Q2 earnings possibly skewed, consumer demands pick-up eyes World Cup & festivals

An erratic monsoon and delayed festive season made recovery in rural demand difficult while relief in a few commodity prices may help in margin expansion

By Nasrin Sultana

Published: Oct 11, 2023 04:41:45 PM IST

Updated: Oct 11, 2023 04:47:49 PM IST

The entire festive season this year has shifted to the October-December period, which may affect consumption in the second quarter. Image: Shutterstock

While high inflation, multi-year high interest rates, rising bond yields, recessionary fears, and geopolitical risks kept companies on tenterhooks, the challenge ahead is how will they sustain growth as uncertainties are flaring up towards the end of the year. Corporate earnings are expected to be skewed in the three months ending September amid demand weakness in lower-end consumption and exports. However, lower commodity prices have likely aided in margin expansion of companies in few sectors.

An erratic monsoon—with the lowest rainfall in August in more than 100 years—and a delayed festive season made recovery in rural demand difficult. The entire festive season this year has shifted to the October-December period, which may affect consumption in the second quarter. Product categories such as hair oil and edible oil remain weak given high rural salience and down-trading. Biscuits, soaps and detergents players have seen adverse impact of local players coming back, given commodity deflation.

Prateek Parekh, equity strategist, Nuvama, feels the quality of earnings is deteriorating. “Furthermore, with BFSI earnings clearly losing momentum and margin tailwinds at fag end, demand outlook would be critical in shaping the earnings trends hereon,” he adds.

Overall earnings growth is likely to be driven once again by domestic cyclicals, such as banking, financial services and insurance (BFSI) and auto while oil marketing companies (OMCs) may see a sharp rise in net profits due to large marketing and inventory losses in September quarter of last fiscal.

“The next two quarters will be driven by big events like the ICC Cricket World Cup and the festive season and these can serve as positive catalysts in the short term for consumer demand. We believe several sectors in consumer discretionary can see demand uptick from these events – QSR, hotels, aviation,” says Gautam Duggad, head of research—institutional equities, Motilal Oswal Financial Services.

Also read: Is it time to brace for turbulence as the Indian economy may not be resilient enough?

How numbers stack up?

Duggad sees net profit of companies listed on the Nifty to grow 21 percent year-on-year in the second quarter of fiscal 2024. He expects sales and earnings before interest, taxes, depreciation, and amortisation (Ebitda) of Nifty companies to improve 7 percent and 19 percent YoY in Q2FY24, respectively. However, excluding OMCs, the Ebitda of Nifty is expected to grow 14 percent YoY. The Ebitda margin for Nifty, excluding financials, is likely to expand 230 basis points (YoY) to 19.5 percent during the quarter.

According to Duggad’s estimates, the profitability of OMCs may surge to Rs 26,200 crore in Q2FY24 from a loss of Rs 2,700 crore in the same quarter last fiscal, fuelled by strong marketing margins. However, he has trimmed the earnings per share (EPS) target of Nifty by 0.3 percent and 0.9 percent to Rs 986 and Rs 1,132 for FY24 and FY25 respectively.

“We now forecast the Nifty EPS to grow 22 percent and 15 percent in FY24 and FY25, respectively. The financials and oil and gas are likely to account for 66 percent of the incremental FY24 earnings growth for Nifty. Excluding BFSI, we expect Nifty’s FY24 earnings to grow at 24 percent YoY; while ex-metals and O&G, Nifty’s FY24 earnings are likely to post 20 percent YoY growth,” Duggad explains.

Analysts at Kotak Institutional Equities increase the net income of automobiles, banks due to lower provisions, capital goods, commodity chemicals, construction material and metals & mining sectors. They expect net profits of Sensex companies to increase 19 percent YoY and 2 percent sequentially. For Nifty, Kotak Institutional Equities analysts see the net profit increase 23 percent YoY but flat on a quarterly basis. They estimate the EPS of Sensex at Rs 3,078 for FY2024 and Rs 3,544 for FY2025. Similarly, for Nifty EPS is projected at Rs 952 for FY2024 and Rs 1,076 for FY2025.

Parekh, equity strategist, Nuvama also believes the second quarter of FY24 will be similar to the preceding three months not only in terms of aggregate revenue and net profit growth, but also underlying trends.

According to Parekh, top line of companies are likely to stay muted in exporters and low-ticket consumption, but buoyant in high-ticket consumption and industrials, while lower input prices may propel Ebitda growth/margins on a yearly basis. On a YoY basis, autos, cement, durables and internet are likely to log maximum margin expansion.

He adds that margin tailwinds shall start fading from the second half of FY24 as lower commodity prices seep into the base and incremental tailwinds from easing supply are now behind. “Furthermore, a delayed festive season is weighing on consumption companies, but a relatively hot weather is aiding activity, particularly for industrials companies,” Parekh explains.

Also read: Why the rural economy isn't out of the woods yet

Parekh estimates Nifty earnings to grow 18 percent YoY in Q2FY24. “The strong start to FY24 does limit the downgrade risk this year, but it continues to loom large over FY25. We remain overweight on margin-sensitive sectors: FMCG, domestic autos, cement, telecoms and internet; and underweight on cyclicals: BFSI, metals, industrials and durables,” Parekh elaborates.

Key raw materials such as copra, edible oil, palm oil and packaging costs for consumer companies especially in biscuits and confectionaries have narrowed in the quarter. Analysts will be watching out management commentaries on demand expectations in the upcoming festive season and trends in the rural markets.

Apart from weak macro, early-commentaries from FMCG players pointed towards adverse weather (below-normal rainfall overall with rather erratic distribution) as one of the reasons for weaker growth. Analysts will watch out whether the August dry spell in rains has a carry-forward impact on next year’s crops which may impact food prices in the upcoming quarters. Even Dabur, which is usually more optimistic and had sounded relatively upbeat compared to peers in Q1, is now cautious that recovery has been more gradual even though consumption is showing improvement.