Q2FY25 Earnings On Slippery Ground

The current market sentiment is divided, with some viewing the ongoing downturn as a necessary correction, others as a bursting bubble, and while some investors are getting into a panic state and selling their stakes, others are considering it a potential buying opportunity to capitalise on the dip. It is intriguing to consider whether Q2FY25 earnings can uplift the market, justify elevated valuations, and restore investor confidence amidst uncertain conditions. Mandar Wagh analyses the results reported in the IT and banking sectors while highlighting expectations from other sectors and observed trends 

These days, it has become a common experience for domestic investors to open their equity portfolios only to find most of their holdings in the red. With the broader market, particularly Mid-Caps and Small-Caps, hitting fresh lows with each trading session, the focus has shifted to the relentless sell-off by foreign institutional investors (FIIs) in Indian equities. Despite this pressure, domestic institutional investors (DIIs) have played a critical role in stabilising the market. DIIs have recorded significant inflows of around `430,000 crore so far this year, substantially outperforming their performance over the last decade. 

Although DIIs are supporting the market, FII investments in the equity market play a pivotal role in driving liquidity and price stability, as they bring in sizeable capital inflows that can stimulate trading activity and investor interest. Their active participation often shapes market trends. In 2024, FIIs have sold over ₹225,000 crore worth of equities so far, with October alone contributing more than ₹1 lakh crore to this outflow. At this pace, if the sell-off persists, the total outflow figure could surpass the 2022 record of ₹278,000 crore – the highest in the past 15 years. 

The major reasons behind this FII sell-off include escalating geopolitical tensions in the Middle East and a shift in capital flows toward China, driven by its stimulus measures that have attracted global investors. Another key factor is the overvaluation in Indian markets, prompting FIIs to focus on China, where valuations are more attractive. China’s price-toearning (PE) ratio is pegged at around 14 times compared to India’s estimated 23 times. Additionally, the Buffett Indicator, which measures stock market valuation relative to GDP, is also flashing red for India. 

Amidst these challenges, one beacon of hope for Indian investors is the Q2 performance of India Inc. Strong results have the potential to lift the market, justify high valuations, and help regain investor confidence. One needs to therefore analyse the performances of the various sectors also and see how they have contributed to both overall economic gain and toward increasing their stakeholders’ wealth. Let’s take a closer look at the Q2 performances of companies that have reported their results so far to gain a clearer understanding of the near-term outlook. 

Information Technology
Overall, the Q2FY25 earnings of the Indian IT industry exhibited moderate growth, as anticipated by experts, fuelled by new deal wins and improved client sentiment. Investments in artificial intelligence (AI) and strong performance in North America contributed significantly to this momentum. As of October 25, 2024, the domestic IT industry collectively reported a 6 per cent year-on-year revenue growth and a notable 11 per cent surge in net profit, with over 90 per cent of the companies achieving positive profit growth. 

While industry leaders experienced steady or range-bound revenue growth, Tier 2 companies outperformed, achieving stronger revenue growth through specialised services. The IT industry is cautiously navigating a path toward gradual recovery, with Tier 2 companies emerging as pivotal growth drivers. Top performers in the small-cap segment included MosChip Technologies, Mastek, Netweb Technologies India and Newgen Software Technologies, each reporting stellar performance. 

The domestic earnings season kicked off with Tata Consultancy Services (TCS), the largest IT solutions provider by market capitalisation, reporting lacklustre results that underscored weak operational performance, shrinking margins and minimal signs of recovery. The company’s consolidated net profit for Q2FY25 declined by over 1 per cent quarter-on-quarter, missing street estimates, while its revenue rose by 2.6 per cent to ₹64,259 crore, also falling short of projections. 

On a year-on-year basis, the company reported an 8 per cent revenue growth and a 5 per cent increase in net profit, despite notable growth in the energy, resources, utilities and manufacturing segments. The management noted that the cautious trends observed in previous quarters persisted this quarter, with the company’s largest vertical, BFSI, showing marginal recovery. India’s second-largest software exporter, Infosys, reported a modest 5 per cent growth in both revenue and consolidated net profit, with net profit reaching ₹6,506 crore in the second quarter. 

