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

The March quarter earnings had largely been in-line with the street expectations. Of the top 100 companies, about 40 percent beat revenue expectations while 30 percent did so at the earnings level, which is similar to the trend seen in recent quarters.

The heavy lifting was done by Financials companies given the backdrop of strong broad-based credit growth. This is similar to what we saw last year when Nifty EPS estimates remained quite resilient, with the major downgrades in globally linked sectors such as IT services being offset by the upgrades in the Financial and Auto sectors.

On the consumption side, management’s commentary remained cautious for the near term. While some companies have started seeing a sequential recovery in volumes and rural demand, underlying consumption trends remain weak overall.

What is your take on the FY24 earnings estimates after reading FY23 earnings and considering the global economic environment?

The bulk of the Nifty’s earnings growth in FY24 is expected to come from the sectors linked to investment and consumption demand, mainly Financials, Autos (likely on a low base) and Materials (again on a low base with the sector having seen an earnings decline in FY23).

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With the prices of key commodities cooling off, margins are likely to recover from the lows made in FY23. But we are doubtful on the extent of margin expansion being able to meet consensus expectations, which are quite elevated for both commodity producers and consumers in FY24.

On balance though, we could still end up with mid to high double-digit earnings growth, slightly below where market expectations are.

Your preferred bets for the current financial year?

We continue to like IT services and Financials. Although the India IT sector might face near-term pressures given recessionary concerns in developed markets, we find the sector attractive given reasonable valuations and strong medium- to long-term growth potential.

Similarly, we find Financial services’ valuation attractive, considering healthy credit growth, nearly best-in-a-decade asset quality, high provisioning and low leverage in the system.

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Do you expect the FII money to continue to chase emerging markets including India as we have seen significant flow in the current month?

Barring the past few months, FPIs have been net sellers in the Indian markets over the past couple of years. This has brought down their percentage holding of India’s equity markets to close to the lowest in several years.

The market expects the current rate hike cycle to be near its peak globally, with some forecasting Fed rate cuts as early as this year. This could ensure the recent inflow trend continues. Alongside, India’s macro outlook has improved significantly, aided further by a fall in crude/commodities prices, making it as a preferred investment choice within EMs.

Do you think the equity markets will continue to see consolidation and will find it difficult to reclaim record highs in the coming months?

After remaining cautious throughout the past year, we turned positive on Indian equities in March 2023. With inflationary pressure easing, the RBI has already paused on rate hikes and the expectations are similar from major global central banks in the upcoming meets. Bond yields have come off from the peak, which is again positive for equities.

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Corporate earnings have remained quite resilient. Furthermore, given the recent taxation changes on insurance and fixed-income products, the relative attractiveness of equities has increased, especially for those in higher-income tax brackets.

Given the sharp rally we have seen in recent weeks, we may see some consolidation in the near term, but we still expect to see high single-digit returns for India equities through the year-end.

Do you think the markets may start pricing in interest rate cuts in second half of this calendar year?

Investors are anticipating rate cuts as early as second half 2023, especially after the liquidity related stress seen in the global banking system in the past couple of months.

But we think some of these expectations may be a little premature. The situation still remains quite volatile with the future interest rate trajectory likely to be determined by incoming data on inflation, labour market conditions and consumer spending trends.

Do you want to wait for June quarter earnings to take buying decision in IT sector?

We continue to like the IT services sector from a long-term perspective but also agree that the near-term situation is challenging. The sector provides valuation comfort, after the correction seen during the past year. Even in the latest quarter, we saw robust deal wins with further headroom for margin expansion as revenue growth accelerates, benefits of optimisation measures kick in, supply-side issues ease and attrition rate moderates.

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