IGI Logo

Domestic cyclicals drive earnings; Global cyclicals drag

* In this report, we present our interim review of the 1QFY25 earnings season.

* As of 1st Aug’24, 163/39 companies within the MOFSL Universe/Nifty announced their 1QFY25 results. These companies constitute: a) 76% and 80% of the estimated PAT for the MOFSL and Nifty Universe, respectively; b) 48% of India's market capitalization; and c) 86% weightage in the Nifty.

* The 1QFY25 earnings growth of the aforementioned 163 MOFSL Universe companies declined 2% YoY (est. -4% YoY). The aggregate performance was hit by a sharp drag from global commodities. Excluding Metals and O&G, the MOFSL Universe and Nifty posted a healthy 16% and 15% earnings growth vs. expectations of +13% each, respectively. The earnings growth was fueled by BFSI and Autos. Along with Metals and O&G, the earnings of the Cement and Specialty Chemicals sectors also decreased during the quarter.

* The overall earnings growth was driven, once again, by domestic cyclicals, such as Automobiles (+34% YoY) and BFSI (+19% YoY), with improved contributions from Healthcare (+19% YoY), Real Estate (+80% YoY), and Capital Goods (+14% YoY). Conversely, earnings growth was weighed down by global cyclicals, such as O&G (OMC’s profit plunged 80% YoY), which saw a dip of 49% YoY, along with Metals (-5% YoY), Cement (-2% YoY), and Specialty Chemicals (-16% YoY).

* Excluding BFSI, profits for the MOFSL Universe would have declined 12% YoY (vs. est. of -15% YoY). Until now, 26/61 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 170bp YoY to 14.2% thus far.

* Earnings of the 39 Nifty companies that have declared results so far grew 5% YoY (vs. est. of +2% YoY), fueled by HDFC Bank, Tata Motors, ICICI Bank, Maruti Suzuki, and TCS. These five companies contributed 131% to the incremental YoY accretion in earnings. Conversely, BPCL, JSW Steel, Reliance Industries, and Asian Paints contributed adversely to Nifty earnings. Twelve companies within the Nifty reported profits below our expectations, while 11 recorded a beat, and 16 registered in-line results.

* Nifty EPS saw a downgrade of 1.2%/0.8% for FY25E/FY26E: The Nifty EPS estimate for FY25 was cut by 1.2% to INR1,120, largely owing to Reliance Industries and BPCL. FY26E EPS was also reduced by 0.8% to INR1,319 (from INR1,330) as upgrades in Infosys, Coal India, Tata Motors, and Maruti were offset by downgrades in Axis Bank, HDFC Bank, ICICI Bank, and Indusind Bank.

* Summary of the 1QFY25 performance thus far: 1) Banks: FY25 has started on a modest note, with several private banks reporting moderation in business growth. Private Banks reported broadly steady performance. Margins were largely stable to marginally weak. 2) NBFCs – Lending: 1QFY25 was a seasonally weak quarter in terms of asset quality and relatively weaker demand in new PVs and mortgages. While select lenders across the affordable housing sector and vehicle finance continued to exhibit strong disbursement momentum, others faced challenges related to elections and heat waves. 3) Automobiles: 1QFY25 results have been positive so far. Revenue has been in line, largely driven by healthy volume growth across most of the segments (particularly 2Ws), a better product mix, and price hikes. The EBITDA and PAT were above our estimates. 4) Technology: The IT Services companies reported healthy performance (exceeding our estimates), with a median revenue growth of 1.2% QoQ CC. The Tier-1 players achieved a median revenue growth of 0.7% QoQ CC, while the Tier-2 companies recorded a growth of 1.6% QoQ CC. 5) Consumer: The results so far have been in line with expectations, exhibiting an improving consumption trend. In the staples sector, demand has been steadily increasing, with indications of growth in rural markets. 6) Oil & Gas: Our coverage universe has so far reported mixed results. RIL fell short of our estimates mainly due to weak O2C performance resulting from a sharp correction in refining cracks. OMCs' earnings were significantly impacted by LPG under-recovery. Refer to page 8 for the detailed 1QFY25 sectoral trends 

Key 1QFY25 result highlights

* As of 1st Aug’24, 39 Nifty stocks reported a sales/EBITDA/PBT/PAT growth of 7%/6%/5%/5% YoY (vs. est. of +6%/4%/2%/2%). Of these, 11/12 companies surpassed/missed our PAT estimates. On the EBITDA front, 9/8 companies exceeded/missed our estimates during the quarter thus far.

* For the 163 companies within our MOFSL Universe, sales/EBITDA/PBT/PAT were +6%/0%/-2%/-2% YoY (vs. est. of +9%/-1%/-5%/-4%). Excluding Metals and O&G, the MOFSL Universe companies recorded a sales/EBITDA/PBT/PAT growth of 9%/13%/16%/16% YoY (vs. est. of +9%/10%/12%/13%) in 1QFY25 so far.

* Among the Nifty constituents, Coal India, Tata Motors, HCL Tech, Maruti Suzuki, Sun Pharma, Adani Ports, Ultratech Cement, Dr Reddy’s Labs, Tata Steel, and SBI Life Insurance exceeded our profit estimates. Conversely, Reliance Industries, Axis Bank, ITC, BPCL, M&M, IndusInd Bank, Asian Paints, JSW Steel, Nestle, HDFC Life Insurance, and Tata Consumer missed our profit estimates for 1QFY25.

* View: The corporate earnings scorecard for 1QFY25 has been in line so far, with heavyweights such as HDFC Bank, Tata Motors, ICICI Bank, Maruti, and TCS driving the aggregate. The earnings spread has been decent, with 63% of our 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 21x, at a 3% premium to its own long-period average (LPA). 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 and cut Auto from OW to UW. We also turned OW on Healthcare from Neutral, while maintaining our UW stance on Pvt Banks and Energy in our model portfolio.

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

* Aggregate performance of the MOFSL Universe: Sales/EBITDA/PBT/PAT grew 6%/0%/-2%/-2% YoY (vs. est. of +9%/-1%/-5%/-4%). Excluding Metals and O&G, the MOFSL Universe companies recorded a sales/EBITDA/PBT/PAT growth of 9%/13%/16%/16% YoY (vs. est. of +9%/10%/12%/13%) in 1QFY25.

* Nifty-50 companies that surpassed/missed our estimates Coal India, Tata Motors, HCL Tech, Maruti Suzuki, Sun Pharma, Adani Ports, Ultratech Cement, Dr Reddy’s Labs, Tata Steel, and SBI Life Insurance exceeded our profit estimates. Conversely, Reliance Industries, Axis Bank, ITC, BPCL, M&M, IndusInd Bank, Asian Paints, JSW Steel, Nestle, HDFC Life Insurance, Tata Consumer missed our profit estimates for 1QFY25.

* Top FY25E upgrades: Coal India (10.8%), Dr Reddy’s Labs (6.7%), Adani Ports (4.3%), Tata Steel (3.3%), and Infosys (3.1%).

* Top FY25E downgrades: BPCL (-16.3%), JSW Steel (-8.2%), Indusind Bank (- 7.7%), Ultratech Cement (-6.6%), and Tata Consumer (-6.3%).

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412