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Q3FY24 earnings were strong and largely in line with estimates. Topline growth remains weak, and margins—though stable sequentially—benefited from a weak base last year. Consensus Nifty earnings estimates remained resilient and unchanged through the earnings season. Industrials stood out on topline and margins, while consumer discretionary was aided by operating leverage. Financials reported steady growth, although the base effect is dwindling and growth rates are tapering. We remain constructive on the markets, and expect most of the CY24 returns to be bunched in the Apr-Sep period.

* The BSE-500 aggregate earnings were, once again, strong and resilient. For nonfinancials, topline growth saw sequential acceleration, from -1% YoY (in Q2FY24) to 4% YoY (in Q3FY24). Margins though have started to peak and EBITDA margins were down by ~50bps QoQ to 18.2%. The trough created by the commodity price-spike in FY23 has been unwound, and margins seem to be largely normalized. Overall, PAT growth was strong at 26% – still healthy, but sequentially down (58% in 2QFY24), as the positive base effect is now dwindling.

* The Nifty PAT growth of 16% YoY was significantly below that of the BSE 500 (26% YoY), reinforcing our thesis of democratization of profits and reinforcing our positive view on SMIDs. One wrinkle is the convergence in revenue growth across both indices: if this continues, profit growth is also likely to converge over time (the margin differential is narrowing). This would make the SMID story even more bottom-up and the broad outperformance may dwindle. We will watch this trend in Q4FY24.

* Industrials stood out as a top performer, on growth and margins. Consumer discretionary delivered strong operating leverage on weak sales growth, while Materials showed margin and PAT resilience amid a weak topline. Financials continued their steady delivery, but the PAT growth trajectory is now weakening because of the base effect and the upward normalization of credit costs. (Exhibit 3).

* The share of negative surprises rose across both, the Nifty (vs consensus) and the Emkay coverage, by 8-10ppts (Exhibits 6 & 7). Despite this, Nifty estimates have remained resilient through this earnings season, with FY24/FY25 EPS estimates both staying flat. The implied growth for Q4FY24 is moderate at 3% (adjusted for Axis Bank’s Q4FY23 oneoff), suggesting negligible downside risk and some possible upside. This is an additional positive in the post-Covid era: the trend of through-the-year downgrades of consensus earnings has been arrested, barring a blip in FY23.

Our market view remains unchanged. Our year-end Nifty target of 24,000 implies a 9% upside, with SMIDs expected to outperform. We are Underweight on Financials, Staples, and IT; and Overweight on Consumer Discretionary (including autos) and Materials..

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