Q2 Results Outlook: In the struggle of a global economic slowdown, India is witnessing a stroke of fortune. Post initial hurdles, the outlook for FY24 is poised for a gradual, yet promising, transformation. FY23 wrapped up on a subdued note, with subpar earnings growth and soaring valuations. Initially, it did have a mirror effect on the future forecast of FY24. However, when the domestic economy remained resilient to global challenges and the inflation started to peak out, it eventually led to an upswing in India’s corporate earnings.
Q1 Results Surprise
After the below-par quarterly results of the latter half of FY23, it was projected that Q1FY24 would yield an improvement in profitability, facilitated by a reduction in commodity input prices. However, skepticism was lingering in the market regarding the sustainability of the positive forecast, given the persisting global headwinds and significant FII sell-off. Surprisingly, the Q1 actual results not only surpassed the forecast but also delivered an impressive 10% outperformance, with an actual Nifty PAT growth of 30%. The most incremental growth providers were Finance, Auto and Oil & Gas sector. The weakest were Metals and FMCG due to high inflation, while rest of the other sectors were mixed with a positive bias.
Can Q2 results meet expectations?
And the delight is that the optimism is expected to continue in Q2. The Nifty50 consolidated PAT is estimated to grow again by a whopping 21% YoY, a similar number forecast in Q1FY24. Once more, this growth is expected to be driven by stellar performances in the Auto, Finance, and Oil & Gas sectors. However, on a sequential basis, Auto and Finance sectors are anticipated to exhibit a more tempered trajectory due to a moderation in margin expansion stemming from sustained production and service costs. Conversely, instant improvement is estimated in sectors that were muted in Q1 such as Metal, FMCG, Telecom, Cement, Telecom and Infra due to moderation in inflation and improvements in household and government spending. Overall, sectors like IT, Pharma, Ports, Power, Chemicals, and FMCG are likely to register restrained figures.
If the projected Q2 results, coupled with the actual Q1 performance, materialize as expected, the Nifty50 index EPS is set to witness a robust 25% earnings growth in H1FY24. Market expectations suggest an earnings growth range of 20 to 25% for the entire FY24, surpassing the initial conservative forecast of 10 to 15% put forward by experts and analysts between January and March 2023.
A pivotal factor contributing to the progress of India’s corporate outlook is the commendable performance of the country’s economy during the global crisis. Corporate performance in FY23 was muted with estimated earnings growth of ~6-8% for Nifty50. A downward revision in earnings occurred during FY23, especially in H2, owing to elevated global inflation, supply chain constraints, and a slowdown in global demand, all of which exerted pressure on the profitability of Indian corporates.
However, volume growth for India Corporate was intact and continued to arise in FY23 and FY24. This upward trend was primarily propelled by heightened government expenditure and the strategic initiative of global entities to diversify their supply chains, with a particular focus on prominent EMs such as India. Hence, when the global headwind of high inflation started to peak out in 2023, it chipped into India’s profitability since demand & volume were healthy.
The notable enhancement in earnings growth primarily stemmed from the expansion in EBITDA (operating profit), attributable to the decline in essential commodity and input costs such as crude oil, metals, and food grains in 2023 compared to the preceding year. Till date, Nifty50 is up by 14% in FY24, below to the 20 to 25% earnings growth being forecast for large caps stocks today. However, at the same time, the Mid and Small-cap indices have experienced a substantial surge of 35 to 45%, hinting at the possibility of large caps to outperform in the upcoming period.
First published in Mint