Market Performance Analysis: Signs of Slowdown?

 As most market leaders have released their financial results, we provide a sectoral analysis to assess whether there are definitive signs of an economic slowdown.

1. Macro Data

a. RBI Forecast:
The Reserve Bank of India (RBI) recently revised its GDP growth forecast for Q2 FY24, lowering it from 7.2% to 7.0%. This adjustment reflects geopolitical concerns, adverse weather, and their combined impact on consumption and growth.

b. Capacity Utilization:
Corporate India's capacity utilization has dropped from a peak of 76.8% to 74% in Q1 FY25, indicating some slack in production.

c. Q2 FY25 Results:
As of November 5th, 1,129 companies have reported their Q2 FY25 results, showing an overall revenue growth of 8%, while profits after tax (PAT) declined by 2.8%. Below is a breakdown of performance by sector.

2. Consumption Slowdown

a. Power & Energy:
Diesel sales remained flat in October, with volume growth of only 1.8% over the first ten months, marking the slowest pace since 2020. Peak power demand for October 2024 fell slightly year-over-year, down to 219.2 GW, and day-ahead-market (DAM) prices in October were Rs 3.92/unit, a 39% YoY drop.

b. Infrastructure & Capex:

• Government Spending: Capex by the government fell by 15% YoY in H1 FY25, with CPSE capex down by 11% in the same period.
• Telecom Expansion: Both Jio and Airtel have delayed further 5G expansion due to lower utilization rates and pending monetization.
• Cement Industry: Major cement companies reduced FY25 growth projections due to severe weather, decreased government spending, and labor shortages related to elections. Major manufacturers reported margin declines in the September quarter, primarily driven by lower prices.

c. Real Estate:

• Sales in the top 30 tier-II cities dropped 13% in Q2 FY25, while new project launches declined by 34%.

d. Retail:

• Festive Sales: Festive sales grew by around 15% YoY, a marked slowdown from 32% in 2023 and 88% in 2022. Major consumer product firms like HUL, Godrej, Marico, ITC, and Tata Consumer Products reported margin contractions in Q2 due to high input costs and food inflation.
• Consumer Durables & Automobiles: Logistics costs surged, with shipping expenses rising as much as 200%.
• Quick-Service Restaurants (QSRs): QSRs are struggling with profitability this festive season due to high prices for oils, vegetables, and wheat. Same-store sales at KFC and Pizza Hut saw YoY declines of 8% and 3%, respectively.
• Other Sectors: D-Mart faces challenges from quick-commerce competitors, with its same-store growth rate slipping to 5.5% in Q2 FY25, down from 8.6% in the previous year and 9.1% in Q1 FY25.

e. Urban Consumption:

• Consumer Products: Inflation and unemployment have softened urban middle-class spending, with major players like Reliance Retail, HUL, Nestle, Maruti Suzuki, and Bajaj Auto expressing concerns.
• Growth Trends: Urban consumption grew by 2.8% in Q2, while rural growth accelerated to 6.0%.
• RBI Warnings: The RBI is monitoring the flow of unsecured loans into the stock market, as individual traders face substantial losses in futures and options, potentially impacting urban spending further.

3. Credit Slowdown

• Personal Loans: Personal loan growth slowed to 12.1% YoY in September 2024, halving from last year's rate.
• Non-Banking Financial Companies (NBFCs): Higher delinquencies in unsecured loans have prompted NBFCs to increase provisions, impacting profits. Bajaj Finance, the largest listed consumer finance firm, has adjusted its gross non-performing asset (GNPA) guidance upward.
• Corporate Lending: Some private banks experienced a contraction in corporate loans during Q2 FY25, shifting focus to higher-yielding corporate bonds and SME loans.
• Credit Cards: New card issuances have dropped over 64% YoY in September 2024, and delinquencies may be approaching 6%, a peak not seen in years.

Outlook

Given these indicators, a robust demand recovery appears to be delayed. The government is urging ministries to meet their capex targets, making order awards over the next 4-5 months crucial for FY25. Additionally, the impact of "Shradh" days in Q2 FY25, which last year fell in Q3, adds a unique seasonal element to this year’s data, suggesting a need for close monitoring in the coming weeks.