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Expect tepid topline, healthy bottomline

Domestic cyclicals to drive performance; large-cap IT to drag

Expect Elara coverage universe (239 companies) to see muted sales growth of 1.7% YoY in Q3E, owing to oil marketing companies (OMCs) seeing lower crude prices compared with prior quarter. Ex-OMCs, sales growth for our universe still looks tepid at 7.6%. Despite this, bottomline growth may be healthy at 15.4% YoY, primarily due to expected earnings expansion in Auto, Banks,Consumer Discretionary and Cement. Earnings for IT may decline ~3% YoY as furloughs weigh down on operating margins.

Easing cost pressure and operating leverage benefits for cement companies as also higher marketing margins for OMCs may increase EBITDA margin (ex-Financials) for our universe by 169bps YoY, while slight firmness in raw material prices for Auto and inventory losses for OMCs may drag down margin sequentially by 123bps to 15.8%

Chemicals and Metals to see downgrades

Dissecting earnings of our coverage universe across quarters, we find that a steep 27.6% QoQ growth is warranted in Q4FY24E to achieve our target earnings for FY24E. Companies within Chemicals (both Agro and Specialty) and Metals are at great risk to see earnings downgrade given high implied growth expectations in Q4. However, on the positive side, most earnings expansion is predicated on sector heavyweights, Autos and Banks and on GRM expansion in Energy companies (with one-off inventory losses behind), which looks achievable.

Mixed bag of macros to play on corporate performance

The impact of declining crude prices would be felt the most in the Energy space due to inventory losses (PAT down ~29% sequentially). While steady loan growth and lower credit cost may cushion the earnings for Banks, expect a softer quarter marked by lower NIM. Commentary around growth momentum may be the key monitorable given RBI regulations on unsecured loans. Benign operating cost with operating leverage benefits may prop Cement, while a sharp ramp-up in execution led by ease in supply chain and power transmission may be the drivers for strong revenue growth in Capital Goods. IT may face a challenging quarter, with furloughs weighing on operating margins in an alreadyweak quarter. Expect the disconnect between revenue growth and deal wins to continue

FMCG continues to grapple with challenges, primarily due to persistently weak rural volumes, which with delayed winter may mar sales in the coming quarter

Weak quarter for mid-caps; small-caps may continue besting large-caps

We find the underlying business conditions deteriorating sequentially for our mid-caps universe, led primarily by OMCs and Metals, while smallcaps may continue to outperform large-caps.

Our mid-caps universe may see a sequential revenue decline of ~4% and earnings decline of ~19%. Mid-cap IT names may surpass large-cap counterparts on the back of limited exposure to troubled sectors such as US regional banks and strong presence in thriving verticals such as Manufacturing and Hi-tech industries

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