Daily Voice: Gautam Duggad expects these 5 sectors to have a strong Q4 as well

The Q3FY24 corporate earnings ended on a strong note driven by continued margin tailwinds. Earnings for Nifty50 posted a solid 17 percent growth (versus estimates of +11 percent) ,while our broader MOFSL coverage universe delivered 29 percent earnings growth (against estimates of 20 percent).

Domestic cyclicals such as automobiles and financials along with global cyclicals (i.e. metals and oil & gas) driving the beat. Within MOFSL universe, auto posted a strong profit growth of 60 percent YoY (above estimates of 34 percent), while BFSI recorded a 22 percent YoY (above estimates of 17 percent) led by banks.

Metals posted second consecutive quarter of earnings growth of 74 percent YoY (versus estimates of 25 percent). Cement and capital goods reported a strong in-line 105 percent/28 percent YoY earnings growth.

Our consumer universe delivered an in-line profit growth of 14 percent YoY, mainly led by margin expansion as top line growth remains weak. Technology reported marginal earnings decline after 26 quarters of earnings growth.

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Have you seen more upgrades than downgrades after the December quarter numbers?

The beat-miss ratio for the MOFSL universe was unfavourable, with 38 percent of the companies missing our estimates, while 33 percent reported a beat at the PAT level. For the MOFSL universe, however, the earnings upgrade-to-downgrade ratio has turned weaker for FY25E as 58 companies’ earnings have been upgraded by >3 percent, while 84 companies’ earnings have been downgraded by >3 percent.

Which are the sectors that disappointed on the earnings front?

Among the key sectors, speciality chemicals, retail, infrastructure and telecom reported earnings below our estimates. Of the 23 sectors under our coverage, seven reported profits below our estimates, whereas, 16 posted earnings above or in-line our estimates in Q3FY24.

Which sectors will continue reporting healthy earnings growth in the coming quarters?

Automobiles, BFSI, cement, consumer, healthcare and capital goods are expected to continue reporting strong earnings growth in Q4 as well.

What is your reading of management commentaries?

Overall management commentary remains a mixed bag. Managements of sectors such as automobile, PSBs, capital goods, real estate and select consumer discretionary continue to remain positive due to ongoing sector tailwinds and earnings delivery.

Overall consumption demand continue to remain muted, mainly due to ongoing weakness in the rural demand, with no sign of notable recovery anytime soon.

Also, managements guided thin margin tailwinds would continue to moderate due to high base going ahead. IT services also lowered their revenue guidance due to ongoing weakness in the US and Europe and their key verticals.

Do you think the FMCG sector is lacking in terms of stock performance due to earnings?

Our FMCG coverage universe continues to post a muted revenue growth of 4 percent YoY in Q3FY24 on a low base of 7 percent growth in Q3FY23. The consumption trend and management commentary about rural recovery remained weak and unchanged in Q3.

Local competition, a delayed rural recovery and price cuts continued to hurt revenue performance during 9MFY24 (4 percent revenue growth). Volume growth improved a bit sequentially but revenue growth was muted due to price cuts. Continued weakness in consumer demand and historically high valuations have led to weak stock performance compared to broader markets.

Should one start betting on the technology sector or wait for March FY24 quarter earnings?

Tech earnings met our muted expectations of flattish YoY performance. IT companies reported a mixed performance overall in Q3FY24, with tier-1 firms delivering muted revenue growth and modest margins, while tier-2 companies outpaced the tier-1 pack with stronger revenue growth.

The MOFSL IT services coverage universe exhibited a median revenue growth of 1 percent QoQ in constant currency (CC). With continued weakness in key verticals and pressure on Q4 execution, the companies have either narrowed their revenue guidance band or expect to achieve the lower end of the range.

We currently have an underweight stance on the sector in our model oortfolio and are biased towards largecaps, given the relative risk-reward attractiveness. However, it offers a good defensive element in the portfolio.

Do you think the market will remain strong this year, too? What are the triggers to watch?

Yes, we remain optimistic on markets and believe that India is currently enjoying the confluence of the best macro and micro tailwinds with around 7 percent GDP growth, moderating inflation prints, range-bound crude prices, easing 10-year G-sec yield, stable currency, and resilient corporate earnings.

We expect 16 percent earnings compounding over FY24-26 for the Nifty after an already robust 22 percent CAGR over FY20-24E and believe that market should continue to reflect the underlying earnings growth.

The Nifty is trading at a 12-month forward P/E ratio of 19.4x, which is in-line with its long-period average (LPA) even as broader markets trade at expensive valuations (NSE Midcap 100 index trading at ~40 percent premium to Nifty). The Lok Sabha election outcome and interest rate movement are the key triggers to watch out for in the near term.

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