Q1FY24 is anticipated to be a positive quarter with signs of recovery while the pain points persist with companies adapting new business strategies to increase volume and revenue.
Even as lower raw material costs are expected to bolster margins of companies in the quarter ended June, slowdown in exports and consumption demand remained stressful, which are likely to crimp overall revenue. Oil market companies had a bumper first quarter of FY 2024 but sectors like technology services and metals continued to face a tough time. Overall, Q1FY24 is anticipated to be a positive quarter with signs of recovery while the pain points persist with companies adapting new business strategies to increase volume and revenue. Rise in margins is estimated to drive aggregate profitability but management commentary on demand will be critical.
According to Neeraj Chadawar, head, quantitative equity research, Axis Securities Q1FY24 earnings season was marked by four factors: Strong domestic macroeconomic environment, sequential improvement in high-frequency indicators, lower key commodity prices lower, easing inflation and, last, growth challenges in export-oriented demand. He feels that April-June earnings season is likely to deliver positive surprises on the margins front.
“We believe that sectors such as banks, consumer, industrials, and automobiles are likely to post robust earnings. On the other hand, export-oriented themes are likely to be proved laggards,” says Chadawar. He forecasts Nifty to deliver revenue growth of 6 percent, EBITDA to rise 17 percent and net profit to climb 24 percent in Q1FY24. Excluding BPCL, he projects Nifty revenue to rise 7 percent, EBITDA to jump 9 percent and net profit at an 11 percent growth. Currently, he foresees Nifty earnings in FY24 and FY25 at Rs 920 and Rs 1040 respectively.
High-frequency indicators such as goods and services tax (GST) collection, PMI manufacturing & services, UPI transactions, and E-way bills have shown a rise on a sequential basis. However, consumer demand has been challenging amid price hikes by companies.
Sensex and Nifty earnings drivers
Analysts at Kotak Institutional Equities expect Q1FY24 net profits of Sensex companies to increase 18 percent year-on-year (YoY) but may decline 8 percent on a sequential basis. Similarly, for Nifty companies, net profits may expand 25 percent YoY but drop 8 percent compared to the preceding three months. They estimate earnings per share (EPS) of Sensex at Rs 2,972 for FY2024 and Rs 3,473 for FY2025. For Nifty, EPS is estimated at Rs 925 for FY 2024 and Rs 1,061 for FY2025.
“We expect a bumper quarter for oil marketing companies as elevated marketing margins on petrol/diesel would likely lead to significant (Rs 25,000 crore) automobile fuel over-recoveries and offset moderation in refining margins,” analysts of the brokerage firm say.
Other than OMCs, they expect a strong annual increase in the net income of automobiles led by Tata Motors, banks, commodity chemicals and telecommunication led by average revenue per user (ARPU) increase. They see the metals and mining sector to report a sharp decline (weak realisations) in net income.
Brent crude prices averaged $78.4 per barrel in April-June, declining 3 percent quarter-on-quarter. Starting May, OPEC+ had cut oil production by 1.66 mnbopd, in addition to the already announced production cut of 2 mnbopd from November last year. Additionally, Saudi Arabia has voluntarily cut production by 1 mnbopd for July-August. Despite the production cuts, crude prices have been under pressure due to a weak demand outlook amid rising interest rates globally and slower-than-expected recovery in Chinese manufacturing and consumption.
According to estimates by Gautam Duggad, head of research, institutional equities, Motilal Oswal Financial Services, Nifty earnings are likely to grow 25 percent YoY in 1QFY24. Excluding OMC, Nifty’s earnings may possibly rise 11 percent YoY for the quarter. “Overall, earnings growth is likely to be driven once again by domestic cyclicals such as BFSI and auto, which are expected to post 47 percent and 11 percent YoY jump, while consumer and IT are likely to report a healthy 19 percent and 16 percent YoY growth, respectively. Metals and cement are anticipated to drag the aggregates with a 53 percent and 17 percent YoY decline in earnings, respectively,” Duggad explains.
Prateek Parekh, equity strategist, Nuvama Group, feels that despite a strong start to FY24, earnings estimates could be at risk with both consumption and exports slowing down and commodities being in deflation. For FY24, consensus of analysts is forecasting 18 percent earnings per share (EPS) growth of aggregate Nifty companies.
Parekh estimates Nifty earnings to grow 19 percent year-on-year in Q1FY24 but adds that the slowdown in topline is concerning as, historically, topline and profit divergence has not lasted very long.
“EBITDA margin contraction has been the sore point for earnings, excluding BFSI, in FY23—shrinking 300 basis points from peak. However, the pain has now largely eased. In Q1FY24, for our coverage universe, EBITDA margins are likely to rise 220 bps and 180 bps for excluding BFSI and commodities. As a result, despite topline slowing, EBITDA growth for coverage (ex-banks-commodities) is likely to accelerate to 24 percent. On a YoY-basis, autos, pharma, internet and consumer services are likely to see maximum margin expansion,” Parekh explains.
Analysts will keep a watchful eye on management commentaries related to demand, margin recovery, and pick-up in rural demand.