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The 2QFY24 earnings season closed in a positive undertone. The margin loss of FY23 is recovering incrementally, aided by lower commodity prices. Nifty earnings forecasts held up during this period, with a 2% upward revision for FY24. Going forward, Consensus EPS for the Nifty looks resilient, though there seem to be some worries at the individual stock level. We are constructive on the market for the medium term; near-term worries are also steadily dissipating.

Headline earnings strong, but energy-heavy

The impressive headline earnings (BSE 500 PAT: +41% YoY) are distorted by 171% growth from Energy, with a large swing from oil PSUs. Adjusted for this, Non-financials delivered 58% YoY growth, while Financials saw PAT growth at 21%. Much of the profit growth was driven by margin improvement, as topline for Non-financials was tepid, at (0.6%). One idiosyncratic feature was that the delayed festival season hurt topline growth for consumer companies (refer to Exhibits 1-3 for details).

Sectoral analysis

Consumer Discretionary (+72% YoY) and Financials (+21% YoY) were the other movers of the BSE500 profits. The CD sector was propped by the Tata Motors turnaround, but there was widespread participation too – a third of the companies reported 20% PAT growth. IT, Consumer and Materials delivered soft numbers, with 3-10% growth. Industrials and Real Estate also logged strong growth, though their contribution to the aggregate is negligible.

Forecasts remain resilient

The results were in-line. 46% of Nifty companies surprised positively against Consensus (vs 56% in 1QFY23), while the ratio of positive-to-negative surprises was strong at 1.44, marginally down QoQ. For the Emkay universe, the share of positive surprises was almost flat at ~38%. The Nifty EPS estimates saw a small 2% uptick from 30-Sep-2023, though they are still down 3% from 31-Mar-2023 levels. The Nifty forecasts look reasonable, with the implied growth for 2H at 19%. The forecasts for the broader universe are more challenging, with Consensus building-in faster YoY growth in 2HFY24 (vs 1HFY24 YoY growth) in ~50% of the companies (for a 278-stock universe with coverage by more than 10 analysts). The FY23 downgrade trend is unlikely to recur, but there are granular risks

Strong cash flows

BSE500 cash flows continued to strengthen. At an aggregate level, OCF growth was at 135% YoY, while FCF also saw growth, at 78% YoY. The OCF/EBITDA ratio has bounced from the abysmal 38% in 1HFY23 to 88% (FY23: 77%), probably implying that the worst of working-capital pressures are now over. The improvement was across the board – Energy, Industrials, Consumer Discretionary, Healthcare, and Utilities all delivered better outcomes. Our read-through is that the volatility in input prices was probably the cause of stress in 1HFY23 and cash flows are now normalizing.

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