India Inc: Key takeaways from Q3 earnings season for investors

The Q3FY25 earnings season has concluded, and as we have done previously, we will analyze the key trends and sectoral performance. This quarter presented a mixed performance, with some sectors continuing their growth momentum while others lagged. Nifty 50 posted a 7% YoY growth; however, PAT growth remained resilient at 16% YoY, highlighting expanding margins and improved profitability.

Similar to the previous quarter, the Pharma and Realty sectors demonstrated strong performance, driven by robust demand and enhanced operational efficiencies. Meanwhile, sectors such as Energy and Infrastructure continued to face headwinds in income growth.

Revenue growth remained below the average YoY revenue growth compared to the past four quarters, reflecting a moderate slowdown in expansion. However, profitability remained strong, indicating that margin expansion helped offset the impact of slower revenue growth.


For market participants, these trends provide valuable insights into sector-specific opportunities and corporate strategies shaping future market dynamics. Below is a sector-wise breakdown to highlight key growth drivers and prevailing challenges.



Nifty Realty:
The Realty sector emerged as the standout performer, registering the highest income growth among all sectors at 27.45% YoY. Sequential volume recovery and sustained demand bode well for further improvement, with favorable pricing trends supporting future growth.

Nifty Metal:
The Metal sector continued to witness PAT outperformance relative to revenue. While total income grew by 3.84% YoY, PAT expanded by 5.58%. Increased sales volumes in metal and cement companies were observed, although realized yield remained under pressure which resulted in high in PAT growth compared to revenue growth.

Nifty IT:
IT sector revenue rose by 6% YoY, while PAT growth stood at a robust 13%. The earnings season reflected a mix of resilience and near-term challenges. With rising demand for cloud services, digital transformation, and automation, the sector remains poised for long-term growth.

Nifty Bank:
Banking sector growth was moderate, with total income rising 9% YoY. However, PAT surged by 20.75%, additionally, it also reflected improving asset quality and marginal CASA growth. The sector remains attractive from a valuation standpoint, with the RBI’s recent rate cut and changes in tax slabs is expected to support future performance.

Nifty Auto:
The Auto sector delivered an improved performance, with revenue growth of 7.96% YoY. However, profit growth remained subdued. A recovery in rural demand provided a boost to two wheelers & three wheelers. The consumption boost provided in the budget could increase the discretionary spending by the people which may ultimately lead to surge in demand for passenger vehicles (PVs) going forward.

Nifty FMCG:
The FMCG sector posted muted revenue growth of 7.84% YoY, while PAT remained flat at just 0.50% growth. Operating margins were under pressure. However, demand is expected to pick up in the coming quarters, with the Maha Kumbh Mela 2025 projected to drive significant consumption.

Nifty Pharma:
Pharma emerged as the second-best performer in total income growth, rising 9.59% YoY. PAT growth outpaced revenue at 16.60%, reflecting improved operational efficiencies. The sector remains well-positioned to leverage structural tailwinds.

Nifty PSE:
Public sector enterprises (PSEs) encountered challenges, with total income registering a marginal growth of 0.23% YoY, while PAT declined by 4.45%. Previously, government-driven policy initiatives had fueled growth in this sector. However, the recent budget indicated muted spending, potentially leading to continued near-term sluggishness.

Conclusion:
The Q3FY25 results mirrored the trends observed in Q2FY25, with revenue growth remaining sluggish while PAT expansion remained strong. Realty and Pharma sectors capitalized on structural advantages, whereas Energy and PSEs lagged behind. Looking ahead, the final quarter of FY25 is expected to follow a similar trajectory, with political uncertainty and broader economic factors influencing market sentiment. Investors should remain focused on resilient sectors that demonstrate earnings strength amid evolving macroeconomic conditions.


