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NEW DELHI : Indian companies put out an impressive performance in the June quarter amid rising interest rates and inflationary pressures, prompting several analysts to conclude that the worst of earnings downgrades is over.

So far, there have been no significant disappointments in quarterly earnings, and many firms have reported better-than-expected numbers. Therefore, without any negative surprise, the uptick in consumption is expected to gather momentum in the second half of the fiscal.

Earnings trajectory
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Earnings trajectory

The first quarter has seen more upgrades than downgrades, said Mitul Shah, head of research at Reliance Securities. However, the IT sector has seen a downgrade due to moderation in new deal wins and a rise in manpower and travel costs. Meanwhile, some mid-cap stocks and the engineering sector have seen upgrades, factoring in softer commodity prices.

Among Nifty 50 companies, five have seen FY24 earnings estimates being upgraded, 21 have seen earnings estimates being maintained, and only four have seen downgrades, said Amnish Aggarwal, head of research, Prabhudas Lilladher Pvt. Ltd.

The earnings downgrade cycle is clearly behind us, said Manish Jain, fund manager, Coffee Can PMS, Ambit Asset Management. Other than IT services, there is incrementally no growth pressure, he said. “We believe that earnings upgrade has started happening in bits and pieces. We believe the September quarter will be a key quarter to watch out for in terms of earnings trajectory," Jain said.

Deepak Jasani, head of retail research at HDFC Securities, said, “As inflationary pressures are easing, there is hope of better performance in H2FY23, provided we do not have any other negative trigger by then."

While the pressure on operating performance of manufacturing firms was expected, and many companies did report a sequential decline in operating profits due to rising input costs, analysts said volume growth remained strong and cost pressures may start easing by the second half as commodity prices have softened. In addition, a pickup in consumption, especially rural demand, will also boost earnings. “One of the key surprises for us in this result season has been the strength in consumption demand. We were certainly not expecting a pickup in volume growth trajectory on a sequential basis. But, surprisingly, even rural demand has started showing some green shoots," Jain of Ambit Asset Management said.

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Revenue growth of Nifty50 firms has been aided by both rising volumes and price hikes. Analysts said banking and financial services sector supported Ebitda (earnings before interest, taxes, depreciation and amortization) of Nifty companies.

Data compiled by Mint suggests that among 34 Nifty 50 companies, net sales growth has remained strong at 27.1% year-on-year. Total expenses, however, have grown faster at 22.8%. Ebitda grew at a slower 15.2% pace, in line with the 15.4% increase in net profit.

“The growth is driven by cyclical sectors like banks, capital goods and consumption. The contraction was driven by metals, auto, IT and cement," Shah of Reliance Securities said. In terms of expectations, there are more beats compared to misses, added Shah.

Most analysts maintain a positive outlook on banks, which have underperformed for some time. “Banks for sure look very promising as the credit growth has been strong, asset quality is also good, and we would expect a NIM (net interest margin) expansion also in coming quarters," said Ambit’s Jain.

Within the companies under the Motilal Oswal Financial Services universe, state-run banks, telecom, metals, and consumer sectors recorded FY23 earnings upgrades of 11%, 10%, 6% and 3%, respectively.

Even in cement, which saw intense cost pressure, the earnings downgrade cycle is largely behind, analysts at ICICI Securities Ltd said. Instead, investors will shift focus back to regional demand-supply dynamics, market share gains, cost efficiencies and balance sheet strength, they said in a note.

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