Daily Voice | Banking sector profit growth to continue in Q1FY24, PSBs to surprise positively: Gautam Duggad

Auto sector has underperformed over last 4-5 years due to incessant headwinds having sharp impact on volumes and margins. However, recovery in volumes and margins over last few quarters has driven outperformance of the sector. We expect recovery to sustain across segments, though the pace of growth will see divergence across segments of Auto OEM (original equipment manufacturer) and Auto components.

Looking at the segment level performance, 2-wheeler is witnessing gradual recovery in rural demand as well as pick up in exports volume sequentially, PVs (passenger vehicle) growth is expected to normalise after witnessing 21-percent CAGR over FY21-23, CVs (commercial vehicles) are in the middle of its cyclical growth phase, but should see sustained growth over next few quarters at least.

Also read: Positive on consumption space, rural demand likely to pick up this year, says Anand Rathi

With tractors volumes at peak, a weak monsoon increases the risk to FY24 volumes; however, structural changes in agriculture and high reservoir levels lower the risk of share fall in volumes.

Q: Are the corporate earnings in Q4FY23 in line with your expectations?

Q4FY23 corporate earnings were in-line with our expectation with Financials and Auto leading the earnings while metals dragging the performance. Earnings of the MOFSL Universe companies grew to four quarter high of 15 percent YoY (estimates +14 percent YoY) in Q4FY23, while for Nifty, earnings growth stood at 16 percent YoY (versus estimates of +14 percent YoY).

This aggregate performance has been led by BFSI and Automobiles that reported 43 percent/115 percent earnings growth, while it has been dragged by weaker-than-expected performance of Metals that clocked 45 percent earnings decline.

Q: Do you think the sectors that supported corporate earnings in Q4FY23 will continue to do so in Q1FY24 as well?

Banks and Automobile sectors led majority of the incremental corporate earnings for Q4FY23 and FY23.

Also read: This fund manager prefers to play capex theme through mid, small-caps. Here are his picks

Banks - Given the tailwinds of healthy loan growth momentum, stable margins, continued asset quality improvements, growth in both Retail and MSME book with corporate book displaying a healthy rebound, we believe the banking sector profit growth momentum to continue in Q1FY24. While private banks earnings momentum remained strong, PSBs will continue to surprise positively.

Autos - The auto sector is recovering from multiple years of headwinds, which are now receding and the sector is on the path of complete normalcy. Improving demand and healthy auto sales volume (with PV/tractors sales above and 2W/CV sales volumes near to the pre-pandemic levels), improved supply chain, and cost pressure declining sequentially reaffirms the healthy earnings growth momentum to continue in the upcoming quarters as well.

Q: What is your take on metals earnings that broadly underperformed in Q4FY23?

Q4FY23 earnings of MOFSL universe was sharply dragged by metals, which reported a 45-percent earnings decline. Companies like Coal India, Hindustan Zinc, JSPL, SAIL, Tata Steel and Vedanta reported wide earnings miss. The sector was impacted by higher input cost, weak global macros, lower than expected pickup in China which was partially offset by lower coking coal prices and relatively better volumes sequentially.

Also read: Bulk of Nifty’s FY24 earnings growth likely from sectors linked to investment, consumption demand: BNP Paribas' Abhiram Eleswarapu

In line with the recent corrections in the metal prices the realisations are expected to be subdued with similar levels of cost of production in Q1FY24. The benefits of lower coking coal cost will accrue post June 2023.

Q: Have you cut your EPS estimates for FY24 after recent corporate earnings season? If yes, then why?

We have reduced Nifty EPS for FY23 by 0.6 percent to Rs 807 (earlier: Rs 812) largely due to notable downgrades in ONGC, Coal India, and BPCL. FY24E EPS also saw a cut of 0.6 percent to Rs 972 (earlier: Rs 978) due to downgrades in ONGC, BPCL, and Infosys.

Q: What is your take on IT space after Q4FY23 earnings? Have you started taking big exposure in the space?

IT companies reported a mixed performance overall in Q4FY23, with tier-1 firms delivering muted revenue growth and modest margins, while tier-2 companies outpaced the tier-1 pack with stronger revenue growth. MOFSL IT Services coverage universe delivered USD revenue growth of 0.3 percent QoQ/6.9 percent YoY, while EBIT margin declined by 25bp QoQ/50bp YoY during the quarter.

The rupee PAT growth came in at 0.4 percent QoQ/8.6 percent YoY. Deal momentum during the quarter was relatively soft compared to the previous quarters, on account of higher deal scrutiny, an elongated sales cycle and delays in approvals.

We currently have a NEUTRAL stance on the sector in our Model Portfolio and are biased towards large-caps given the relative risk-reward attractiveness.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.