India Strategy : 3QFY25: Reality check By Kotak Institutional Equities
3QFY25: Reality check
BSE-500 Index companies face growth issues in 3QFY25 too, with revenue growth at 7% yoy, similar to the past seven quarters. EBITDA and PAT both grew 7% yoy. The operating performance of small-caps lagged that of largecaps with a 13% yoy decline in PAT, resulting in FY2025E/26E consensus EPS cuts of 13%/10% for small-cap. stocks versus minor cuts for large-caps.
BSE-500 companies witnessed 7% yoy growth each in revenues, EBITDA & PAT
3QFY25 results of the BSE-500 companies show that the broader universe continues to struggle with weak revenue growth (+7% yoy), even on ex-OMCs (+11% yoy); see Exhibit 1. EBITDA and PAT growth trended similar to top-line growth at 7% each (see Exhibits 2-3). Banks, capital goods, capital markets, diversified financials, healthcare, real estate, retailing and telecommunication services reported decent-to-strong sales growth on a yoy basis. Exhibits 4-6 show sector-wise growth in key financials over 3QFY21-3QFY25.
Small-caps continue to lag on operating performance
The contribution of the top-100 companies to revenues of the BSE-500 universe has increased marginally to 70%, while the contribution to PAT has been broadly stable around 73% (see Exhibit 7). Exhibits 8-10 show the sectoral earnings growth of large-cap., mid-cap. and small-cap. companies in the BSE-500 universe. We note that small-caps continue to lag their larger peers on all growth metrices, with most sectors facing operating challenges. Exhibit 11 shows the contribution of major sectors in incremental earnings growth in 3QFY25 across various market-cap. buckets.
Margins expanded 20 bps yoy and 80 bps qoq
BSE-500 companies reported improvement in margins in 3QFY25, with composite EBITDA margin expanding by 20 bps yoy and 80 bps qoq (see Exhibit 12). However, most consumer-facing sectors such as automobiles, commodity chemicals, construction materials, consumer durables & apparel, consumer staples, real estate and retailing reported margin contraction yoy. Internet, pharmaceuticals and telecom reported sharp improvement in margins yoy (see Exhibit 13). We note that RM costs and employee costs are around normalized levels for the BSE-500 universe (see Exhibits 14-15).
FY2025E consensus EPS saw further cuts; marginal change in FY2026E EPS
The continued weakness in broader markets has resulted in continued downgrades in consensus earnings for small-caps compared to large-caps in 3QFY25 (see Exhibit 16). Post the 3QFY25 changes, mid-cap. companies have seen 11%/9% cut in their FY2025/26 estimates, while small-cap companies in the BSE-500 universe have seen 25%/17% cuts in FY2025/26 estimates (see Exhibit 17) in 11MFY25. Meanwhile, large-cap. stocks have seen minor cuts over the same period. Our analysis of sectoral aggregates suggests that the downward revisions have been broad-based (see Exhibit 18). The same is also reflected in the earnings revision analysis of individual stocks (see Exhibit 19).
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