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Interim earnings review: 2QFY25 soft; In-line Ex Commodities

* In this report, we present our interim review of the 2QFY25 earnings season.

* As of 31st Oct’24, 166/34 companies within the MOFSL Universe/Nifty

announced their 2QFY25 results. These companies constitute: i) 73% and 74% of the estimated PAT for the MOFSL and Nifty Universe, respectively; ii) 50% of India's market capitalization; and iii) 81% weightage in the Nifty.

* The earnings growth of the aforementioned 166 MOFSL Universe companies declined 8% YoY (est. -4% YoY) in 2QFY25 (lowest in 17 quarters). The aggregate performance was hit by a sharp drag from global commodities. Excluding Metals and O&G, the MOFSL Universe and Nifty clocked 9% and 11% earnings growth vs. expectations of +9% and +10%, respectively.

* The modest earnings growth was driven once again by BFSI, with positive contributions from Technology, Real Estate, Utilities, Telecom and Healthcare. Conversely, earnings growth was weighed down by global cyclicals, such as O&G (OMC’s profit plunged 92% YoY), which saw a dip of 58% YoY, along with Metals (-28% YoY), Cement (-41% YoY), Chemicals (-23% YoY), and Consumer (+3%).

* Excluding BFSI, profits for the MOFSL Universe would have declined 19% YoY (vs. est. of -11% YoY). Until now, 25/70 companies within the MOFSL Coverage Universe have reported an upgrade/downgrade of more than 3% each, leading to an adverse upgrade-to-downgrade ratio for FY25E. Further, the EBITDA margin of the MOFSL Universe (ex-Financials) contracted 280bp YoY to 15.4%, primarily dragged down by OMCs.

* Earnings of the 34 Nifty companies that have declared results so far have been flat YoY (vs. est. of +2% YoY), fueled by ICICI Bank, Axis Bank, Bharti Airtel, NTPC, and HDFC Bank. Conversely, BPCL, JSW Steel, Coal India, IndusInd Bank, Reliance Industries, and Ultratech Cement contributed adversely to Nifty earnings. Nine companies within the Nifty reported profits below our expectations, while 10 recorded a beat and 15 registered in-line results.

* Nifty EPS saw a downgrade of 1.2%/1% for FY25E/FY26E: The Nifty EPS estimate for FY25 was cut by 1.2% to INR1,059, largely owing to BPCL, Reliance Industries, and Coal India. FY26E EPS was also reduced by 1% to INR1,256 (from INR1,269) led by downgrades in BPCL, Reliance Industries, Maruti Suzuki, Bajaj Finance, and IndusInd Bank.

* Summary of the 2QFY25 performance thus far: 1) Banks: Earnings growth for private banks was mixed, while PSBs reported a healthy earnings trajectory. Margins witnessed compression for both PSBs and Private Banks, with a few reporting double-digit NIM compression on a sequential basis. 2) NBFCs – Lending: 2QFY25 was a weak quarter in terms of asset quality. Weak macros (particularly in MFI) and the regulator stance also prompted a cut in the AUM growth guidance for select players in the micro LAP segment. 3) Technology: The IT Services companies (within MOFSL Universe) reported healthy performance (beating our estimates), with a median revenue growth of 2.0% QoQ CC in 2QFY25. While results were encouraging, the outlook remained slightly guarded, signaling persisting uncertainties. 4) Automobile: The 2QFY25 results have generally aligned with expectations, mainly driven by domestic 2W volume growth and a sequential recovery in exports. Demand commentary remains moderate across categories. 5) Consumer: The 2QFY25 results so far have been slightly lower than expected. Demand was subdued for the urban market, while rural growth contributed positively to overall growth. . 6) Healthcare: Earnings growth for pharma companies remained healthy. The domestic formulation business witnessed ~11% YoY growth for companies under our coverage. 7) Oil & Gas: Our O&G Coverage Universe has so far reported weak results. RIL’s 2QFY25 performance was in line but soft, owing to a weak performance in O2C and Reliance Jio (elevated subscriber churn). OMCs reported a significant miss on EBITDA estimates due to subdued refining margins. 

