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* Corporate earnings – domestic cyclicals propel growth: The 3QFY24 corporate earnings ended on a strong note, with widespread outperformance across aggregates driven by continued margin tailwinds. Domestic cyclicals such as Autos and Financials, along with global cyclicals (i.e., Metals and O&G) drove the beat. Technology posted a marginal decline in earnings, its first in 26 quarters.

* Financials and Autos drive 3QFY24 earnings: The aggregate earnings of the MOFSL Universe companies exceeded our expectations and rose 29% YoY (vs. our est. of +19%). Earnings for the Nifty-50 jumped 17% YoY (vs. our est. of +11%). The earnings growth for the MOFSL Universe was fueled by domestic cyclicals (such as BFSI and Autos), as well as healthy gains from global cyclicals (i.e., Metals and O&G). BFSI clocked a 22% YoY growth (vs. est. of +17%), while Autos registered a significant growth of 60% YoY (vs. est. of +34%). Metals earnings jumped 74% YoY (vs. est. of +25%) over a weak base of 3QFY23, led by TATA Steel, JSW Steel, and Coal India. OMC’s profitability surged 4.6x to INR120b in 3QFY24 from INR26b in 3QFY23, due to strong marketing margins.

* Heavyweights on the march: Nifty delivered a strong beat with a 17% YoY PAT growth (vs. est. of +11%). Five Nifty companies  – Tata Motors, HDFC Bank, Tata Steel, ICICI Bank, and JSW Steel – contributed 56% of the incremental YoY accretion in earnings. Ex-OMCs, Nifty’s earnings grew 17% YoY (vs. est. of +10%). Ex-Metals & O&G, Nifty’s earnings were up 15% YoY (vs. est. of +10%).

* The beat-miss dynamics: The beat-miss ratio for the MOFSL Universe was unfavorable, with 38% of the companies missing our estimates, while 33% reported a beat at the PAT level. For the MOFSL Universe, however, the earnings upgrade-to-downgrade ratio has turned weaker for FY25E as 58 companies’ earnings have been upgraded by >3%, while 84 companies’ earnings have been downgraded by >3%. The earnings upgrade/downgrade ratio of 0.6x was the worst since 3QFY22. EBITDA margin for the MOFSL Universe (ex-Financials) rose 210bp YoY to 16.6%.

* Report card: Of the 23 sectors under our coverage, 6/10/7 sectors reported profits above/in line/below our estimates. Of the 252 companies under our coverage, 82 exceeded our profit estimates, 95 posted a miss, and 75 were in line.

* The 9MFY24 snapshot: The MOFSL/Nifty Universes delivered 41%/26% YoY earnings growth in 9MFY24. Excluding OMCs, MOFSL/Nifty reported 24%/19% YoY earnings growth. For 4QFY24, we expect MOFSL/Nifty earnings to report a growth of 4%/5% YoY.

* FY24E earnings highlights: The MOFSL Universe is likely to deliver sales/EBITDA/ PAT growth of 5%/21%/32% YoY in FY24. The Autos, O&G, and Banks (Private/PSU) are projected to be the key growth drivers with 91%, 73% and 28% YoY earnings growth, respectively. They are likely to contribute 64% of the earnings growth.

* Nifty EPS stable: Our EPS estimates for FY24/FY25 have remained unchanged at INR975/INR1,142 (vs. INR976/INR1,142). We now expect the Nifty EPS to grow ~21%/17% YoY in FY24/FY25.

Key sectoral highlights – 1) Technology: The IT Services companies (within MOFSL Universe) exhibited a median revenue growth of 1.0% QoQ in CC. With continued weakness in key verticals and pressure on 4Q execution, the companies have either narrowed their revenue guidance band or expect to achieve the lower end of the range. Throughout 3QFY24, softness persisted in key verticals and geographies, with BFSI, Consumer, and Communications reporting muted growth. 2) Banks: The banking sector exhibited a mixed performance in 3QFY24, characterized by healthy business growth, controlled provisions, persistent NIM pressure, and high opex. Credit growth was primarily driven by retail growth. The corporate sector saw a gradual pickup, aided by MSME growth. Most of the banks witnessed stagnant or a slight dip in margins, barring select PSU banks. 3) Autos: In 3QFY24, Auto volumes (ex-tractors) grew 16% YoY (flat QoQ) led by a healthy recovery in 2Ws, stable growth across other segments, and a lower base due to the festive mismatch. 2Ws witnessed the sharpest growth of ~19% YoY during the quarter. 4) Consumer: Our coverage universe posted a muted revenue growth of 4% YoY in 3QFY24 on a low base of 7% growth in 3QFY23. The consumption trend and management commentary about rural recovery remained unchanged in 3Q. Local competition, a delayed rural recovery, and price cuts continued to hurt revenue performance during 9MFY24 (4% revenue growth). Volume growth improved a bit sequentially, but revenue growth was muted due to price cuts.

* The top earnings upgrades in FY25E: Tata Motors (+26%), Coal India (+10%), Hero MotoCorp (+10%), Cipla (+8%), and Bharti Airtel (+7%).

* The top earnings downgrades in FY25E: UPL (-23%), LTIMindtree (-8%), ITC (-6%), Divis Labs (-5%), and HUL (-5%).

* Our view: India is currently enjoying the confluence of the best macro and micro tailwinds with ~7% GDP growth, moderating inflation prints, range-bound crude prices, easing 10-year G-sec yield, stable currency, and resilient corporate earnings. The 3QFY24 corporate earnings have exceeded our expectations, with the BFSI and Automobile sectors driving the overall performance. The Metals and O&G sectors reported healthy earnings growth, providing further support to the overall earnings. The spread of earnings has been satisfactory, with 62% of our Coverage Universe either meeting or exceeding profit expectations. However, the earnings revision trend in the broader coverage universe, excluding Nifty, was lackluster. The margin tailwind from 4QFY24 onwards will be receding and facing a high base, necessitating a recovery in revenue growth to drive earnings ahead. Nifty is trading at a 12-month forward P/E ratio of 19.4x, which is in-line with its long-period average (LPA) even as broader markets trade at expensive valuations (NSE Midcap 100 index trading at ~40% premium to Nifty). We prefer PSU Banks, Industrials (Capital Goods and Cement), Real Estate, Consumer Discretionary, and NBFCs, while we are UW on IT and Metals. We recently upgraded Energy to Neutral and downgraded Autos and Pharma to Neutral in our model portfolio. Markets, in the near term, will take cues from: 1) the outcome of the Lok Sabha elections scheduled in Apr/May’24 and 2) the timing and quantum of easing in the interest rate cycle, both globally and in India.