India Inc. Delivers Strong Q2 Growth, Surpassing Expectations Amid Tariff and GST Concerns

India Inc. has demonstrated resilience in the second quarter (Q2) of FY25, reporting an aggregate revenue growth of 8.7% and a significant 15.7% increase in net profit. This performance outshines the first quarter's more modest 6.5% revenue growth and 10% profit increase, offering a positive outlook despite earlier concerns. The feared impacts of increased US tariffs and consumers holding back purchases in anticipation of Goods and Services Tax (GST) rate cuts did not materialize as severely as expected.

Sectors like textiles, gems and jewellery, leather, and chemicals, which are more directly exposed to US tariffs, did not show significant negative impacts. This could be due to exporters front-loading sales, continued sourcing by US buyers, or diversification to other export markets. Automobile companies experienced muted domestic demand before the GST implementation but compensated with increased exports, thereby securing revenue and profit growth. Consumer durables firms managed the pre-GST period through discounts, while Fast-Moving Consumer Goods (FMCG) companies reported steady, low double-digit growth.

Real estate and construction sectors witnessed a revival in revenue and business activity. The strong performance in steel, cement, and capital goods segments signals increased capital expenditure by both the government and households. Information Technology (IT) companies saw a marginal sequential growth recovery, partly aided by a weaker currency.

However, the banking sector faced challenges. Net interest margins were compressed due to the transmission of recent repo rate cuts to lending rates, and credit offtake slowed, leading to a 0.1% contraction in net profit for listed banks. In contrast, Non-Banking Financial Companies (NBFCs) had a better quarter, with sustained demand for credit from retail and Micro, Small and Medium Enterprises (MSME) borrowers.

Looking ahead, consumer-oriented sectors are expected to benefit from lower GST rates and festive season purchases in Q3 and Q4. However, global uncertainties and the banking sector's sluggishness may continue to pose headwinds for aggregate growth, particularly for IT exporters.

Impact:

This news is significant for investors as it indicates the underlying strength of the Indian corporate sector and its ability to navigate economic headwinds. While aggregate numbers are positive, sector-specific performance reveals nuances that investors need to consider for stock selection. The positive outlook for consumer spending in the coming quarters is a key takeaway. Overall impact on the Indian stock market is moderately positive, encouraging cautious optimism. Rating: 7/10

Terms:

GST (Goods and Services Tax): A comprehensive indirect tax levied on the supply of goods and services in India.

US Tariffs: Taxes imposed by the United States on imported goods, intended to protect domestic industries or for political reasons.

Revenue: The income generated from normal business operations, typically from the sale of goods and services.

Net Profit: The profit remaining after all expenses, taxes, and interest have been deducted from total revenue.

Operating Margins: A measure of profitability that represents the percentage of revenue that exceeds the cost of goods sold and operating expenses.

FY25/FY26: Fiscal Year 2025 / Fiscal Year 2026, referring to the 12-month financial accounting period.

FMCG (Fast-Moving Consumer Goods): Everyday household products that are sold quickly and at relatively low cost, such as packaged foods, toiletries, and beverages.

NBFC (Non-Banking Financial Company): A financial institution that provides banking-like services but does not hold a banking license.

MSME (Micro, Small and Medium Enterprises): Businesses categorized based on their investment in plant and machinery and annual turnover, crucial for employment and economic growth.

Repo Rate: The rate at which the central bank (Reserve Bank of India) lends money to commercial banks.

Net Interest Margins (NIMs): The difference between the interest income generated by banks or financial institutions and the amount of interest they pay out to their lenders (the cost of funds), expressed as a percentage of interest-earning assets.

Credit Offtake: The amount of credit or loans disbursed by banks to borrowers.

Capital Goods: Tangible assets used by a company to produce goods or services, such as machinery and equipment.