Dear reader,
In the next few weeks, market volatility will likely rise as we approach the Budget and earnings season. Expectations for the Budget are modest as the finance minister is slated to present an interim Budget, with no significant announcements expected. However, considerable attention will be directed towards the earnings season.
Regrettably, the outlook for Corporate India's performance in the October-December 2023 quarter is less than optimistic. Analysts are forecasting a subdued showing, with both top line and bottom line figures expected to register a decline.
The combined net profit of Nifty 50 companies is expected to be the lowest in the past four quarters. The anticipated growth of 13.3 percent in the December quarter will be sharply lower than a 28.6 percent growth in the second and 34.8 percent growth in the first quarter of the current fiscal. The combined revenue of the Nifty 50 companies is expected to be in single digits for the third consecutive quarter.
From a record Rs 1.85 lakh crore in Q4 FY23, net profit is likely to fall to Rs 1.73 lakh crore in Q3 FY24.
The good news is that operating margins will likely improve, especially for manufacturing companies, because of lower commodity and energy prices. Margins are likely to expand by 186 basis points and touch a 7-quarter high of 19.4 percent.
Sectors that are likely to underperform and contribute to the decline are banking, financial services and insurance (BFSI), IT, FMCG, and oil and gas. On the other hand, automobile and mining and metal companies are expected to post strong numbers.
In an election year, the capital goods and infrastructure sector are expected to show strong performance as government spending tends to increase ahead of the elections. Analysts expect 11-16 percent revenue growth with a strong multi-year high order book and modest margin improvement and are likely to see earnings improve by 30 percent during the quarter.
Results of the top IT companies will kick off the earnings season. No fireworks are expected from the frontline companies during the October-December lean quarter. Top companies may post a marginal decline in their revenue and a slight growth in net profit. The key variables to watch out for in the management commentary would be deal momentum, hiring trends, and the impact of new technologies such as generative artificial intelligence (Gen AI).
As a result of an expected drop in earnings, brokerages have cut down their forward earnings estimates for the Nifty by around 2 percent to Rs 976 for FY24, registering a growth of 21 percent.
While the drop in earnings is not significant, there may be some correction in the market if the actual numbers are lower than analysts' expectations.
However, the main action in the market is in stocks out of the benchmark indices. Small and mid-cap stocks have performed far better than benchmark indices and continue to do well. Market participants would be more keen on watching the performance of the smaller companies, and a slowdown there would have a meaningful impact on the market.
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