The 3QFY24 corporate earnings ended on a strong note, with widespread outperformance across aggregates, driven by continued margin tailwinds.
Domestic cyclicals such as Autos and Financials, along with global cyclicals (i.e., Metals and O&G) drove the beat. Technology posted a marginal decline in earnings, its first in 26 quarters.
The aggregate earnings of the MOFSL Universe companies exceeded our expectations and rose 29% YoY (vs. our est. of +19%).
Earnings for the Nifty50 jumped 17% YoY (vs. our est. of +11%). Five Nifty companies – Tata Motors, HDFC Bank, Tata Steel, ICICI Bank, and JSW Steel – contributed 56% of the incremental YoY accretion in earnings.
Ex-OMCs, Nifty’s earnings grew 17% YoY (vs. est. of +10%). Ex-Metals & O&G, Nifty’s earnings were up 15% YoY (vs. est. of +10%).
The earnings growth for the MOFSL Universe was fueled by domestic cyclicals, as well as healthy gains from global cyclicals (i.e., Metals and O&G).
BFSI clocked a 22% YoY growth (vs. est. of +17%), while Autos registered a significant growth of 60% YoY (vs. est. of +34%).
Metals earnings jumped 74% YoY (vs. est. of +25%) over a weak base of 3QFY23, led by TATA Steel, JSW Steel, and Coal India. OMC’s profitability surged 4.6x in 3QFY24 YoY, due to strong marketing margins.
The IT Services companies (within MOFSL Universe) exhibited a median revenue growth of 1.0% QoQ in CC.
With continued weakness in key verticals and pressure on 4Q execution, the companies have either narrowed their revenue guidance band or expect to achieve the lower end of the range.
Throughout 3QFY24, softness persisted in key verticals and geographies, with BFSI, Consumer, and Communications reporting muted growth.
The banking sector exhibited a mixed performance in 3QFY24, characterized by healthy business growth, controlled provisions, persistent net interest margin (NIM) pressure, and high OPEX. Credit growth was primarily driven by retail growth.
The corporate sector saw a gradual pickup, aided by MSME growth. Most of the banks witnessed stagnant or a slight dip in margins, barring select PSU banks.
In 3QFY24, Auto volumes (ex-tractors) grew 16% YoY (flat QoQ) led by a healthy recovery in 2Ws, stable growth across other segments, and a lower base due to the festive mismatch.
2Ws witnessed the sharpest growth of ~19% YoY during the quarter. Under the consumer segment, our coverage universe posted a muted revenue growth of 4% YoY in 3QFY24 on a low base of 7% growth in 3QFY23. The consumption trend and management commentary about rural recovery remained unchanged in 3Q.
Local competition, a delayed rural recovery, and price cuts continued to hurt revenue performance during 9MFY24 (4% revenue growth).
India is currently enjoying the confluence of the best macro and micro tailwinds with ~7% GDP growth, moderating inflation prints, range-bound crude prices, easing 10-year G-sec yield, stable currency, and resilient corporate earnings.
The 3QFY24 corporate earnings have exceeded our expectations, with the BFSI and Automobile sectors driving the overall performance.
The Metals and O&G sectors reported healthy earnings growth, providing further support to the overall earnings.
The spread of earnings has been satisfactory, with 62% of our Coverage Universe either meeting or exceeding profit expectations.
However, the earnings revision trend in the broader coverage universe, excluding Nifty, was lackluster.
The margin tailwind from 4QFY24 onwards will be receding and facing a high base, necessitating a recovery in revenue growth to drive earnings ahead.
The Nifty50 is trading at a 12-month forward P/E ratio of 19.4x, which is in-line with its long-period average (LPA) even as broader markets trade at expensive valuations (NSE Midcap 100 index trading at ~40% premium to Nifty).
Markets, in the near term, will take cues from the outcome of the Lok Sabha elections scheduled in Apr/May’24 and the timing and quantum of easing in the interest rate cycle, both globally and in India.
Here are top stocks to buy post December quarter earnings with a 12-month investment horizon:
Siemens: Buy| LTP Rs 4396| Target Rs 4950| Upside 12%
Siemens, as the company is a direct play on the transmission and HVDC-related spending over the next few years. It is also rightly positioned to capture railway-related opportunities.
The company is optimistic about the growth prospects from higher spending by the government on infrastructure (rail, roads, and energy) and by private players from several sectors, such as pharma, data center, automotive, electronics, metals, intra-logistics, chemicals, water, and cement.
SBI: Buy| LTP Rs 754| Target Rs 860| Upside 14%
SBI reported a mixed quarter as one-off pension provisions impacted earnings, whereas high wage provisions were partially offset by a decline in loan loss provisions.
Operating expenses thus remained high, thereby affecting PPoP growth. The management anticipates lower wage provisions at INR54b in 4Q. Consequently, we expect an improvement in operating profitability in FY25.
Margins contracted 7bp QoQ to 3.22% in 3Q; however, the bank expects margins to remain broadly stable, with a potential 1-2bp decline. The bank has various levers such as CD ratio and MCLR repricing to keep margins stable.
(The author is Head – Retail Research, Motilal Oswal Financial Services Limited)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