Key result highlights: 2QFY25

* As of 31st Oct’24, 34 Nifty stocks reported a sales/EBITDA/PBT/PAT growth of 5%/1%/0%/0% YoY (vs. est. of +5%/4%/2%/2%). Of these, 10/9 companies surpassed/missed our PAT estimates. On the EBITDA front, 8/7 companies exceeded/missed our estimates during the quarter thus far.

* For the 166 companies within our MOFSL Universe, sales/EBITDA/PBT/PAT were +5%/-4%/-7%/-8% YoY (vs. est. of +9%/-2%/-4%/-4%). Excluding Metals and O&G, the MOFSL Universe companies recorded a sales/EBITDA/PBT/PAT growth of 9%/10%/10%/9% YoY (vs. est. of +9%/8%/9%/9%) in 2QFY25 so far.

* Among the Nifty constituents, ICICI Bank, Wipro, HCL Technologies, Bharat Electronics, Tech Mahindra, Maruti Suzuki, L&T, Cipla, Tata Consumer, and JSW Steel exceeded our profit estimates. Conversely, BPCL, Coal India, IndusInd Bank, Ultratech Cement, Nestle, Kotak Mahindra Bank, NTPC, and Bharti Airtel missed our profit estimates for 2QFY25.

* View: The corporate earnings scorecard for 2QFY25 has been weak but excluding commodities, it’s broadly in-line. The earnings spread has deteriorated, with only 62% of MOFSL Coverage Universe either meeting or exceeding profit expectations. Consumption has emerged as a weak spot while select segments of BFSI are seeing asset-quality stress. Nifty FY25 EPS has seen another 1% cut after a 4% cut in preview. Overall Nifty EPS has seen 7% downward revision in last six months, reducing the expected FY25 earnings growth to just 5%, weakest since FY20. The Nifty is trading at a 12-month forward P/E of 20.7x, in-line with its long-period average (LPA) of 20.5x. Despite the recent 7-8% correction from the highs, the broader markets are still trading at expensive valuations (NSE Midcap 100 at ~30x forward P/E). We had made several important changes in our model portfolio in 2QFY25 preview where we raised the weights in BFSI, Technology, Healthcare with a distinct bias towards large-caps. Our model portfolio reflects our conviction in domestic structural as well as cyclical themes. We are OW on IT, Healthcare, BFSI, Consumer Discretionary, Industrials and Real Estate. In contrast, we are UW on Metals, Energy, and Automobiles.

Performance in line: BFSI and Technology drive earnings; OMCs drag

* Aggregate performance of the MOFSL Universe: Sales/EBITDA/PBT/PAT were +5%/-4%/-7%/-8% YoY (vs. est. of +9%/-2%/-4%/-4%). Excluding Metals and O&G, the MOFSL Universe companies recorded a sales/EBITDA/PBT/PAT growth of 9%/10%/10%/9% YoY (vs. est. of +9%/8%/9%/9%) in 2QFY25.

* Nifty-50 companies that surpassed/missed our estimates ICICI Bank, Wipro, HCL Technologies, Bharat Electronics, Tech Mahindra, Maruti Suzuki, L&T, Cipla, Tata Consumer, and JSW Steel exceeded our profit estimates. Conversely, BPCL, Coal India, IndusInd Bank, Ultratech Cement, Nestle, Kotak Mahindra Bank, NTPC, and Bharti Airtel missed our profit estimates for 2QFY25.

* Top FY25E upgrades: Bharti Airtel (16.3%), Tech Mahindra (8.8%), Tata Consumer (6.3%), L&T (2.9%), and ICICI Bank (2.8%).

* Top FY25E downgrades: BPCL (-34.3%), IndusInd Bank (-16.7%), Ultratech Cement (-15.5%), NTPC (-8.3%), and Coal India (-7.3%).

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