India Inc’s weakest earnings in 17 quarters: What retail investors must do

India’s Q2 FY25 corporate earnings reveal a concerning narrative for retail investors. Aggregate earnings for listed companies have dropped 8 per cent year over year, marking the weakest performance in 17 quarters.

Excluding the banking, financial services, and insurance (BFSI) sector, whose earnings have been relatively better, sectors such as cement (-41 per cent), chemicals (-23 per cent), and consumer goods (+3 per cent) highlight either contraction or stagnation, emphasising that India’s growth narrative is struggling to translate into corporate profitability.

Key contributors to the decline included metals, whose earnings dropped 28 per cent year over year, reflecting subdued demand and pricing pressures; oil and gas, with a staggering 58 per cent decline driven by operational inefficiencies in refining and subdued global margins; and cement, with earnings contracting by 41 per cent because of declining realisations and rising costs.

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“The earnings spread has deteriorated, with only a few either meeting or exceeding profit expectations. Consumption has emerged as a weak spot,” Motilal Oswal said in a note to investors.

Macroeconomic headwinds

The earnings slump can be attributed to macroeconomic, sectoral, and global dynamics. The downturn in metals and energy was unsurprising, given the ongoing weakness in global demand due to geopolitical disruptions and high inflation.

These sectors’ performance is highly correlated with global economic trends, and in 2024, the slowdown in major economies such as China and Europe played a significant role. “Persistent inflation has affected consumer spending patterns, reducing demand for goods and services. Companies are facing higher input costs, which they struggle to pass on to consumers without risking further declines in sales,” an analyst said.

Domestic consumption trends have yet to offer much solace. Urban demand remained tepid, with only a modest uplift from rural markets. Rising interest rates and inflation weighed on consumer sentiment, constraining discretionary spending.

Weak operational metrics in banking, asset quality issues in NBFCs, and pressures from e-commerce on traditional retail further exacerbated sector-specific headwinds.

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Corporate earnings are more than just a statistic for retail investors—they shape portfolio returns, influence market sentiment, and inform broader investment strategies. The decline in earnings carries several implications:

With corporate earnings under pressure, the valuation of stocks becomes a crucial concern. Earnings downgrade over the past six months—down 7 per cent—raise questions about whether current valuations adequately reflect these pressures. Retail investors must tread carefully, avoiding sectors where valuations appear stretched relative to growth prospects. Analysts have noted that the current earnings season reflects broader economic uncertainties. For instance, a financial analyst commented, “Companies are navigating through a complex landscape where both external economic factors and internal operational challenges are at play,” one analyst said.

BFSI in a sweet spot

The performance of sectors such as technology and BFSI offers a silver lining. These industries are poised for growth thanks to structural tailwinds like digitisation and financial inclusion. Conversely, sectors tied to global commodities and cyclical demand face a longer road to recovery. For retail investors, this divergence underscores the need for sectoral rotation—allocating resources towards industries with favourable earnings momentum while reducing exposure to laggards.

Earnings reductions impact companies’ ability to maintain dividend payouts, a key consideration for income-focused retail investors. Sectors such as oil and gas, traditionally known for high dividend yields, may need help in sustaining payouts amid profit declines. Lower-than-expected corporate earnings often dampen overall market sentiment. Retail investors must navigate this landscape clearly, avoiding panic-induced decisions driven by short-term volatility.

In light of the earnings slowdown, brokerage firms have said retail investors should adopt a pragmatic and diversified approach. In an environment of earnings downgrades, companies with robust balance sheets, strong cash flows, and high ROE (return on equity) will likely outperform. Large-cap stocks may offer relative safety, particularly in resilient sectors such as technology and BFSI.

Healthcare and utilities, which showed stable or improving profitability, offer defensive investment opportunities. These sectors are less sensitive to economic cycles and provide a hedge during periods of uncertainty.

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Patience is the key

Given the global and domestic factors influencing earnings, retail investors should monitor key macro indicators such as inflation trends, interest rate movements, and commodity prices. These will provide early signals for potential sectoral recoveries or risks.

Adopting SIPs (systematic investment plans), which allow investors to average out costs and benefit from long-term compounding, can mitigate volatility in earnings and markets.

Despite the challenges, some rays of hope exist. The festive season, anticipated moderation in interest rates, and stabilisation in commodity prices fill earnings in the coming quarters. Additionally, infrastructure spending and rural development initiatives may support demand recovery in critical sectors such as cement and consumer durables.

However, retail investors must exercise patience. Corporate earnings often lag economic recoveries, and a sustained uptrend will require consistent policy support and favourable macro conditions.

For retail participants, the focus should shift from short-term gains to building a resilient portfolio that can weather the storms of fluctuating earnings cycles.