Jefferies predicts significant domestic earnings growth slowdown in FY24

Autos, staples, cement and metals are expected to see the biggest margin improvement primarily on declining cost pressures, according to the report. (Representational image)

The consensus estimate for Nifty earnings growth projection for FY24 is 20 percent, which may appear high, but Jefferies pointed to the slowdown in domestic earnings.

Domestic earnings growth in FY23 was a strong 30 percent year on year (YoY) but it is expected to fall to 19 percent in FY24, partly because of a higher base, wrote the brokerage’s analysts in a recent report.

Foreign-related earnings is expected to make a strong comeback, from a decline of 14 percent in FY23 to a growth of 21 percent in FY24. This will be driven by a rebound in metals, and oil and gas sectors wrote the analysts.

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For their analysis, they have considered earnings by certain sectors (IT, metals, O&G) and part of earnings of select stocks (RIL-O&G, Bharti-Africa, Tamo-JLR, and exports for Pharma, Bajaj, UPL) as 'foreign' earnings.

Nifty-earnings-growth driver in FY24 will be margin expansion, they wrote. “Improving supply chains, declining commodity cost pressures, price hikes etc. are expected to drive margin improvements across all sectors barring IT. 63% of Nifty cos (ex-financials) are projected to see a margin increase in FY24,” the report elaborated, with the analysts estimating that the margin expansion would contribute 5-6 ppts to EBITDA/PAT growth.

“However, even if margin expansions don't come through, the Nifty overall EPS growth / domestic cos EPS growth looks a still reasonable 14%/15% YoY,” they added.

“Autos, staples, cement, and metals are expected to see the biggest margin improvement primarily on declining cost pressures,” the report stated, adding a recommendation to stay overweight on domestic cyclical--financials, property, and industrials.

According to the analysts, the consumer discretionary and staples sectors are projected to see a margin expansion of 2.4 / 0.7ppt in FY24. “Autos are expected to see a broad-based margin improvement in FY24 as chip shortage eases and RM pressures muted with Tata Motors benefiting the most with 3.7ppt improvement in margin followed by Maruti (2ppt), Hero motors (1.8ppt) and Bajaj Autos (1.5ppt),” they wrote.

“Consumer staple margins are also likely to benefit as commodity inflation eases with HUL (1.1ppt), Tata Consumers (0.8ppt), Nestle and ITC (0.5ppt each) seeing margins rise. The financial sector earnings are projected to grow at a still strong 18% in FY24; as asset quality stays strong and system loan growth of 12-14% supports healthy topline expansion,” the report added.

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In earnings growth driven by global markets, metals are forecasted to see a growth of 22 percent in FY24, a turnaround from a sharp 61 percent decline last year.  This will partly be based on cost benefits partly by Average Selling Price (ASP) stabilising, according to the report.

With oil prices receding, the analysts see energy earnings increasing by 10 percent, which is 2 percentage points (ppts) higher than the growth in FY23. They expect earnings growth in IT to be relatively modest at 8 percent in FY24, which would be a slight improvement over the 6.5 percent seen in FY12.