues, though without significant increases from the interim budget. The reinforced commitment to affordable housing, urban infrastructure, and the MSME ecosystem is expected to drive long-term growth. 

Even though the market experienced a sharp decline on Budget Day, it swiftly erased losses, regaining investors' confidence. As stocks correct and investment opportunities emerge, investors are eagerly waiting to enter the market. Therefore, high valuations alone are unlikely to derail the bull market, as long as they are supported by robust growth prospects. In the midst of the ongoing quarter results season, most companies have reported strong financial performances for Q1FY25, showcasing a year-on-year aggregate revenue growth of 10 per cent and a net profit surge of 20 per cent. As additional companies release their results, we will gain a clearer understanding of the overall Q1FY25 performance, market reactions, and future outlook.