Indian firms’ Q1 earnings growth likely at 7-quarter high
Banking and automobile sectors are seen to be leading drivers of overall profits
NEW DELHI : Indian companies are expected to deliver their strongest earnings growth in seven quarters, as declining input costs bolster profitability.
While banks and automobile sectors are seen to be leading drivers of overall profits in the June quarter, several more sectors are expected to contribute to the earnings momentum.
“Softer commodity and fuel prices could lead to an expansion of margins for fast-moving consumer goods (FMCG), auto, and allied sectors," said Deepak Jasani, head of retail research at HDFC Securities Ltd.
According to data compiled by Mint, the net profit for 44 companies in the Nifty 50 index is expected to grow 25.3% from a year earlier during the June quarter, while net sales are expected to grow at a slower 6.20% pace.
“The best performance is expected from auto and finance, closely trailed by energy and FMCG," said Vinod Nair, head of research at Geojit Financial Services Ltd.
Operating margins widened, supported by consumer demand and easing inflation, boosting earnings. Oil marketing companies are expected to drive earnings in the energy sector, while industrials, consumer durables, and hotels are likely to report improved earnings performance.
Easing supply-chain constraints and a pre-election pickup in project execution are likely to support the earnings of industrial companies. The pharmaceutical sector may also see an earnings rebound with new US launches gaining regulatory approval.
On the other hand, analysts noted a sense of pessimism in the cement, metals, and chemicals sectors due to moderation in demand and high raw material costs. But easing energy costs may provide some relief to cement and metals companies.
However, analysts anticipate weak earnings from non-banking financial companies, chemicals, and IT sequentially.
Mid-cap and small-cap companies may also benefit from the economic recovery, driving volume growth as declining input costs and price hikes undertaken help.
“We remain very constructive on quality mid- and small-cap companies and do believe that both earnings and valuations are supportive," said Manish Jain, fund manager at Ambit Asset Management.
More benefits for mid-caps may be visible over time due to the lag effect in economic efficiency, analysts said. “We can expect the results to improve in the next one or two quarters. The monsoon deficit has narrowed and rural activities are rapidly expanding, a benefit that will be visible in Q2," Nair said. But the El Nino risk still prevails, a clear effect of which could be evaluated only after August, he added.
Corporate performance could depend on how the El Nino weather pattern affects the monsoon in India and whether the spike in food inflation prompts the Reserve Bank of India to restart the rate-hiking cycle, said Jasani of HDFC Securities.
Investors will also watch out for signs of rural recovery during the results season. Management commentaries on overall demand, global growth moderation, and the recovery of rural and private capital expenditure cycles will be of particular interest to investors, said analysts at Antique Stock Broking Ltd.
Most sectors are expected to report earnings in line with expectations during the quarter, with a positive surprise likely in store for oil and gas, cement, and capital goods, according to Antique Stock Broking. However, earnings downgrades are likely in IT services, consumer durables, and agrochemicals, they added.
Meanwhile, Ambit’s Jain said given the sharp easing in wholesale inflation and better-than-expected monsoon rainfall, rural demand appears steady and will likely recover in the next few months, potentially boosting markets.
According to Nair of Geojit Financial Services, the expected profit growth numbers are very good compared to the subdued expectations the market had a quarter ago amid expectations of a global recession and a slowdown in the domestic economy.
However, the upside could be limited due to the global slowdown and the high market forecast of 18% earnings growth in FY24 for the Nifty 50. The optimism stems from factors such as expansion in operating margins, external demand because of the China-plus strategy, and steady local demand driven by government and private spending.
