The June quarter (Q1FY24) earnings season saw an overall in-line performance, however, wide divergences were witnessed across sectors and companies. In an earnings review report, domestic brokerage house HDFC Securities noted that 98 percent of incremental YoY earnings growth came from only three sectors— auto, energy, and lending financials — reflecting heavy lifting by these sectors.
The Nifty 50 index is now trading at 20.6x FY24 and ~17.4x FY25 consensus EPS, indicating limited upside potential in the next 12 months, further estimated the brokerage.
Post the Q1 earnings, the brokerage prefers sectors including large-cap banks, industrial and real estate, power, autos, pharma, gas, insurance, and capital markets. However, it remains underweight on consumer (staples and discretionary), energy, NBFCs, and small banks.
Model portfolio:
The brokerage said that post the June quarter results, it has maintained a bias toward the economy-facing and value sectors. It has also made some key changes in the model portfolio.
Inclusion/weight increase: BSE, Star Health, CDSL, Hindalco, Divi’s lab, Sobha, and CESC.
Exclusion/weight reduction: ICICI securities, Torrent pharma, PGCIL, DLF, Cummins, Phoenix, ITC, and NTPC.
Earnings
As per the brokerage, aggregate revenue/PAT grew by 3 percent/52 percent YoY across the HSIE coverage (219 stocks), with their four-year CAGRs at 12 percent/22 percent. Large-cap stocks of the coverage universe dominated the incremental earnings, which grew by 55 percent YoY, while the midcap category grew by 24 percent YoY, it added.
Further, its coverage universe saw strong YoY revenue growth in auto, lending financials, industrials, cement, consumer discretionary and pharma sectors. On the other hand, staples, real estate, energy, chemicals, metals, home improvement and power sectors disappointed.
The key theme of the quarter, HDFC Securities said, was input cost deflation, which helped companies improve their profitability but had an adverse impact on revenues due to low realisations.
Overall, the coverage universe’s Q1FY24 PAT beat of 6.6 percent was led by the auto, lending financials, energy, and metal sectors. Further, it also pointed out that there was a decrease in the percentage of companies beating estimates this quarter as names from IT, chemicals and home improvement missed the estimates.
The historical trend of the percentage of under-coverage companies beating estimates is as below:
Earnings estimates
According to HDFC Securities, the changes in earnings estimates were deeply concentrated. 18 percent, 46 percent and 13 percent of the earning upgrades were led by auto, lending financials and energy sectors, respectively, while IT, chemicals and metals were responsible for 46 percent, 19 percent and 24 percent of cuts respectively for FY24.
Similarly, lenders, energy, and power accounted for 46 percent, 19 percent and 15 percent of FY25 upgrades while metal, chemicals and, consumer discretionary led 38 percent, 34 percent and 16 percent of cuts for the same year respectively, it observed.
Consequently, the aggregate earnings estimates saw upgrades of 0.6 percent and 1.2 percent in FY24 and FY25 respectively, added the brokerage.
Earnings growth
For the HSIE coverage universe, projected earnings growth for FY24 and FY25 stands at 23.4 percent and 12.0 percent respectively, factoring in sustained margin recovery and demand momentum, said the brokerage. FY23 was an exceptionally subdued year for the energy sector due to the freeze on petrol and diesel retail prices and windfall tax impacting OMCs and upstream respectively. So, excluding energy, earnings growth for the coverage universe for FY24 and FY25 stands at 18.2 percent and 14.7 percent, informed the brokerage.
