Indian corporates continue to maintain their optimistic business performance. The demand and the earnings growth are being sustained in Q3. Notably, the material sector excels, particularly in segments such as metals and cement, attributed to improved realization and reduced raw material costs. Conversely, chemicals, a segment of material, has experienced subdued growth characterized by single-digit figures, primarily influenced by a decline in international realization. Later, it is followed by high growth in consumer discretionary, with sectors like auto, auto-ancillaries, and lifestyle goods, maintaining high growth in PAT, led by consumption demand. Industrials are also stable, with segments like capital goods, defence, port, and aviation. And real estate also continues to exhibit a robust trend.
The consumer staples sector, encompassing FMCG and retail, is grappling with a slowdown primarily due to weak rural demand. Information technology continues to have a muted outlook throughout the year, with marginal negative de-growth in the Q3 forecast. On the other hand, sectors like energy, utilities, healthcare, and finance are forecasted to experience moderate growth, ranging between 10% to 20% YoY.
IT giants have announced the initial results, which are as muted as forecast, with revenue growth of 1.5% QoQ. However, it has positively surprised investors with better-than-expected results on account of improvements in certain segments like healthcare, energy, utilities, and manufacturing. Despite a subdued deal win, margins have improved by 50-bps, attributed to cost optimization measures such as a lower attrition rate and enhanced utilization. Management suggests that pockets of optimism are emerging as it arrives to the end of global rate-tightening cycle. CY25 is foreseeing a boost in the resumption of delayed discretionary projects and enhanced revenue visibility. Investors are buying into the sector given that valuations have contracted compared to the expensive market, resulting in a safe long-term investment choice.
In the realm of banking, the performance has been affected by FII selling off HDFC Bank, even though Q3 EPS exceeded expectations. Investors have read between the lines that a significant dip in Net Interest Margin (NIM) is forecast in the future. Or the foreign funds are restructuring their positions in EMs and Indian banks (as strategy is moving from risk-on to risk-off due to reversal in view that Fed may not cut rate in March) or they are simply not happy with the performance of the merged entity of Bank + HFC, expecting a downgrade in future valuation.
Concerns have surfaced regarding HDFC Bank, suggesting potential liquidity challenges as evidenced by a decline in the Liquidity Coverage Ratio from 124% to 110% compared to the previous quarter. Generally, in the current high cost of funds scenario, most banks are finding it challenging to mobilize CASA funds, and there is an uptick in the growth of term deposits, exerting upward pressure on cost of deposits. The difficulty in passing on this incremental cost to borrowers is, in turn, affecting the Net Interest Margin (NIM) ratio negatively. Despite these challenges, our outlook on both the stock and the sector remains optimistic.
Back to the overall Q3 result, though the total number provided decent growth, there is a slowdown in the trajectory. Nifty50 YoY PAT growth was robust at 30% and 25% in Q1 and Q2, which is expected to narrow to 15% in Q3, flattish on a QoQ basis. And when we extend the coverage from mega 50 large to top 100 large cap companies, the same indication is visible. PAT growth, which was 45% and 25% in Q1 and Q3, is expected to normalise to 19% in Q3.
Currently, the market forecast for Nifty50 EPS growth of 23% in FY24 is based on robust H1 results, which presume to be on the higher side considering the slowdown visible in Q3 and expected to drift on to Q4. Based on initial Q3 results, corporate earnings growth doesn’t align with the market’s high valuation. The figures aren’t bad but insufficient to sustain the prevailing euphoria. Simultaneously, FIIs are exercising caution on emerging markets, considering the possibility that the Fed may not implement rate cuts as aggressively in CY24 as initially forecasted. Investors should adopt a cautious approach in the short to medium term. Sector rotation and the safety of equity should be the key strategies of retail investors. Sectors deemed secure include IT, Pharma, Infra, and FMCG.
First published in Mint