One of the most crucial campaigns of Alexander the Great was the Battle of Hydaspes in 326 BC, when he went up against King Porus of Punjab. Porus’s mighty army relied heavily on its contingent of war elephants, which struck fear into the hearts of his enemies. However, on the day of the battle, the Macedonian phalanx managed to repulse the giant beasts, which turned around in panic and trampled many of their own soldiers to death.

The episode has played out multiple times in Indian history, and not just in warfare. Size might be a critical advantage in many situations, but it also risks being the biggest drag when the winds turn unfavourable. Take the current Q2 earnings season, for example. The country’s biggest IT firm TCS, biggest private sector lender HDFC Bank and largest NBFC Bajaj Finance have for long been benchmarks for Corporate India. But as their Q2 report card shows, a larger surface area has not only amplified the impact of global and domestic headwinds, but also added to the biggest burden facing any company - the weight of expectations. TCS kicked off the Q2 results season with a contraction in USD revenues for the first time since the pandemic-hit June 2020 quarter as well as the highest-ever quarterly decline in headcount. The IT major bore the brunt of the growth pangs in the US and EU, which account for around 68 percent of its topline. Elevated interest rates and weak consumer sentiment in Western economies have led to a continued slowdown in discretionary spends, leading to delays in decision-making as well as deal conversions. “Management highlighted that while the company is able to sign large deals and the new projects are ramping up on time, revenue leakage from existing projects due to deferrals or ramp downs is impacting revenue growth. Furthermore, management highlighted that the demand sentiment has not changed and clients remain cautious,” analysts at Jefferies said. The silver lining was that deal wins remained strong at $11.2 billion, its second-highest-ever deal total contract value (TCV) and also the third consecutive quarter of deal wins staying above $10 billion - a milestone for India’s $245-billion Indian IT industry. However, Q2 deal wins were driven by two mega deals with TCV of around $1 billion each from BSNL and JLR. Worryingly, order wins across the key market of North America slumped 13.5 percent QoQ to $4.5 billion. Needless to say, the Street has taken note of this slowing juggernaut. TCS is the worst performer among the top 3 IT firms for the past month. Probably the most vivid demonstration of ‘big is not always better’ philosophy right now is HDFC Bank, which reported its first quarterly results after it merged with the parent Housing Development Finance Corporation (HDFC). While the Q2 numbers are not comparable to the pre-merger period, HDFC Bank’s management had provided proforma numbers for the first quarter to give a sense of how the merged entity would look. As per an analysis by Jefferies, adjusted for the merger, HDFC Bank’s net profit declined by 2 percent sequentially against the reported 33 percent jump. The biggest impact was on the net interest margin (NIM), which tumbled by a whopping 70 basis points sequentially to 3.4 percent, as against the 4 percent-level HDFC Bank has traditionally maintained. NIM - the difference between what banks offer depositors and what they charge for loans – is a key profitability metric for lenders. One of the major reasons for the deteriorating margins was an increase in liquidity post the merger. When HDFC Bank absorbed HDFC’s loans, it had to increase its liquidity position to meet various regulatory guidelines like cash reserve ratio. The bank said there was a “debt-funded cost for the additional liquidity and merger management” which was a drag on the NIMs during Q2. “While we expect NIMs to see sequential improvement going ahead, as the impact of excess liquidity wanes out, it will be difficult to see pre-merger levels as lower-margin home loans of HDFC Ltd gets added to the loan portfolio,” domestic brokerage firm JM Financial said. Another fallout of the merger was an uptick in its gross non-performing assets (NPA) ratio to 1.34 percent from 1.17 percent in Q1 as about Rs 5,000 crore worth of HDFC’s loans were restructured and had to be labelled non-performing on the bank’s balance sheet. The HDFC Bank stock has been a conspicuous underperformer ever since the merger was announced in April last year, dropping around 7 percent. Investors, however, can still take heart from the fact that despite its merger-related pain, the analyst view on the company remains overwhelmingly positive. Shrinking margins has claimed another high-profile victim this earnings season – Bajaj Finance. Its net interest income growth of 30 percent lagged AUM expansion of 33 percent due to an 11 bps QoQ compression in NIMs to 10.5 percent. “Moreover, management guided that margins may see another 25-30 bps compression as funding costs will rise and Bajaj Finance may not like to pass that on to clients. While this will be a drag on top line, Bajaj Finance has levers to slow opex growth… to mitigate impact on profit / ROA,” Jefferies added. Other analysts pointed out that its NPA profile will be keenly tracked as it is already one of the most aggressive lenders in the NBFC space today and will have to maintain its scorching pace of growth to sustain its leadership position in the market. However, as most finance sector professionals know only too well, lending is the easiest part for banks and NBFCs in India. The real challenge is to recover those loans. Shareholders would be hoping this mad rush for growth does not result in laxity in the company’s credit appraisal process and subsequent deterioration in its asset quality. Some parts of its book have started throwing up signs of stress. Bajaj Finance’s gross stage-3 assets (or loans which have been overdue for more than 90 days) increased 5 bps QoQ to 0.9 percent, while the net stage- 3 was largely stable at 0.3 percent. “Rural B2C exhibited minor stress, and the management has cut incremental business volumes in this segment to mitigate risk. It expects Rural B2C to remain muted until Feb’24 and recover subsequently,” Motilal Oswal said in a note. Weighed by these lingering concerns, the Bajaj Finance counter closed in the red for two straight sessions after its results announcement. In a report earlier this year, Elara Securities had described Bajaj Finance as an “elephant that continues to dance”. Investors would be praying it remains that way, because as we have seen, wounded elephants do not paint a pretty picture.