India Inc’s revenue growth is seen to be slowing down sequentially in the first quarter of FY25, weighed down by headwinds such as a deceleration in government spending during the general elections and the onset of monsoon.

According to a report by ICRA, the operating profit margins of the companies are, however, likely to remain stable in the range of 15-18 per cent with raw material costs holding steady, even though the revenue will be muted.

The credit metrics of the corporate sector, in the June quarter, are estimated to remain largely stable with the interest coverage ratio in the range of 4.7-5.0 times, against 4.9 times in the March quarter, the report said.

“Evolution of the global economic scenario and the onset and intensity of the monsoons in India would remain a key monitorable over the near term,” it observed. “Moreover, the concerns of the ongoing geopolitical tensions may adversely impact demand sentiments, especially for export-oriented sectors,” saidKinjal Shah, Senior Vice President & Co-Group Head – Corporate Ratings.

Pause in spending

The slowdown in government expenditure and lacklustre consumption demand, as well as a higher base effect were reasons for the lower earnings growth expected in the current quarter that would have an effect in the first half of the fiscal year as well, according to Madan Sabnavis, Chief Economist, Bank of Baroda.

He pointed out that urban consumption has also slowed due to higher inflation, hitting purchasing power.

Elections to the Parliament dominated the country’s discourse in April and May, and there was a temporary pause in infrastructure activities for a major portion of the current quarter, which would have affected growth. With the rural economy still dependent on a good monsoon for a revival, demand from that segment would remain muted in the quarter and the next as well.

In a report last week Barclays pointed to a slowdown in government capital expenditure in the fourth quarter of FY24 whose results were seen in a slowdown in production of capital intensive and infrastructure related goods. This would have an impact on the toplines and earnings of companies in related sectors.

Leading brokerage firms have pegged a lower earnings growth for the Nifty in FY25 which can be taken as representative for India Inc. Kotak Institutional Equities sees earnings growth in FY25 at 9.9 per cent compared to 20 per cent last year. Prabhudas Lilladher expected Nifty earnings growth to drop more than half in the current fiscal year. The growth will be largely driven by capital goods, metals, cement, IT and telecom. Oil and gas profits are seen declining. 

Sabnavis however said that with a good monsoon forecast and expectations of a decent kharif crop demand would return in the second half of the year. By that time government expenditure would also have picked up.

The fourth quarter of FY24 saw a 5 per cent annual revenue growth and 6.3 per cent sequential growth in corporate revenues, supported by healthy demand in consumer-oriented sectors such as hotels, autos, airlines, and fast-moving consumer goods. The construction and power sectors also saw strong demand.

There were some sectors, such as fertilisers and chemicals, that saw a demand slowdown, and the revenue growth was restricted by lower realisations.

ICRA said its analysis of the performance of 558 listed companies (excluding financial sector entities) in the March quarter revealed improved operating profit margin, increasing by 92 bps to 17.2 per cent year-on-year. This was primarily aided by the softening in commodity prices and benefits of operating leverage. However, on a sequential basis, the OPM (operating profit margin) remained flat.

India Inc’s OPM is yet to revive to its historic highs of 18-19 per cent seen in FY22, it pointed out.  

Stable debt

The corporate sector saw a marginal increase in debt levels in FY24, with increases in sectors such as gems and jewellery, construction, sugar, and chemicals, but credit metrics were stable. The improvement in earnings, driven by the recovery in demand across sectors, prevented any sharp increase in the total debt to OPBITDA (operating profit before interest, tax, depreciation, and amortisation) levels of India Inc in FY24, ICRA said.

The indebtedness trends have been divergent across sectors, with five sectors accounting for 69-70 per cent of ICRA’s sample set companies’ debt. Capacity expansion in ferrous and non-ferrous metals, as well as the power sector, drove debt addition last quarter.