Indian Companies Experience Slower Profit Growth in FY25 Amid Weak Demand

Profit Growth Declines for Indian Firms

The financial year 2024-25 witnessed a slowdown in profit growth for Indian corporations, attributed to soft demand, lackluster top-line performance, and reduced capital expenditure, according to a report from Nuvama Research.

The report highlights that the total profit after tax (PAT) for firms listed in the BSE500 index (excluding Oil Marketing Companies) saw a mere 10% year-on-year increase in Q4FY25, and a 9% rise for the entire FY25, a significant drop from the 21% growth recorded in FY24.

It was noted that the PAT growth for BSE500 (excluding OMCs) in Q4FY25 reached 10% YoY, an improvement from 8% in Q3FY25, despite a weak top line, driven by cost rationalization and a low base effect.

Sector Performance and Capital Expenditure Trends

In Q4FY25, profits increased by 10% compared to the same quarter last year, slightly surpassing the 8% growth observed in Q3FY25. This growth was primarily achieved through cost-cutting strategies, including a modest 5% rise in wage expenses, alongside the advantages of a low base.

While sectors such as metals, telecom, chemicals, and cement reported improved profits, areas like public sector banks and industrials, which had previously driven growth in FY24, experienced a decline.

Future Outlook for Indian Corporations

The report also indicated a notable decline in capital expenditure growth. Despite robust operating cash flows, the capital expenditure for Indian companies grew only 6% in the latter half of FY25, a stark contrast to the 20% growth seen in FY23 and FY24.

This cautious approach may be viewed positively from a governance and valuation perspective, but it also signals weak demand conditions that could jeopardize future earnings.

Mid and Small-Cap Companies Show Signs of Recovery

Mid- and small-cap (SMID) companies, which lagged behind large-cap firms for most of FY25, exhibited some profit recovery in Q4FY25, aided by cost management and a low base. However, their overall performance for the year was more in line with large caps, after having outperformed them in FY24.

The report characterized FY25 as a "year of reconciliation," where various trends from FY24 moderated. Profits, revenues, and capital expenditures all grew by approximately 8-10%, reverting to pre-COVID patterns. The outlook for FY26, however, remains uncertain, with earnings estimates for FY26 being downgraded by 2%, and one-year forward earnings per share (EPS) projections stagnating, mirroring trends observed prior to the pandemic.

Nuvama indicated that the market currently anticipates a 15% earnings CAGR for FY25-27, but highlighted potential risks stemming from weak demand, slowing credit growth, corporate cost-cutting measures, and uncertain export conditions. In conclusion, FY25 marked a period of slowdown for Indian corporations, with all key financial indicators aligning with a subdued top-line performance, and the outlook for FY26 remains cautious.