The earnings for the June quarter (Q1FY24) came in strong and could underpin the underlying overall optimistic narrative of India. As per a report by brokerage house Motilal Oswal, after a solid 23 percent earnings CAGR over FY20-23, Nifty posted 32 percent earnings growth in 1QFY24 vs expectations of 25 percent. Once again, the earnings growth was propelled by domestic cyclical, such as BFSI (bank, financial services, and insurance) and auto.
Q1 earnings review: MOSL lists best-performing sectors, stocks and top picks after results
After a solid 23 percent earnings CAGR over FY20-23, Nifty posted 32 percent earnings growth in 1QFY24 vs expectations of 25 percent, said MOSL.
MOSL also highlighted that its Coverage Universe recorded the highest earnings growth in the last eight quarters. Healthcare has made a strong comeback with 24 percent earnings growth after six consecutive quarters of flattish earnings while metals continued to drag.
The brokerage further pointed out that the earnings performances of both MOFSL Universe and Nifty were led by heavyweights. The top five companies within MOFSL Universe contributed 84 percent to the incremental YoY accretion in earnings (three OMCs contributed 59 percent, followed by SBI – 13 percent and Tata Motors – 12 percent). Similarly, within Nifty, five companies (BPCL, SBI, Tata Motors, HDFC Bank, and ICICI Bank) contributed 100 percent to the incremental YoY accretion in earnings during the quarter, observed the report.
Hit and miss ratio: As per the report, the beat-miss ratio for the MOFSL Universe was largely balanced as 36 percent of the companies beat estimates, while 38 percent missed estimates at the PAT level. Of the 231 companies under its coverage, 84 exceeded profits estimates, 87 posted a miss, and 60 were in line.
SBI, HDFC Bank, ONGC, Coal India, Kotak Mahindra Bank, Maruti Suzuki, Hindalco, Mahindra & Mahindra, Tata Motors, Asian Paints, Dr Reddy’s Labs, Hero Motocorp, JSW Steel, Cipla, Nestle, SBI Life Insurance, Grasim Industries, and UPL reported higher-than-estimated earnings. While BPCL, Infosys, ITC, HCL Technologies, Hind. Unilever, LTI Mindtree, Tech Mahindra, Titan Company, Tata Steel, Divis Labs, Tata Consumer, and Apollo Hospitals missed profit estimates, noted the report.
Upgrades/Downgrades: The brokerage reported that for MOFSL Universe, the earnings upgrade to downgrade ratio was a bit unfavorable for FY24E as 66 companies have reported earnings upgrades of >3 percent, while 76 companies’ earnings have been downgraded by >3 percent. The EBITDA margin of MOFSL Universe (ex-Financials) rose 330bp YoY to 17.6 percent, it added. Seven Nifty companies saw an upgrade of over 5 percent in their FY24 EPS estimates; conversely, five companies witnessed a downgrade of over 5 percent, it highlighted.
The top earnings downgrade in FY24E: Tech Mahindra (-10%), UPL (-7%), Tata Steel (-5%), Apollo Hospital (-5%), and HUL (-4%).
Of the 21 sectors under the brokerage's coverage, 7 sectors reported profits above estimates, 8 were in-line and 6 were below expectations.
According to the brokerage, the BFSI coverage universe recorded a 60 percent YoY profit growth. The banking sector posted a mixed 1QFY24, driven by healthy loan growth and sustained improvement in asset quality; however, the margin trajectory reversed due to a sharp rise in funding costs, noted MOSL. For NBFCs, it stated that most of them (except HFCs) reported a sequential contraction in NIM, surpassing initial projections. For a majority of NBFCs, the principal reason behind this NIM compression was the substantial increase in borrowing costs, it added.
Meanwhile, it informed that auto posted a significant profit of ₹17,900 crore (vs. a profit of ₹1300 crore in 1QFY23). Ex-Tata Motors, the Auto Universe registered a healthy 83 percent earnings growth in Q1FY24 vs the expectation of 59 percent. The quarter saw upgrades for FY24E largely to factor in the benefits of better gross margin, thus aiding overall profitability and commentaries related to a sequential improvement in exports, mentioned MOSL.
OMCs' profitability also surged to ₹30,500 crore in 1QFY24 vs a loss of ₹18,500 crore in 1QFY23 due to strong marketing margins, it further said.
Ex-OMC, MOFSL/Nifty's earnings rose 19 percent YoY each vs expectations of 12 percent/11 percent, observed the brokerage. Metals continued to drag the aggregates with a 40 percent YoY decline in earnings, led by Tata Steel (-92 percent YoY), Vedanta (-81 percent YoY), and Hindalco (-40 percent), it added.
It also stated that IT services companies reported weak performance in 1QFY24 with flattish median revenue growth QoQ in constant currency, in an otherwise seasonally strong quarter. The weakness in key verticals continued through Q1 with BFSI and retail reporting a median USD revenue decline of 1.2 percent and 0.4 percent QoQ, respectively. For consumer space, it noted that the overall performance of MOFSL Universe was a mixed bag with a few companies reporting healthy volume growth while others posted healthy value growth during the quarter.
Margin shows signs of recovery
As per the brokerage, sales for the MOFSL Universe grew 3 percent YoY. Excluding metals and O&G, sales growth stood at 16 percent YoY.
Sectoral sales growth: Automobile (26%), Private Banks (26%), PSU Banks (24%), Retail (20%), Healthcare (16%), and Technology (11%).
It also mentioned that the EBITDA margin of the MOFSL Universe (ex-Financials) rose 330 bp YoY to 17.6 percent. Gross margin for major sectors spiked, while margin for a few contracted. In 1QFY24, eight of the 13 major sectors under MOFSL reported an expansion in gross margin YoY, while five sectors saw a contraction, it informed.
Going ahead, the brokerage expects the MOFSL Universe to deliver sales/EBITDA/PAT growth of 7 percent/22 percent/33 percent YoY in FY24. The Auto, O&G, and Banks (Private and PSU) are expected to be the key growth drivers with 77 percent, 56 percent and 30 percent YoY earnings growth, respectively, and are likely to contribute 71 percent to earnings growth, it predicted.
It also raised its FY24E EPS of Nifty by 2.5 percent to ₹988 (earlier: ₹964) due to notable earnings upgrades in Tata Motors, JSW Steel, Bharti Airtel, SBI, and Kotak Mahindra Bank. It now expects the Nifty EPS to grow 22 percent/16 percent YoY in FY24/ FY25.
"The corporate earnings for FY24 have begun on a healthy note. After a solid 22 percent earnings CAGR over FY20-23, Nifty opened FY24 with a 32 percent earnings growth. The spread of earnings was decent with 62 percent of our Universe either meeting or exceeding profit expectations. Going forward, we expect the earnings to remain healthy and pencil in over 20 percent earnings growth for Nifty in FY24. The profit pool of MOFSL Universe is expected to grow at 33 percent YoY in FY24 and surpass the ₹10 lakh crore mark. Nifty is trading at a 12-month forward P/E of 18.5x, at an 8 percent discount to its own long-period average (LPA). We remain OW on Financials, Consumption, and Automobiles. We are UW on Metals, Energy and Utilities and Neutral on IT, Healthcare and Telecom within our model portfolio," it said.
Here are its top picks after June quarter earnings:
marketsManik Kumar Malakar
marketsManik Kumar Malakar