5 Strategies that can Help Investors in this Falling Market

The Indian equity market is currently in a downtrend, significantly impacting retail investors' portfolios. Since April 2023, despite occasional short-term corrections, Nifty experienced a continuous uptrend until September 2024. However, in recent months, a trend reversal has emerged. October saw a record foreign institutional investor (FII) outflow of over Rs. 1 lakh crore from the secondary market. In January, another record selloff of over Rs. 76,000 crore further pressured the market. As of 13th Feb 2025, Nifty has declined by 12% from its September peak, while Nifty Midcap 150 and Nifty Smallcap 250, which after making a recovery in December, fell by 14% and 19%, respectively.

Let us discuss what factors have played a role in recent market turmoil and how should people navigate their investment journey further.

Factors Behind the Steep Market Decline

1. US Yield Rise & FII Outflow

The US 10-year government bond yield, which stood at 3.618% in mid-September, rose to 4.441% by mid-November. It later hit a new high of 4.794% in mid-January and currently hovers around 4.525%. Higher yields offer FIIs better risk-reward opportunities in US treasuries. Additionally, increased borrowing costs make funding expensive, prompting FIIs to withdraw capital.

2. Overvaluation Concerns

Indian equities had become overvalued, surpassing fundamental growth. Domestic fund inflows, particularly record SIP contributions, continued to drive liquidity and inflate prices. For instance, in case of Nifty Midcap 150 Index, while the past 5 Year median Price-to-book value (P/B) ratio is 3.6 times currently, the ratio had reached 5.9 times as of September 2024 end, up 64% from the median level. Similarly, in case of Nifty Smallcap 250 Index, while the past 5 Year median P/B ratio is 3.3 times currently, the ratio had reached 4.3 times as of September 2024 end, up 30% from the median level. Following the downturn, the P/B multiples of the Nifty Midcap 150 and Nifty Smallcap 250 indices have currently declined to 4.92 times and 3.46 times, respectively.

Valuation expert Prof. Ashwath Damodaran noted on February 7, 2025, that India has the highest median trailing P/E of 31.07 and an aggregate P/E of 27.42 across 4,788 companies.

3. S&P 500’s Record Rally

The S&P 500 has reached new highs, surpassing the 6100 level in January. This would have drawn FII investments into US equities, reducing allocations to Indian stocks.

4. Dollar Strength & INR Weakness

The Indian Rupee has weakened against the US Dollar, falling from Rs. 83.5/USD in September 2024 to Rs. 87.5/USD last week. A weaker INR reduces foreign investors' net returns in their home currency, prompting some FIIs to exit, and further pressuring the rupee.

5. Slowdown in Economic Growth

India’s GDP growth rate declined from 8.2% in FY2023-24 to 5.4% in Q2 FY2024-25. Corporate profit growth, which was strong in FY2023-24, has also slowed. This lower growth reduces the present value of future cash flows, leading to stock price declines.

6. Global Events & Market Sentiment

Market sentiment plays a crucial role. Sharp volatility index spikes in recent months reflect the fragile investor sentiments. Uncertainty around Trump’s tariff policies and ongoing geopolitical tensions further exacerbate volatility. Initial declines have triggered stop-losses, leading to a cascading selloff and heightened investor risk aversion.

7. Primary Market & Gold Shift

The lure of IPO listing gains has driven oversubscriptions, leading investors to liquidate secondary market holdings, increasing selling pressure. Additionally, gold has gained momentum as an alternative investment, shifting capital away from equities.

Strategies to Protect Portfolio Value

1. Diversify Investments

Allocate capital across multiple asset classes, including bonds, commodities, and precious metals. Geographic diversification also mitigates country-specific risks.

2. Invest in Low-Valuation & Large-Cap Stocks

Large-cap stocks with lower price-to-book ratios have limited downside risks and better withstand selling pressure. Comparisons among peers and historical median valuation multiples help identify undervalued opportunities.

3. Focus on Profit Growth & Quality Stocks

Companies demonstrating strong profit growth or having future growth potential remain attractive if valuations are reasonable. Quality stocks with solid fundamentals tend to perform better over the long term.

