MC Interview: BFSI, auto, pharma sectors may post healthy numbers in Q2FY24, says HDFC Securities' research head

When oil prices soar, it often leads to higher prices for everything that can trigger inflation and slow down economic growth. It may also lead to prolonged elevated interest rates. Many sectors are already under pressure due to the rising energy costs. In view of the forthcoming elections, final prices of fuels (petrol, diesel etc) may not be revised upwards despite the rise in crude oil prices. To that extent, the impact on inflation may be contained.

Indian markets could be negatively impacted by the high and rising crude oil prices due to its effect on inflation, and trade deficit. The recent conflict in the Middle East and unsatisfactory outcome of the forthcoming state elections could compound the negative effect. Having said that, in a year preceding the elections, Indian markets have done well in 12 months preceding and 12 months following the elections based on data of last 7 elections.

What do you broadly expect from the September quarter earnings?

For Q2FY24, we have a large base in terms of sales of Nifty companies (Q2FY23 sales up 28 percent ex-BFSI) while profit base is smaller (Q2FY23 PAT down 17 percent ex-BFSI). Hence, sales growth could lag the profit growth in Q2FY24. Cyclical companies reported pressure on their performances in Q2FY23 as the realisations were unable to keep pace with costs. Consequently, profitability came under pressure despite solid revenue growth.

The earnings of some sectors may show decent year-on-year growth but fireworks are unlikely. On an overall basis, Q2FY24 could be a soft quarter with more sectors reporting lukewarm scorecard.

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Do you expect better earnings growth in the IT space for Q2FY24, compared to Q1FY24? Is it better to stay underweight on the entire sector, though deal wins remain strong?

Sectors like IT may post softer numbers. Due to increasing inflation and declining consumer spending, verticals such as BFSI, retail, hi-tech, and communication may continue to show signs of softness.

For IT companies, the results are likely to be weak in a seasonally strong quarter as macroeconomic headwinds in their biggest markets, along with delays in client decision-making and ramp-up of won projects in certain cases, continue to weigh on discretionary spending. There were several large deals signed during the quarter, but they are spread over several years.

Majority of clients are maintaining caution and pausing contracts that are non-critical to them. Large companies could report revenue growth ranging from -1 percent to +2 percent QoQ,  and midcaps could report growth ranging from +0.7 percent to +3.3 percent QoQ in constant currency (cc) terms.

Margins may not fall due to easing supply side challenges through falling attrition and salary hikes returning to usual levels compared to the huge spike seen in FY23. Investor focus would be on commentary around the demand environment and any signs of improvement or expectations of recovery in H2FY24.

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Which are the sectors that will report strong numbers during the September quarter?

Sectors such as BFSI (banking, financial services and insurance), auto (on a low base), and pharma may post healthy numbers. Capital goods sector is set to benefit from increased infrastructure spending. Media companies could have a better quarter due to sporting events, G20, and increased political advertisements and media spend by consumer companies.

Is the building material and home decoration a good theme to own?

In Q2FY24, these companies can report healthy volume growth on a YoY basis and expanded margins despite lower realisations, mainly aided by costs reduction efforts. In a growing economy like India, these sectors can do well over a multi-year period; however one will have to be cognizant of the rising competition and valuations attributed to them.

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Do you think the rural recovery may get impacted due to uneven distribution of monsoon?

Erratic and uneven spread of monsoon can result in foodgrain production (especially pulses) getting impacted and rural incomes getting restrained. Foodgrain prices could remain elevated affecting the monies that can be spent on other purposes by rural people. This could have an impact on the spending power of the rural populace. However, we will know more about this impact by November-December.

Q: Sectors that will disappoint with quarterly earnings....

Slowdown in global trade will have a dampening impact on chemicals and textile sector results. The agrochemicals industry faced pricing pressure in case of generics due to falling prices in China and also faces unpredictable weather patterns. The banking space may see some NIM (net interest margin) compression this quarter due to re-pricing on the liability side. Consumer companies could report sluggish topline growth but some improvement in margins resulting in muted absolute profit growth.

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