The September earnings quarter is starting today and could show India Inc.’s worst quarterly performance since June 2020’s lockdowns, which crippled business.
Motilal-Oswal’s brokerage estimates predict that Nifty earnings in Q2 will only grow by 2% YoY, the lowest rate of growth for 17 quarters.
Fear of downwards grading and pressure on margins
Fears of downgrades have been raised by the tepid earnings growth. Motilal oswal said that the H1 growth in earnings per share for the Nifty index could be just 3%. The full year FY25 forecast growth may also slip down to only 7%. This is well below consensus estimates of 13%.
Analysts believe that earnings fatigue may lead to further reductions in projected growth. Aditya Suresh is the head of India equity analysis at Macquarie.
Earnings expectations continue to be lowered and we see a decline in the 15% consensus growth forecast for 2-year earnings per share. We see more missed than beats, particularly in financials, consumer goods, materials and consumer discretionary.
The second quarter of this year could see a profit increase below 10%, after Q1’s earnings growth was only 4%.
Nifty’s profits after taxes (PATs) have been increasing in double-digits since September 2020. This trend continued until the quarter of March 2024.
The slowdown in earnings due to demand is a cause for concern
Analysts say that weakening consumer demand is more concerning than shocks such as liquidity crises.
What’s worse is that the earnings decline is being driven by demand, and not an external or liquidity shock. Prateek P. Parekh, Nuvama said that reversing the demand trend would require a significant policy response. This isn’t in sight for now.
The consensus Nifty earnings forecasts for the FY24/25/26 are Rs957/1.084/1.250 respectively. This indicates a continued slow growth.
Brokers expect Nifty to reduce its margins by 40 basis point, and settle at 20 percent.
BFSI, utilities and commodity sectors will drive profits; BFSI to be the main driver
Sectors like Banking, Financial Services, and Insurance (BFSI) are expected to grow by 11% year-over-year, despite the general slowdown.
Healthcare (15% YoY), utility (24% YoY) and telecom are expected to have strong results.
Motilal oswal estimates that the telecom sector’s losses will drop from Rs 4,300 crore in Sept 2023 to Rs 400 crore in Sept 2024.
Earnings will be affected by global cyclicals, such as metals and oil & Gas (O&G).
O&G earnings, particularly those of oil marketing companies, could decline by as much as 33% year-over-year, while the metal industry may only see a 2% increase.
Cement is another major commodity expected to drop sharply, by as much as 41%.
Retail and real estate stand out
Despite the slowdown in earnings, both real estate and retail are predicted to grow strongly.
Retail is expected to grow 17%, while real estate may increase 44%. Forecasts indicate that capital goods (+13% YoY), and the consumer segment (+4% YoY), will grow modestly.
Elara Capital reported that the Q2 quarter would mark the first time in the last seven years where earnings have declined both year-over-year and on a QoQ basis among the 235 stocks it covers, due to the struggle of domestic cyclicals to counteract the impact from the commodity sector.
Long-term opportunities for buying remain despite the market volatility.
Emkay expects a modest earnings season with considerable divergence between sectors.
Materials, Energy, and Financials have brought down Nifty’s PAT aggregate growth to just 5%, whereas other sectors will deliver robust, double-digit growth.
Consensus estimates of growth in Nifty’s EPS for the FY25 remain at 15,9%.
The market was expected to be rangebound with “increased volatility”, with valuations limiting the potential upside.
We see markets in range bound with increased volatility. It said that valuations cap the upside. “Our Sep-25 target price for Nifty is $26,000, which is generously priced at 22x per 1YF. This offers an 5% increase from this point,” it stated.
According to the brokerage, the market is not likely to experience a significant correction due in part because of macro-financial and earnings stability. This could be despite concerns about global events such as the Middle-East Oil Shock and the shift of foreign portfolio investments towards China.
Investors with an horizon longer than two years, who are looking to capitalize on the market’s weakness should do so.
The post India Inc. set to report the weakest second quarter earnings in 4 years: A long-term investment opportunity? This post may change as new information becomes available
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