4. Hedge Against Market Declines

Shorting futures can help to hedge long equity positions. Buying put options can also safeguard investment value against sharp downturns. Since both of them involve exposure to derivatives one should understand the products before entering in to a transaction.

5. Postpone Buying & Re-Enter Strategically

Until the downtrend stabilizes and reversal signals emerge, holding cash and delaying new investments is prudent. Averaging in a falling market is risky. Instead, wait for a confirmed uptrend and set strategic re-entry points.

Conclusion

Market fluctuations are inevitable, and no trend lasts forever. Recognizing this helps investors manage emotions during downturns and respond strategically to changing market conditions. Lessons from this market phase include:
• Prioritizing rational valuations in stock selection.
• Avoiding herd mentality in chasing unsustainable growth.
• Being proactive and diversifying investments.
• Maintaining discipline and setting stop-loss levels.
• Learning from past mistakes while keeping an eye on quality stocks for future opportunities.
A well-structured approach will enable investors to navigate market turbulence effectively. Not to despair as it is said that every dip gives an opportunity to acquire at a lower cost. So, be vigilant and capitalize on opportunities as the market stabilizes.


From Capex to Consumption: A Strategic Shift in Market Sentiment

In my articles published in January 2024 and June 2024, I highlighted the importance of investors exercising caution in the capital goods sector. Since then it peaked and has been on a downward trajectory for six out of the last seven months, with just one flat month in between. The rationale remains unchanged - valuations remain high, with the S&P Capital Goods Index trading at a P/E ratio of 40, well above historical averages.

One of the most notable budgetary measures is the reduction in taxes, which, while leading to an estimated INR 1 lakh crore revenue shortfall for the government, effectively translates into higher disposable incomes for middle-class taxpayers. This shift in policy is expected to fuel consumption, creating new investment opportunities across various sectors.



Sectors Benefiting from the Consumption Boom

1.FMCG: Higher disposable incomes will drive demand for essential goods. However, investors should be mindful that valuations in the FMCG sector remain elevated, with most Nifty FMCG constituents trading at P/E multiples above their five and ten-year averages.

2.Consumer Durables & Electronics: Increased purchasing power will make high-value goods such as televisions, mobile phones, and home appliances more accessible, benefiting electronic manufacturers and consumer brands

3.Automobiles: The auto sector, particularly two-wheelers and passenger vehicles, stands to gain significantly as consumer sentiment shifts toward viewing vehicles as necessities rather than luxuries. Enhanced liquidity will further fuel demand in this sector.

4. Real Estate: Among the three fundamental necessities - Roti, Kapda, and Makan, housing remains a key aspiration for many individuals. Low to middle-income house developers stand to gain as purchasing power rises thereby increasing housing demand. Interest rate cut will also make housing more affordable going forward.

5.Retail & Home Financing:While consumption is projected to rise, the modern consumer’s preference for deferred payments through credit will also increase. This trend is favorable for NBFCs and financial institutions specializing in retail and home financing, particularly those catering to the low-income and mid-income segments.

6.Banking & Investment Services: While a portion of the increased income will be channeled into consumption, a parallel trend will emerge in savings and investments. Many recent investors, having never experienced market downturns before, could turn towards fixed deposits, aiding deposit growth for banks. Meanwhile, investors seeking better returns will continue to participate in direct equity and SIPs, benefiting brokerage firms and AMCs.

Conclusion: Adapting to a Changing Market Landscape

The government’s strategic transition from an infrastructure-driven growth model to a consumer-led economy necessitates a realignment of investment strategies. While capital goods stocks are showing signs of fatigue, consumer-driven sectors stand to gain from the increased disposable income and credit availability.

Investors should exercise caution in sectors with stretched valuations while positioning themselves in industries poised to benefit from this structural shift. In a market that is dynamically evolving, staying ahead of trends will be key to maximizing returns.