Muted Q1 earnings point to weakening micro: Is the easy money phase over?

Time of India

4 days ago

We are now exactly at the halfway mark of the
earnings
season. Among BSE 500 companies, nearly 50% have declared their results for the June quarter. So far, the earnings trend has been underwhelming — far from anything to write home about.
Of course, no one expected blockbuster results this quarter. Even on that muted backdrop, the reported numbers have largely disappointed. Given the election-related disruptions in the base quarter last year, many had expected a natural tailwind from the low base effect to support growth this quarter.
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Instead, we're seeing several companies struggle to post even modest growth. This implies that the current softness may not be a one-off. If it's not just a passing blip, are we staring at a deeper growth challenge for the economy in the medium term?
To better understand the underlying trends, it's useful to look at key takeaways from the management commentaries of some prominent companies that have reported earnings so far.
Let's start with banking
The surprise here isn't muted
credit growth
— that has been subdued for a few quarters now. There was no respite from that trend this quarter either, despite a recovery in overall sentiment. In fact, credit growth has fallen further over the past three months.
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From hovering around mid-teen levels in Q4 FY24, credit growth has sharply declined to single digits in this quarter, after staying in the low teens for the past three quarters. However, the bigger negative surprise came from commentary around the unsecured segment — particularly from the management of leading NBFCs and banks.
Managements have raised red flags over the unsecured loan book in MSME and business loan segments. They are pointing to over-leveraged customers (loans from multiple banks), which could hit credit quality and severely impact growth in the coming months. This signals growing stress in the MSME segment, which could significantly constrain growth if the pressure continues.
Deteriorating asset quality and rising slippages in MSME retail loans across banks support this concern. Combined with continued stress in the microfinance segment and a general credit slowdown, the prospects of a sharp economic rebound look dim.
For banks, pressure on Net Interest Margins (NIMs) couldn't have come at a worse time. With successive rate cuts, lending rates have declined, while deposit rates lag behind — squeezing NIMs in the short term.
This pressure is emerging just when growth is scarce and credit costs are rising (due to higher provisions), severely impacting profitability for many banks. Not to forget, banking stocks were the consensus buy at the beginning of the quarter — seen as undervalued plays amid the market's sharp recovery from March lows. Unfortunately, earnings told a different story. The wait for a much-anticipated rerating in banking stocks only gets longer.
Circling back to asset quality in retail, further evidence of stress is visible in the credit card segment. While the slowdown in new credit card additions is well known, growing delinquencies have not received as much attention. Based on the Portfolio at Risk (PAR) metric, long-term delinquencies (PAR over 90 days) have surged to 15%, indicating rising repayment pressure among overdue accounts.
Turning to IT — another sector with equally disappointing earnings.
Bellwether companies reported sequential declines in both revenue and profitability. With muted guidance from major players, we are looking at another year of low single-digit dollar revenue growth. But that's only part of the story.
While revenues may inch up, the real pain lies in job losses triggered by productivity gains from the AI push. If TCS's recent 2% layoff announcement is followed by others in the industry, the second-order effects on broader economic activity could be ominous. Coming at a time when MSMEs are already under stress — as echoed in banks' commentary — the medium-term growth outlook is looking increasingly fragile.
That said, the economy does have some bright spots.
There are no complaints about the agriculture sector's growth prospects, given the robust monsoon outlook this year. While this alone cannot offset the potential slowdown in consumption, it can offer some relief — especially if backed by sustained government capital expenditure (capex), which remains critical given the weakness in private capex.
Government capex
had been a strong driver until FY24, but last year exposed its limitations. Capacity constraints in traditional infrastructure segments like roads, railways, and general infra have started to impact execution. In response, the government is exploring new areas — such as urban water infrastructure (including wastewater treatment) and shipbuilding — to accelerate capex. If successful, these efforts could significantly improve the economic outlook.
For investors, these are not easy times to navigate
While benign macro conditions are helping prevent sharp market corrections, weakening micro fundamentals may keep markets in check and delay the breakout many are hoping for.
In such an environment, investors must adopt a stock-specific approach — seeking bottom-up opportunities. The era of easy money appears to be behind us. Going forward, spotting the next winners will depend more on skill than luck.
(The author, ArunaGiri N is the Founder CEO & Fund Manager at TrustLine Holdings)