In the last week of September, I visited Kochi. Uusally it's bustling, but this time, the city felt low on energy. The Marine Drive crowd had thinned, the spice sellers looked bored, and the malls were mostly filled with window shoppers and college students playing hooky from class. I thought it might be because of the rains or the Pitrupaksha season, when Indians avoid new purchases. 

A week later, the RBI announced its monetary policy, and commentary on the Indian economy flooded my news feed. From slowing car sales to subdued production, slowdown became the talk of the town. Headlines from The Economist and Bloomberg suggested that India's growth may be running out of steam. Perhaps what I saw in Kochi meant something more.

Despite our hopes for India as a ‘China+1’ economic destination, the world's fastest growing nation may be on a bumpy road. Is India reverting to the mean after the post-pandemic boom? Will growth bounce back?

In this week's Analyticks:
 

• Is the world's major growth engine right now - India - slowing down?
• Screener: Upcoming results for Nifty500 companies with previous quarter profit growth greater than 10% both YoY and QoQ

Let's do a health check.

GDP matters for stock markets

Stock markets often draw ire for not reflecting the real economy. But contrary to popular belief, markets do tend to reflect reality in the longer run. Our analysis of quarterly GDP growth rates and Nifty returns shows that over the past two decades, the broader market index has closely tracked economic growth. So if GDP growth stumbles, the markets will feel the brunt.

In the first quarter of this financial year, India’s GDP growth slowed to 6.7% YoY from 7.8% YoY the previous quarter. Many analysts have forecast a further decline in the growth rate in the second quarter. For example, Motilal Oswal estimates 6-6.5% growth in 2QFY25 (RBI is more optimistic than most, and forecasts 7% growth). 

Can this year's festive season cheer up consumers?

As we entered the September quarter, rising raw material costs, a drop in car sales, a high unemployment rate and a decline in tax collections together put the brakes on the Indian economy. 

Amnish Aggarwal, Head of Research at Prabhudas Lilladher, expressed caution about the FMCG sector owing to higher raw material costs. Similarly, Garima Kapoor, an economist at Elara Securities, pointed out that consumer spending has taken a hit, especially in cities due to dwindling savings and slow hiring in sectors like technology and retail. 

The rural areas are seeing some upside. Thanks to normal monsoons, farmers are cultivating more land. The drop in demand for jobs under the MNREGA scheme is another good sign. This scheme usually sees an uptick in employment when the rural economy is struggling, and a decline in demand suggests things are looking better.

Titan, Mamaearth, Himalaya, Dabur, Denver, Bata, and several D2C brands have joined Meesho Mall ahead of the festive season to tap into the tier-2+ market, where the e-commerce platform is popular. The platform has reportedly seen a 40% rise in orders during its recent Mega Blockbuster Sale. 

Online marketplaces have overall registered a 26% increase in just one week of festive sales, selling almost Rs. 55,000 crore worth of goods. ET reported that tier-2 and tier-3 cities accounted for a larger chunk of demand. We need to watch whether this demand holds steady through the next year and spreads across all sectors.

A long wait for the capex cycle

Last week, the statistical ministry released production data for August 2024, which had production contracting by 0.1% over last year. RBI’s Industrial Outlook Survey for Q2FY25 showed manufacturers less optimistic due to slowing demand, lower production, and low-capacity utilisation. However, companies expect marginal improvements in Q3FY25.

Mayank Jha, an economist at HDFC Bank, discussed in a LinkedIn post, emerging weakness in investment growth. Although we have seen a capital expenditure surge in a few sectors, there hasn’t been a broad-based recovery. Firms often announce large capex plans but fail to implement them due to lower capacity utilization. For instance, capex plans in electronics, food processing and textiles have largely remained on paper. 

On one hand, we're still waiting for the long-promised surge in private capex. On the other hand, government capex seems to have hit its limit. The elections stalled both central and state government capex, causing a loss of momentum. Dwindling tax revenues have made it even more challenging to meet the budgeted capex levels while keeping the fiscal math in check. 

Although the finance minister has assured a pickup in government capex after the subdued first quarter, this will be tough to deliver. The government faces the dual challenge of dwindling tax revenues and the need to keep the fiscal deficit in check. A war in the Middle East and rising oil prices for India could constrain government finances even more.

Outlook

I wish we had a (working) crystal ball to predict what the FY25 growth rate would be. Forecasts for FY25 have swung wildly, between 6.5% and 8%. Basically, no one knows.

One way to look at these numbers is that the 8% GDP growth mark achieved in FY24 is now the highest estimate for FY25, and may be out of reach. India's economic engine for now, may have shifted to a lower gear.

Screener: Upcoming results for Nifty500 companies with previous quarter net profit growth greater than 10% YoY and QoQ

Banking stocks among those with the highest net profit growth in Q1FY25

As we enter the result season for Q2FY25, we look at stocks that delivered the highest net profit growth in the previous quarter. This screener shows companies whose results are upcoming, whose net profits YoY and QoQ showed growth greater than 10% in Q1FY25. 

The screener is dominated by stocks from the banking & finance, software & services, chemicals & petrochemicals, food beverages & tobacco, and FMCG sectors. The most notable stocks in the screener are Zee Entertainment Enterprises, Max Financial Services, Biocon, Star Health and Allied Insurance, United Breweries, Go Digit General Insurance, Pidilite Industries, and Petronet LNG. 

Zee Entertainment Enterprises witnessed the highest QoQ and YoY net profit growth of 784.6% and 321.1%, respectively in its Q1FY25. This broadcasting & cable TV stock’s net profit surged due to the company’s efforts to optimize costs, helping to reduce manpower and marketing expenses. The company is scheduled to announce its results on Friday. Analysts at Keynote Capital believe that while concerns around ZEEL’s weak financials, governance, and litigation outcomes continue to persist, the initial signs of improving business are positive. But this company's last few quarters have been bumpy.

Star Health and Allied Insurance’s net profit grew by 216.9% QoQ and 56.7% YoY in Q1FY25, helped by strong investment performance and a Rs 25 crore tax return during the quarter. With its results to be announced on October 29, ICICI Securities believes that this general insurance company will grow in FY25, owing to price hikes, higher growth in new channels, recovery of new business growth, and better investment performance. 

You can find some popular screeners here.