ICRA forecasts revenue growth for India Inc in Q3 FY2025

ICRA Limited forecasts sequential revenue growth for India Inc in Q3 FY2025, driven by an uptick in rural demand, a rise in government spending, and the seasonal impact of the festive period. While these factors are expected to provide momentum, the report highlights challenges such as uneven urban demand and global uncertainties that may affect growth in the second half of FY2025. Overall, ICRA expects an improvement in operating profit margins (OPM), with credit metrics showing positive movement in the upcoming quarters.

Commenting on the trends, Kinjal Shah, Senior Vice President & Co-Group Head – Corporate Ratings, ICRA Limited, said, “While corporate India witnessed a muted sequential revenue growth in Q2 FY2025, led by ongoing slowdown in urban demand, lower Government spending amid monsoon-related disruptions, the same is expected to improve in the coming quarters. This would be supported by continued growth in consumption-oriented sectors like FMCG, Retail as well as improved revenues in commodity-oriented sectors like iron and steel and cement, among others, led by uptick in Government capex spending as well as increased rural demand. Nonetheless, ongoing geopolitical tensions and the possibility of higher tariffs remain an overhang on demand sentiments, especially for export-oriented sectors such as textiles and cut and polished diamonds.”

The festive season, a period of increased consumer activity, will also contribute to the overall revenue growth. However, the report cautions that the uneven demand across urban and rural segments, as well as geopolitical factors such as tensions and possible higher tariffs, could pose risks, especially for export-oriented sectors like textiles and cut-and-polished diamonds.

ICRA’s analysis of the Q2 FY2025 performance of 590 listed companies (excluding financial sector entities) reveals a six per cent year-on-year (YoY) revenue growth for Corporate India. However, operating profit margins (OPM) moderated by 102 basis points, falling to 16.9 per cent. Despite the increase in revenues, the combination of higher input costs and weak urban demand led to a reduction in margins. The sequential decline in OPM was around 81 basis points, reflecting persistent cost pressures.

ICRA further highlighted that while input costs have softened recently, they remain higher than historical levels. As a result, India Inc’s OPM is yet to recover to the pre-pandemic highs of around 19 per cent seen in FY2022. The cost pressures are particularly notable in sectors such as FMCG, retail, and manufacturing, where the weak urban demand has adversely impacted margins.

As of September 30, 2024, India Inc reported a marginal four per cent YoY increase in debt levels. Despite sector-specific variations in debt levels, ICRA notes that the overall credit metrics for Corporate India have remained largely stable in recent quarters. The improved earnings, driven by the recovery in demand across certain sectors, have helped stabilise the debt-to-EBITDA (earnings before interest, tax, depreciation, and amortisation) ratio, which stood at 3.36 times as of September 30, 2024, compared to 3.37 times a year ago.

However, the interest coverage ratio for ICRA’s sample set companies, adjusted for sectors with relatively low debt levels such as IT, FMCG, and pharma, showed a decline on a YoY basis. It decreased to 4.1 times in Q2 FY2025, down from 4.5 times in Q2 FY2024, primarily due to a decline in operating profits and higher interest expenses. This reflects the broader challenge of balancing debt servicing amidst margin pressure.

Outlook for Q3 FY2025

Looking ahead to Q3 FY2025, ICRA anticipates that operating profit margins will improve, supported by the revival of demand in key sectors. The interest coverage ratio is expected to increase as well, due to the likely improvement in OPM, alongside the stabilisation of debt levels. This, in turn, would lead to an improvement in overall credit metrics for Corporate India.

With the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) halting rate hikes since April 2023, the favourable interest rate environment is expected to provide some relief to corporates, further boosting their ability to service debt. The report also notes that any future changes in global economic conditions, including the ongoing geopolitical tensions and potential trade disruptions, remain important risks to monitor.

Furthermore, ICRA highlights that the expected pickup in government spending, particularly in infrastructure and rural development, should support growth in key sectors such as construction, manufacturing, and commodities. A revival in urban demand, especially in the second half of FY2025, will also be crucial for a balanced recovery across sectors.

Sector-specific insights

Consumption-driven sectors, including FMCG and retail, are expected to continue performing well, driven by the recovery in rural demand and the seasonal boost from the festive period. ICRA anticipates steady growth in FMCG, supported by an uptick in rural consumption, while retail will benefit from higher footfall and consumer spending during the festive season.

In contrast, export-oriented sectors such as textiles gems and jewelry may face challenges due to global uncertainties and potential changes in tariffs and trade policies. The global economic scenario remains a significant monitorable, particularly for industries reliant on international demand.

The commodity sector, particularly iron steel and cement, is also expected to show resilience, supported by government capex spending, which is likely to fuel infrastructure projects and boost demand for construction materials.