At the beginning of this result season, we had three themes – overall earnings will be strong and possibly surprise on the upside; earnings in India would be in contrast to weak earnings in the developed world; and thirdly, earnings expectations will continue to see upgrades.
Actual results have borne out our expectations. Nifty earnings grew 28%, a beat of 7% to consensus estimates. This was driven by the EBIDTA growth of 21% as margins rose. Sales growth was weak at 5%. This was in line with our expectations that margins would recover as the drag from high commodity prices following the Ukraine war reverses. Earnings for the broader universe were better with more than 70% of our coverage universe either meeting or exceeding profit expectations. In contrast, the US is seeing a major slowdown at least in earnings. The US earnings growth for the September quarter was in low single digit.
In terms of earnings surprises, nearly 42% of Nifty-50 companies extended their beat. The low base effect led to a big beat in earnings on a YoY basis, while in terms of the number of companies extending the beat, it was similar QoQ. The consensus now expects earnings to grow nearly 25% for FY24 ahead of our more conservative expectation of a 22% growth.
So what drove the earnings growth? Once again, it was propelled by domestic cyclicals, such as BFSI, auto and cement. BFSI clocked a 33% YoY growth, while the auto sector registered a notable growth of 112% YoY. OMC’s profitability surged to Rs 26,600 crore in 2QFY24, compared with a loss of Rs 2,700 crore in the year-ago period, owing to strong marketing margins. Ex-OMCs, Nifty’s earnings grew 22% YoY (vs. est. of +15%).
Earnings in India continue to be robust and we expect an earnings growth of close to 22% for FY24. We continue to see earnings upgrades with a 1.5% earnings uptick for FY24. The result season has again justified our stance of “buy local, avoid global”. We would be watchful of any improvement in the global-oriented sectors where we expect pain for the next two quarters.
Overall, the result season has given us confidence 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 the overall growth. We see a continued pressure on these companies for the next two quarters with an average monsoon possibly dragging down rural-oriented consumer plays. But, the 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, the doubling of earnings over the next five years will lead to strong returns over the medium term.
