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Business and Finance
Source : (remove) : reuters.com
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Business and Finance
Source : (remove) : reuters.com
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India's corporate earnings growth stays weak, banks and IT firms disappoint

India's Corporate Earnings Growth Remains Weak as Banks and IT Firms Underperform

MUMBAI, Aug 5 (Reuters) - India's corporate sector continues to grapple with subdued earnings growth in the latest quarter, with major banks and information technology (IT) companies posting results that fell short of market expectations. This persistent weakness underscores broader economic challenges, including sluggish consumer demand, elevated borrowing costs, and global uncertainties that are weighing on key industries.

The aggregate earnings for companies listed on the National Stock Exchange's Nifty 50 index showed only marginal growth, expanding by just 4-5% year-on-year for the April-June period, according to preliminary data compiled by analysts. This marks the third consecutive quarter of single-digit growth, a stark contrast to the double-digit surges seen in previous years when post-pandemic recovery fueled robust profits. Economists attribute this slowdown to a combination of factors, including inflationary pressures that have eroded profit margins and a slowdown in capital expenditure amid higher interest rates.

Banks, which form a cornerstone of India's financial system, have been particularly hard hit. Major lenders such as State Bank of India (SBI), HDFC Bank, and ICICI Bank reported net profit growth that was either flat or modestly up, but significantly below forecasts. For instance, SBI's quarterly profit rose by only 2%, hampered by rising provisions for bad loans and narrowing net interest margins. The banking sector is facing headwinds from increasing non-performing assets (NPAs), especially in retail and small business lending segments, as borrowers struggle with higher repayment burdens. Analysts point out that the Reserve Bank of India's (RBI) decision to maintain elevated repo rates to combat inflation has squeezed banks' lending spreads, making it harder to generate fee income and expand loan books aggressively.

"The banking sector's performance reflects the broader economic slowdown," said Rajiv Mehta, a senior analyst at Kotak Institutional Equities. "With deposit growth lagging behind credit expansion, banks are forced to rely on costlier funding sources, which is eating into their profitability." Mehta added that without a cut in interest rates or a revival in consumer spending, the sector could see further pressure in the coming quarters.

The IT services industry, another pillar of India's economy and a major exporter, also disappointed investors. Giants like Tata Consultancy Services (TCS), Infosys, and Wipro reported revenue growth in the low single digits, with some even posting declines in key markets. TCS, for example, saw its quarterly revenue inch up by just 3%, missing estimates due to delayed project ramp-ups and reduced spending by clients in North America and Europe. The sector is reeling from a global tech slowdown, where clients are deferring discretionary IT spending amid economic uncertainties, including fears of a recession in the U.S. and geopolitical tensions in Europe.

Infosys, in particular, revised its full-year revenue guidance downward, signaling caution about demand recovery. "We're seeing clients prioritize cost optimization over new investments," said Salil Parekh, CEO of Infosys, during an earnings call. This sentiment echoes across the industry, where hiring has slowed, and utilization rates are under pressure. The IT sector, which employs millions and contributes significantly to India's GDP, had been a bright spot during the pandemic due to accelerated digital transformation. However, with that boom fading, companies are now focusing on efficiency measures, including workforce rationalization, to protect margins.

Beyond banks and IT, other sectors showed mixed results. Consumer goods companies like Hindustan Unilever and ITC managed moderate growth, buoyed by rural demand recovery, but faced margin squeezes from raw material inflation. In contrast, energy firms such as Reliance Industries benefited from higher refining margins, posting stronger-than-expected profits. Automakers, however, struggled with supply chain disruptions and softening sales, particularly in the passenger vehicle segment.

Market reactions have been swift, with the Nifty 50 index declining by over 2% in the week following the earnings releases, reflecting investor disappointment. Foreign institutional investors (FIIs) have turned net sellers, pulling out billions from Indian equities, exacerbating the downturn. "The weak earnings season is a reality check for the market, which had been pricing in overly optimistic growth," noted Neha Singh, head of research at HSBC India. She highlighted that valuations remain stretched, with the Nifty trading at a forward price-to-earnings ratio of around 20 times, leaving little room for error.

Looking ahead, analysts are tempering expectations for the fiscal year. Consensus forecasts now project overall corporate earnings growth at 8-10% for FY26, down from earlier estimates of 12-15%. This revision comes amid concerns over global factors, such as potential U.S. Federal Reserve rate decisions and ongoing trade frictions with China, which could impact India's export-oriented sectors. Domestically, the upcoming monsoon season and government spending on infrastructure could provide some uplift, but risks remain if inflation persists or if geopolitical events disrupt supply chains.

Government officials have downplayed the concerns, emphasizing structural reforms and initiatives like the Production Linked Incentive (PLI) scheme to boost manufacturing. Finance Minister Nirmala Sitharaman, in a recent statement, reiterated the government's commitment to achieving 7-8% GDP growth, supported by investments in digital infrastructure and renewable energy. However, critics argue that without targeted stimulus for consumption-driven sectors, the corporate recovery could be protracted.

The weak earnings also have implications for employment and wage growth. With IT firms scaling back hiring and banks tightening belts, job creation in high-skill sectors may slow, potentially affecting urban middle-class spending. This could create a vicious cycle, further dampening demand and corporate profits.

In summary, India's corporate landscape is navigating a challenging phase, with banks and IT firms at the forefront of the slowdown. While some sectors show resilience, the overall trajectory suggests that a broader economic revival is needed to reignite earnings momentum. Investors and policymakers will be closely watching upcoming data releases, including inflation figures and industrial output, to gauge the path forward. As the global economy evolves, India's ability to adapt will be crucial in determining whether this weakness is a temporary blip or a more enduring trend. (Word count: 928)

Read the Full reuters.com Article at:
[ https://www.reuters.com/world/india/indias-corporate-earnings-growth-stays-weak-banks-it-firms-disappoint-2025-08-05/ ]