Earnings preview: Experts expect more misses than hits in Q2; how can it impact market sentiment?

Earnings season is here. The July-September quarter (Q2) earnings season is set to kick off on Wednesday (October 4). However, TCS is the first company among heavyweights which will report its Q1FY24 earnings next Wednesday (October 11). HCL Tech, Infosys and HDFC Asset Management Company will announce their September quarter scorecard on October 12.

Experts are expecting the Q2 to be a soft quarter with more sectors reporting tepid scorecard. The earnings of some sectors may show decent year-on-year growth but a firework is unlikely.

Also Read: Earnings preview: Indian IT firms to report soft numbers in Q2FY24; revenue, profit likely to be muted

Q2 earnings expectations

Experts believe the second quarter earnings will be mostly stable with some hits and misses. Some sectors like IT may post softer numbers while some sectors such as BFSI (banking, financial services and insurance), auto and pharma may post healthy numbers.

Manish Chowdhury, the head of research at StoxBox expects the second quarter results to be mostly stable, with few pockets likely doing well.

"Our focus in these results would be on the outlook for the second half of the year, especially considering the recent strength in crude oil prices, patchy monsoon, depreciation in rupee and persistent global uncertainties," said Chowdhury.

"We would closely watch the mid and small-cap companies to get a sense of the valuation premium can sustain over the next few quarters," Chowdhury said.

Also Read: Stocks to buy this week: L&T, Exide, Aurobindo Pharma, BHEL among 12 technical picks; do you own any?

Chowdhury believes the automobile and pharma space may post a good set of numbers on the back of strong demand and execution ahead of the festive season and easing pricing pressure in the US generics pharma space. He believes that the banking space may see some NIM (net interest margin) compression this quarter due to re-pricing on the liability side, with public sector space looking more comfortable than the private banking names.

Also Read: 'Valuations of smallcaps ahead of fundamentals; tough to predict RBI rate cut'

Sonam Srivastava, founder and fund manager at Wright Research, PMS believes the banking sector, which has traditionally been a strong performer, might see its growth showing signs of moderation this time around. The auto sector, which is often considered a barometer for consumer demand, might not showcase very attractive numbers, indicating potential challenges in consumer sentiment or supply chain disruptions.

"On the brighter side, sectors like capital goods, metals, and pharmaceuticals are anticipated to post strong numbers. The capital goods sector is set to benefit from increased infrastructure spending, metals from robust international demand, and pharmaceuticals from rising exports of generic drugs," Srivastava said.

"The IT sector is expected to post muted numbers this quarter as well. Overall, the earnings season is shaping up to be a mixed bag, with some sectors outperforming and others facing challenges," said Srivastava.

(Exciting news! Mint is now on WhatsApp Channels. Subscribe today by clicking the link and stay updated with the latest financial insights! Click here!) 

"We are expecting muted results from manufacturing companies and robust results from the BFSI sector," said Sreeram Ramdas, Vice President at Green Portfolio, PMS.

Also Read: RBI will cut rates only after the Fed; IT good for long-term investors, says Siddhartha Khemka of Motilal Oswal

Ramdas underscored that the slowdown in global trade will have a dampening impact on chemicals, pharma and textile sector results. He said it won't be until Q3FY24 that we see a meaningful recovery in these sectors.

Ramdas believes a healthy credit offtake combined with peak net interest margins will lift Q2 earnings for the BFSI sector while the IT sector continues to struggle as indicated by one of the most notable industry players.

"Overall, we are preparing for a flat to slightly negative earnings season," said Ramdas.

On the other hand, Anil Rego, founder and fund manager at Right Horizons expects earnings momentum to continue after a healthy Q1FY24 season.

Rego pointed out that the banking space is witnessing robust credit growth momentum driven by the continued traction in the retail and SME segments. On a segmental basis, home loans, auto loans, and credit card outstanding are expected to continue growing. Recovery in corporate loans is anticipated. As repricing in deposits is catching up, NIMs are expected to moderate marginally on a sequential basis.

For the IT sector, Rego said the second quarter is a seasonally strong quarter for the sector, however, the macro conditions are expected to impact the revenue growth of IT companies despite witnessing strong deal wins led by cost take-out deals.

Due to increasing inflation and declining consumer spending, verticals such as BFSI, retail, hi-tech, and communication continue to show signs of softness. Margins are expected to vary across IT since there is limited room for expansion despite muted hiring, with net currency headwinds putting additional pressure, said Rego.

In the Auto sector, PVs (passenger vehicles) dispatches remained strong in Q2. Domestic two-wheeler business is still weak and recovery in exports is expected in the third quarter. In the building material segment, plastic pipe companies are likely to see stable quarters ahead. Metal pipes players’ margins are likely to improve given their revamped product mix, said Rego.

The likely impact on market mood

Experts say that even though most negatives are already factored into the market if the numbers of some of the key sectors such as banking, IT and automobile come significantly lower than the expectations, it may dent market sentiment.

On the other hand, mild hits and misses will not have much impact on the market mood barring stock-specific volatility.

Experts say as the long-term outlook of the market is strong, investors should buy and add quality stocks in case of declines.

For example, the IT sector's numbers could be lacklustre but Chowdhury of StoxBox believes most of the negatives in the IT sector seem to be priced in so any neutral to mildly negative commentaries may not translate into a sharp market reaction and it could be an opportunity to invest in the sector in a staggered manner considering the recent deal wins and a relatively firmer US economy.

Read all market-related news here

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.