By Jyotivardhan Jaipuria
At the beginning of the result season in July, we had three themes — first was that overall earnings will be strong and possibly surprise on the upside. The second was that earnings in India would be in contrast to weak earnings in the developed world. Thirdly, we expected the recent earnings downgrades to slow.
In terms of earnings surprises, nearly 46% of Nifty-50 companies extended their beat, similar to Q4FY23. The low base effect led to a big beat in earnings on a y-o-y basis while in terms of the number of companies extending the beat, its similar qoq. The Bloomberg consensus FY24-25F EPS was revised upwards by 2% reversing the recent spell of downgrades. The consensus now expects earnings to grow nearly 20% for FY24 ahead of our more conservative expectation of 15% growth.
So what drove the earnings growth? Once again, the earnings growth was propelled by domestic cyclicals, such as BFSI and Auto. BFSI recorded a 60% y-o-y profit growth while Auto posted a significant profit of Rs 179b (vs. a profit of Rs 13b only in Q1FY23. OMC’s profitability surged to `305b in Q1FY24 vs. a loss of `185b in Q1FY23 due to strong marketing margins. Ex-OMC, Nifty’s earnings rose 19% y-o-y vs. expectations of 11%. Metals continued to drag the aggregates with a 40% y-o-y decline in earnings, led by steel companies that saw a 70-80% drop in earnings. This reiterates our sector preference for “buy local, avoid global”.
Overall, the result season has given us confidence in our view that the economy is robust and we are at the start of a strong earnings cycle. Over the past two years, we have seen more investment-driven companies drive earnings with consumption sectors in India as well as global sectors like software dragging overall growth. Near term, we see continued pressure on these companies for next two quarters with a weak monsoon possibly dragging down rural-oriented consumer plays. But overall strong earnings growth is going to be the key driver for the stock markets with valuations looking a trifle expensive. While we think markets will consolidate near term, we think a doubling of earnings over next five years will lead to strong returns over the medium term.
(The writer is founder and MD, Valentis Advisors)