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Business News/ Companies / Company Results/  Q2 Results mixed as industrials and OMCs post strong numbers, IT and chemicals drag - 5 key sectoral trends
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Q2 Results mixed as industrials and OMCs post strong numbers, IT and chemicals drag - 5 key sectoral trends

FY25E earnings at risk due to fading margin tailwinds. High valuations and slowing top line keep brokerage cautious. Overweight stance on FMCG, IT, autos, telecom, internet, and pharmaceuticals. Underweight call on BFSI, industrials, commodities, and durables.

Nuvama Institutional Equities identifies five key trends in Q2FY24 earnings.Premium
Nuvama Institutional Equities identifies five key trends in Q2FY24 earnings.

In itsQ2FY24 earnings review report, domestic brokerage Nuvama Institutional Equities has retrospectively and prospectively connected the performance of the sector to five trends that have been evident thus far in the second quarter of FY24. The brokerage states that domestic investment, global exporters, commodities, domestic consumption, and financials are the five trends associated with the sectors.

The Nuvama coverage universe exceeded forecasts with a 34% YoY profit growth driven by robust segment growth. While cement and industrial profits remained strong and exceeded forecasts, power profits declined. With the exception of autos, demand was modest even as margins rose. This is still an important factor to keep an eye on, said the brokerage.

A soft quarter was reported by Chemicals while IT was mixed. Nevertheless, exports and pharmaceuticals saw rapid growth. Bank profits decreased as NIMs were compressed. Opex also held steady, but profits were maintained by significantly below-trend credit. Profits increased across the board, with Oil Marketing Companies (OMCs) seeing the biggest gains. Profits for metal companies increased sequentially but fell short of estimates.

Q2FY24 earnings snapshot by sector
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Q2FY24 earnings snapshot by sector (Nuvama report)

Q2 Results: Nifty earnings have been relatively stable in FY24E earnings per share (EPS), with declines in IT and commodities countered by gains in cement, autos, and pharmaceuticals. The brokerage believes that the consensus estimate of 8–10% EPS growth for H2FY24 is feasible, compared to the 25% growth predicted for H1FY24.

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"However, it’s the FY25E earnings that we think are at risk given the fading margin tailwinds. High valuations amid slowing top line and fading margin tailwinds keep us cautious. We remain defensively positioned," the brokerage said.

Also Read: Q2 Results: Topline tapers while capex holds up; Check out 5 key takeaways from September quarter corporate earnings

With regard to fast-moving consumer goods (FMCG), information technology, domestic autos, telecom, internet, and pharmaceuticals, the brokerage has"Overweight" (OW) stanceand "Underweight" (UW) callwith regard to banking, financial services and insurance (BFSI), industrials, commodities, and durables.

Here are five key trends highlighted by the brokerage from the overall corporate earnings in the second quarter of FY24 (Q2FY24).

Domestic consumption

With the exception of autos and consumer services, where pent-up was initially delayed, demand was weak across the board in the domestic consumption space. But as input prices are starting to decline, the benefits start to appear, leading to a rise in EBITDA. As a result, input prices are beginning to stabilise, and demand will become even more crucial in determining the margin outlook.

Also Read: Midcaps, smallcaps too hot; investors should have a large-cap tilt right now, says Varun Fatehpuria of Daulat Finvest

Domestic investment

While industrial companies' top line and order book momentum continued to be strong, cement companies' EBITDA/t was stable on a quarter-over-quarter (YoY) basis. In the future, industrials' profitability may decline as corporate capex slows, while that of cement companies should rise.

"Industrial companies posted another strong quarter. The highlight this time was the healthy execution and strong order book. However, the challenge lies in the outlook. At present, capex is mainly driven by the public sector and orders from the Middle East. Going ahead, momentum in these (particularly public capex) could slow," the brokerage explained.

Also Read: Grasim Industries share price rises 2%; is the stock buy-worthy after Q2 result?

External sectors

IT companies saw a decline in top lines but a stabilisation of margins. Chemicals had a deep top-line contraction and was likewise weak. Pharma and export automakers reported impressive financial results.

Commodities

OMCs recovered well, and the profits of energy companies remained steady. Leverage increased along with the profits of metal companies. The earnings of metal companies will probably continue to face pressure in the future.

Financials

Net interest margins (NIMs) for banks decreased, but opex stayed high. Nonetheless, BFSI earnings were bolstered by consistent credit growth and below-trend credit costs.

Also Read: Can Nifty 50 top 21,000 with a pre-election rally ahead of General Election 2024?

Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.

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Published: 17 Nov 2023, 01:43 PM IST
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