MOFSL forecasts Q2FY25 to deliver slowest Nifty earnings growth in 17 quarters

Caught in a tug of war between tailwinds and headwinds, Motilal Oswal Financial Services Ltd (MOFSL) expects Q2 to deliver the slowest earnings growth for Nifty companies in 17 quarters. The moderation in corporate earnings, after four consecutive years of healthy double-digit growth, is likely to come on the back of pressures from commodities, fading tailwinds from BFSI asset quality improvements, high base, and easing demand, MOFSL stated.

Factoring in these trends, MOFSL estimated a mere 2 percent earnings growth for Nifty companies in the July-September quarter, while EBITDA margin, excluding financials, is expected to contract by 40 basis points year-on-year to 20 percent, largely dragged down by oil marketing companies and the ebbing in tailwinds due to a high base.

Overall, earnings growth is expected to be driven by the BFSI sector yet again in Q2, with expectations of an 11 percent year-on-year spike, further supported by healthcare at 15 percent, utilities at 24 percent, and a significant improvement in telecom, where losses are projected to shrink to Rs 400 crore in September 2024 from Rs 4,300 crore a year ago, MOFSL said.

On the flip side, cyclicals may hinder earnings growth, as oil and gas (led by OMCs) and cement are expected to report a 33 percent and 41 percent drop in earnings, respectively. Metals as well as automobiles are likely to deliver single digit growth, MOFSL forecasts. In contrast, other sectors like real estate is expected to grow by 44 percent, retail by 17 percent, capital goods by 13 percent, and consumer goods by 4 percent, reflecting moderate earnings growth.

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Over the last two financial years, there has been an intriguing shift in the relationship between revenue and earnings growth, largely shaped by global macroeconomic conditions. In FY23, India Inc saw a significant hit to margins as commodity prices spiked due to the Russia-Ukraine conflict, leading to just 11 percent earnings growth despite a 24 percent rise in revenue, MOFSL highlighted.

However, this trend reversed in FY24, with falling commodity prices driving a strong margin recovery. As a result, India Inc's earnings growth rose to 30 percent on the back of a modest 4 percent spike in revenue. For FY25, MOFSL expects a more balanced outlook, with earnings growth tracking closer to revenue trends.

Tackling the changing earnings scenario, MOFSL has also made changes to its model portfolio. For largecaps, the brokerage is bullish on  ICICI Bank, HDFC Bank, L&T, HCL Tech, HUL, M&M, Power Grid, Titan, Bharti Airtel, and Mankind Pharma. In the mid and small-cap segments, it picks stocks like Indian Hotels, Angel One, Godrej Properties, Persistent Systems, Metro Brands, PNB Housing, Global Health, Cello World, Dixon Tech, and Five Star Business Finance.

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