India’s stock market exuberance and high growth numbers have been quite the turnaround story after the global meltdown due to the COVID-19 pandemic. Benchmark indices Sensex and Nifty have been scaling their peaks and hitting fresh highs. Companies, including loss-making ones, are tapping into public markets and seeing unprecedented listing premiums. The number of registered investors has also crossed the 100-million mark.

Nevertheless, the 2024-25 fiscal hasn’t particularly gotten off to a great start.

According to a report by brokerage firm Motilal Oswal, in the first quarter of the 2024-25 fiscal, Nifty 50—India’s benchmark index that tracks the performance of the top 50 companies on the NSE across 12 sectors—saw its profit grow by just 4% year-on-year, the lowest since the pandemic. EBITDA, short for earnings before interest, taxes, depreciation and amortization, also registered a growth of just 5%, the lowest in four years.

So, what exactly is going on?

Dragged by OMCs: According to the brokerage’s analysis, excluding oil marketing companies (OMCs) puts the Nifty 50’s earnings growth at 9% for the April-June period. Basically, OMCs significantly dragged down the index. It was the automobile sector that helped keep the index out of the red.

Dragged by heavyweights Reliance Industries, state-run Oil and Natural Gas Corp. (ONGC) and Bharat Petroleum Corp. Ltd (BPCL), the Nifty 50’s earnings per share (EPS) fell 1.7% to Rs 1,115. (EPS is a key measure of a company’s profitability.) The brokerage firm estimates that the EPS for 2025-26 will drop to Rs 1,316 from Rs 1,330 estimated earlier.

The brokerage’s analysis showed that 43% of companies missed analysts’ expectations while 29% beat profit estimates. The first-quarter earnings of five Nifty 50 companies—HDFC Bank, Tata Motors, ICICI Bank, Maruti Suzuki and Tata Consultancy Services—contributed 127% of the year-on-year growth in the index’s earnings.

But what prompted these companies’ poor show in the first quarter of FY25?

Reasons for the profit hit: While the Indian market remained resilient overall amid the Russia-Ukraine war, macroeconomic uncertainties, elections and more, some sectors are eventually seeing a slowdown and have taken a beating. This is what has hit the index in the June quarter. For instance, the infrastructure and construction sectors witnessed a slowdown because of the general election and heatwaves. As a result, quarterly earnings of companies dealing with cement, iron and steel, among others, were affected.

Also note that much of the deemed slowdown is a result of the high post-pandemic growth wearing off. After restrictions put in place during the COVID-19 lockdowns were lifted, pent-up demand for services and discretionary goods, idle savings, liquidity and investments fuelled economic growth. Much of this seems to now be subsiding. Additionally, companies’ surplus capacity installed during this recovery period could also be contributing to their margins getting hit.

Apart from this, capital expenditure—especially private capex—has slowed down. Capex helps with employment and boosts economic growth. Also, rising capital investment signifies confidence in future demand. So, a slowdown in capex by private players is bound to hurt their year-on-year earnings growth. Also read: Why the Union Budget can do little to push India’s consumption story.

We have previously written about private investment in India stagnating. Despite continued posturing by the Reserve Bank of India and the government, private gross fixed capital formation is worryingly low, forcing the government to ramp up its own capex to maintain growth.

This, coupled with slowing and lopsided consumption growth, is hurting companies’ business. Private final consumption expenditure grew at a rate less than half of the GDP number, a departure from the previous years when the two moved mostly in tandem. Read India’s consumption numbers point to strain, inequality for more on this.

Growth in fast-moving consumer goods (FMCG)—a key consumption barometer—is also tepid, at best. The volume growth outlook for most FMCG firms is capped at “mid-single digits”, with several (including Hindustan Unilever, Nestle and Marico) showing just 1-3% growth.

Coming to OMCs, the biggest drag on Nifty 50. Margins of Indian OMCs took a hit because of the rise in global oil price in the first quarter of 2024-25. While OMCs usually factor in international crude prices and currency exchange rates, they had announced a price cut in March. This means that Indian OMCs were cushioning the price impact of international oil prices instead of passing it on.

“Further, with the full impact of Rs2/liter price cut in March and higher Brent prices, marketing margins on auto fuels were also weaker QoQ. We expect ~35-43% QoQ decline in EBITDA for the three OMCs,” according to Kotak Institutional Equities.

The research firm also said that lower discounts on Russian crude oil could further moderate gross refining margins in the future.

The post-pandemic spurt in credit growth—especially in the personal loan category—poses a fresh set of risks. All this at a time when banks are gearing up for intense competition for deposits and some of the largest lenders are curtailing credit growth to check dangerously high credit-deposit ratios, which pose the risk of asset-liability mismatch. Read Indian banking’s inconvenient truths for more on this. (Credit-deposit ratio is a metric to measure how much of banks' deposits are lent out as loans.)

The way forward: Motilal Oswal expects that Nifty 50’s earnings momentum will grow at a moderate rate of 15% between 2024 and 2026. And green shoots are expected, especially as the festive season is upon us, when demand generally picks up.

“Going ahead, an unfavourable base and increased input costs will weigh on corporate profitability. However, support will come from a pickup in demand due to the festive season, moderation in inflation and a pickup in rural demand. Interest costs too are expected to decline once the RBI cuts rate,” Bank of Baroda economist Aditi Gupta was quoted as saying in a report in The Economic Times.

But despite this reality check, the IPO market seems hardly bothered. For instance, Ola Electric, despite its tricky financials, listed at Rs 76 and is up by 107% since its listing on the NSE.

And despite Nifty 50’s earnings slowdown, the market remains up. It’s almost as though news of a benchmark index’s slowest earnings growth in four years doesn’t count.