For the second consecutive quarter, the company raised its FY24-25 revenue guidance, now projecting growth of 3.75 to 4.50 per cent for the fiscal year, up from the previous 3-4 per cent range provided during the last quarter. HCL Technologies has emerged as a top pick among Large-Cap IT companies by brokerages, as it exceeded street estimates, reporting an 11 per cent year-on-year growth in consolidated net profit to ₹4,235 crore for the September quarter, with revenue surging by 8.2 per cent, the highest among industry leaders. 

The company also raised the lower band of its revenue growth guidance to 3.5-5 per cent year-on-year in constant currency (CC), compared to its previous guidance of 3-5 per cent in the first quarter. Tech Mahindra reported a more than two-fold increase in its consolidated net profit, reaching ₹1,250 crore for the July-September quarter. The sudden surge in performance can be attributed to a one-time income of ₹450 crore generated from asset sales. 

Excluding this special income, the year-on-year net profit growth still stands at 56 per cent, attributed to a lower base, as well as growth in European and other non-American markets, along with a strong performance in the BFSI segment. Following nearly four to six quarters of hiring slowdowns, as clients scaled back spending to optimise costs, the IT industry is now experiencing a revival. Major IT companies have announced renewed campus hiring plans, driven by demand for specialised skills. 

The domestic IT industry will need several more quarters to realise significant growth, as experts anticipate an increase in US technology spending in H2CY25. This expected rise is likely to be bolstered by potential interest rate cuts from the Federal Reserve, contingent upon macroeconomic stability. Therefore, despite some momentum in the BFSI, healthcare and manufacturing sectors, the delayed ramp-up of large deals is expected to shift the growth narrative to the second half of the financial year. 

Banks and Financial Services
In Q2FY25, the banking sector, which had previously been a leader in stellar performances, experienced a slight setback, presenting a mixed bag of results. On an aggregate basis, banks reported a 13 per cent top-line growth and an 11 per cent rise in net profit year-on-year – figures that are significantly lower than those reported in the earlier quarters. In contrast to the previous trend of consistent profit growth across the board, five banks reported notable declines in profitability this quarter. 

The shares of IndusInd Bank suffered a sharp decline, plummeting nearly 20 per cent in a single trading session following a 39 per cent year-on-year drop in net profit, driven by softer loan growth, deteriorating asset quality, and reduced net interest margins. Additionally, RBL Bank, Ujjivan Small Finance Bank and Jana Small Finance Bank also recorded substantial double-digit year-on-year declines in net profit. Among the top performers, AU Small Finance Bank led in yearon-year revenue growth with an impressive 55 per cent rise. 

Meanwhile, UCO Bank and Central Bank of India posted strong bottom-line growth, each achieving a 50 per cent surge in net profit. Be sure to read our special feature on the banking sector’s performance and future outlook in this issue, which offers an in-depth analysis to help you understand recent trends and evaluate the banks’ performance comprehensively. The banking sector already has witnessed significant growth and is expected to continue this trajectory, driven by the government’s emphasis on financial inclusion, ongoing digitisation efforts, heightened credit demand, expansions in loan portfolios, and improved asset quality. 

While there are concerns about a ‘higher for longer’ interest rate environment, any potential interest rate cuts by the Reserve Bank of India (RBI) in the near future may have a dual effect: they could reduce the interest income of banks and nonbanking financial companies (NBFCs) while simultaneously boosting credit demand. Given the challenges ahead, banks remain cautious about wholesale loan spreads, which are under pressure, and are also aware of the stress in the unsecured lending segment. Many private banks reported significant increases in non-performing assets (NPAs) linked to unsecured loans, including credit cards. 

Axis Bank, Kotak Mahindra Bank and RBL Bank, which have disclosed their Q2 earnings, highlighted rising slippages in these areas and indicated a cautious stance regarding their loan portfolios.







Furthermore, a spike in US Treasury yields, which has spilled over to Indian bond yields, has negatively affected sentiment across the banking sector. This rise in bond yields is concerning because it erodes the market value of the bond portfolios held by the banks, further complicating their financial outlook.