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OMC’s drag 1Q; Nifty EPS cut 1.7%/1% for FY25/26

* OMCs temper corporate earnings: The 1QFY25 corporate earnings came in line, with overall growth primarily propelled once again by domestic cyclicals. Notable contributions were witnessed from the Healthcare, Real Estate, Capital Goods, and Metals sectors. In contrast, earnings growth was adversely affected by OMCs.

* Domestic cyclicals ignite resilience: The aggregate earnings of the MOFSL Universe companies were in line with our expectations and grew 1% YoY (vs. our est. of -1% YoY). Earnings for the Nifty-50 rose 4% YoY (vs. our est. of +3%). The aggregate performance was hit by a drag from OMCs. Excluding OMCs, the MOFSL Universe and Nifty posted 12% and 9% earnings growth vs. expectations of +10% and +7%, respectively. The overall earnings growth was fueled once again by domestic cyclicals, such as Automobiles (+28% YoY) and BFSI (+16% YoY), with improved contributions from Healthcare (+29% YoY), Real Estate (+62% YoY), and Capital Goods (+23% YoY). Metals also reported a strong earnings growth of 18% YoY (vs. our est. of 1% YoY drop), driven by Vedanta, Hindalco, and Tata Steel. Excluding BFSI, profits for the MOFSL Universe would have declined 6% YoY (vs. our est. of -8% YoY).

* Heavyweights on the march: Nifty delivered a 4% YoY PAT growth (vs. our est. of +3%). Nifty reported first quarter of a single digit EBITDA growth (5%) in four years, (last time Nifty posted single digit EBITDA growth in Sep’20). Also, 4% PAT growth is the lowest since the Pandemic quarter (June’20). Five Nifty companies – HDFC Bank, Tata Motors, ICICI Bank, Maruti Suzuki, and TCS – contributed 127% of the incremental YoY accretion in earnings. Conversely, BPCL, JSW Steel, ONGC, Reliance Industries, and Grasim Industries contributed adversely to the Nifty earnings.

* The beat-miss dynamics: The beat-miss ratio for the MOFSL Universe was unfavorable, with 43% of the companies missing our estimates, while 29% reported a beat at the PAT level. For the MOFSL Universe, the earnings upgradeto-downgrade ratio has turned weaker for FY25E as 46 companies’ earnings have been upgraded by >3%, while 107 companies’ earnings have been downgraded by >3%. The earnings upgrade/downgrade ratio of 0.4x was the worst since 1QFY21. EBITDA margin of the MOFSL Universe (ex-Financials) contracted 120bp YoY to 16.3%.

* Report card: Of the 24 sectors under our coverage, 7/11/6 sectors reported profits above/in line/below our estimates. Of the 263 companies under coverage, 77 exceeded our profit estimates, 113 posted a miss, and 73 were in line.

* FY25E earnings highlights: The MOFSL Universe is likely to deliver sales/EBITDA/ PAT growth of 9%/9%/11% YoY in FY25. The Financials and Metals sectors are projected to be the key growth drivers, with 16% and 38% YoY earnings growth, respectively. They are likely to contribute 78% of the earnings growth.

* Nifty EPS experiences a downgrade of 1.7%/1% for FY25E/FY26E: The Nifty EPS estimate for FY25 was cut by 1.7% to INR1,115, largely owing to Reliance Industries, ONGC, and BPCL. FY26E EPS was also trimmed by 1% to INR1,316 (from INR1,330) as upgrades in Infosys, Coal India, Tata Motors, and Maruti were offset by downgrades in ONGC, Axis Bank, HDFC Bank, ICICI Bank, and Indusind Bank.

* The top earnings upgrades in FY25E: Coal India (10.8%), Dr. Reddy’s Labs (6.7%), Apollo Hospital (4.4%), Adani Ports (4.3%), and Tata Steel (3.3%).

* The top earnings downgrades in FY25E: BPCL (-16.3%), Bharti Airtel (11%), Hero Motocorp (-9.4%), JSW Steel (-8.2%), and Indusind Bank (-7.7%).

Key sectoral highlights –

1) Banks: The banking sector reported a soft quarter amid tepid business growth, NIM moderation, and a slight increase in provisioning expenses, mainly for private banks. NIM contracted for most banks as cost pressures persisted amid intense competition for liabilities and continued pressure on CASA mix. Public sector banks (PSBs) reported a mild compression in margins as new investment guidelines led to better investment yields, which supported margins.

2) Autos: OEMs reported ~10% YoY volume growth in 1QFY25, with nearly all the OEMs contributing to this broad-based growth. 2Ws led the way with around 11% YoY growth, followed by PV at 6% YoY growth. CVs and tractors both posted 4% YoY growth. Demand is expected to stay robust during the upcoming festive season, driven by a favorable monsoon and new product launches.

3) Consumer: Our coverage universe posted revenue growth of 6% YoY (est. 8%) in 1QFY25 vs. 4% in 4QFY24, showing an improving consumption trend. In the staples sector, demand has been steadily increasing, with signs of growth in rural markets. There is a YoY improvement in volume growth, and further improvement is expected in the coming quarters. 4) Oil & Gas: The performance was below our estimate, due to OMCs. Though EBITDA was in line, HPCL, MRPL, PLNG, and AEGISLOG missed our estimates. However, GAIL, GUJS, IGL, IOC, and MGL beat our estimates. Adjusted PAT was 9% below our estimates (down 42% YoY). Adjusted PAT, excluding OMCs, was also 8% below our estimate (down 5% YoY).

5) Technology: The IT services companies (MOFSL Universe) reported healthy performance (beating our estimates) in 1QFY25 with a median revenue growth of 1.2% QoQ CC. With a mild recovery in discretionary spending among BFSI clients, their focus is now transitioning from the cost-takeout deals to “high-priority” transformation deals in some pockets. Nonetheless, the overall pressure on discretionary spending persists. 6) Healthcare: Our coverage companies (excluding hospitals) reported in-line sales, while EBITDA/ PAT beat our estimates by 6% each in 1QFY25. The profitability was driven by: 1) lower raw material costs, 2) reduced intensity of price erosion in US generics, and c) launch of niche products.

* Our view:

We anticipate the earnings momentum to continue; albeit, the magnitude of its growth is likely to moderate to ~15% over FY24-26. The corporate earnings scorecard for 1QFY25 has met expectations, with heavyweights such as HDFC Bank, Tata Motors, ICICI Bank, Maruti Suzuki, and TCS driving the aggregate. The earnings spread has been decent, with 57% of the MOFSL Coverage Universe either meeting or exceeding profit expectations. However, growth has primarily been led by the BFSI and Auto sectors. The Nifty is trading at a 12-month forward P/E of 20.1x, near to its own long-period average of 20.4x. Industrials and Capex, Consumer Discretionary, Real Estate, and PSU Banks are our key preferred investment themes. We remain OW on PSU Banks, Consumption, Industrials, and Real Estate. We recently raised IT to marginal OW from UW, while we cut Auto from OW to UW. We also turned OW on Healthcare from Neutral, while maintaining our UW stance on Private Banks and Energy within our model portfolio.

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