In Q4, more beats than misses as market went into earning season with low expectations: Vinod Karki

Vinod Karki, Equity Strategist, ICICI Securities, analyzes corporate earnings, noting FY25 losses hit a cycle low. Corporate profit growth surpassed nominal GDP. Q4 results exceeded low market expectations. Operating profit grew by 12%, but net profit growth slowed due to one-offs. FMCG and IT sectors faced disappointments. Cyclical sectors like real estate and auto showed strength. Global uncertainty impacts outlook for globally exposed companies.

What is your view on how the Q4 FY25 earning season panned out? What does this mean for the rest of the year and any specific sectors that you are looking at after the result season?
Vinod Karki: There are two-three ways to slice and dice the earnings. One is the aggregate corporate profitability itself. So, if you look at FY25 itself, one remarkable thing that happened in FY25 was that the losses or the loss pool of the loss-making companies that went to the cycle low of around 0.27% of GDP and in absolute term, this was the first time after FY14 from where this earnings recession happened that the losses shrunk below one trillion in aggregate, so that was one.

We know that the GDP expanded by around 9.8% for FY25 and the overall corporate profit expanded by 10.7% and slightly went ahead of the nominal GDP and reached the level of 5.1% of GDP, which is the aggregate. The second thing is to look at what the market was expecting and how the results came in. Apparently, in Q4, the market went into the results with low expectations. Overall, we saw more beats coming in than the misses.


Thirdly, look at the growth in Q4. Looking at the growth, we saw the operating profit growth at around 12%. That is ahead of the nominal GDP that we saw for Q4 itself. But when it came to the PAT level, it dropped off to around 6-7%. I think that is to do with a lot of one-offs for a lot of companies which resulted in the net profit level growing at a lower pace than the operating profit.

The last but not the least is how the Street is looking at earnings after the result.

We have seen that on an average, wherever data is available for consensus, the average downgrade for 26 and 27 has been limited to around 2-2.5%, that’s it in a nutshell. But just to give one data point, the disappointments largely have been across these sectors on actual growth, the outlook and downgrades.

We saw some of the FMCG and IT where growth expectations and actual growth everything and outlook was not looking too good. Defensives in general just to put in perspective, were lagging compared to the cyclical sectors like real estate, capital goods, hotels, travel, industrials and defence. The banks also, after the stimulus by the RBI, are looking ahead for good credit growth. Overall the cyclical sectors in the economy appear to be doing well in a nutshell.

What is your view on any hits or misses, any surprises or disappointments that you have seen because you said we were anyway expecting a muted set of numbers. Our expectations were rather muted, but these numbers have been a beat on the back of that. So, anything that stood out to you in terms of a good surprise or a disappointment and your overall outlook on what stood out and whether that merits a re-rating in your portfolio?
Vinod Karki: As I said, expectations were lower, and that is why we got more beats overall. But what was remarkably weaker in terms of outlook we saw from some of the larger IT companies and some of the large staples companies in terms of the growth outlook, was looking pretty muted and weak.

Obviously, what has also happened is that there is a lot of uncertainty from the global angle. The outlook for any company that is catering to the global demand is uncertain because of this whole tariff issue and all that the outlook is getting a little uncertain. There is a bit of uncertainty on globally exposed demand companies, even pharma to some extent. So, anything to do with global demand and some of these defensive sectors are where we saw clear misses. But in the cyclical sectors like industrials, commodities, real estate, travel and tourism and auto, we saw sparks of performance.

Since you spoke about cyclical sectors in particular commodities, and metal numbers largely being in line with what the Street was working with and even slightly better, especially with companies like Tata Steel reporting cost reduction programme, how do you see the metal sector as a whole given what is happening in China and globally? Also, what are your thoughts on oil marketing companies? We have seen a lot of volatility around oil prices.
Vinod Karki: Let me put this in perspective. The biggest drag in FY25 earnings was driven by commodities which include cement, oil marketing companies and metals in general. What we are seeing is that this pressure of commodities on overall aggregate earnings has started to recede and these companies are giving better outlooks, the growth itself is better. With crude prices not spiking the way they were earlier in the year when Trump came to power, that will allow the government to be more conducive to the whole oil marketing company outlook.

Metals is a global commodity and it will be an interplay of how domestic demand plays out, what kind of safeguards we have for protecting the domestic producers, what China does in terms of dumping. All those things are there. Cement for example is another commodity but then, it is not a global commodity, and so there things are much better. The key thing to look out for is that if you look at the expectations, the consensus, the commodities are coming out of a phase where they were a drag on earnings and have started contributing to earnings. That is the key takeaway from this earning season.