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Margin expansion-led earnings growth to continue

The broad theme of margin expansion driving earnings growth is likely to continue into Q4FY24, but we expect the pace to slow as the base effect kicks in. Domestic cyclicals, as has been the case during the past year, may drive earnings growth in Q4 while commodities-oriented sectors, such as metals, energy & chemicals, might drag. Healthcare, cement and utilities are likely to post robust YoY growth whereas that of consumer staples might be moderate. We expect earnings of our coverage universe of 228 companies to grow ~11% YoY, led by a 60bp YoY expansion in ex-financials EBITDA margin. Revenue is likely to grow in the mid-single digits.

Domestic cyclicals to lead YoY incremental PAT addition

We expect domestic cyclicals to add 80% to our coverage universe YoY incremental earnings. Banks will see one of the best earnings growth among sectors despite the expected softening of NIMs. We expect earnings in Autos to grow by 30% YoY, helped by improved product mix and operating leverage led margin improvement. On the other hand, commodity-oriented sectors of materials, energy & metals are going to chip away 7% YoY, 14% YoY and 14% YoY, respectively, from incremental earnings of our coverage universe. Margin is likely to deteriorate YoY of our specialty chemicals universe due to exports markets demand suppression and inventory destocking from the agrochemicals sector in Latin America and the new energy sector in China. We expect a lackluster performance in Q4 for steel firms within our coverage universe, primarily due to subdued steel prices while lower gas realization of upstream PSU would lead to energy posting a YoY decline in earnings. However, earnings for energy QoQ is likely to grow by 10%, driven by higher marketing margin of OMC.

Large caps to outperform mid & small caps in earnings growth

Contrary to the trend observed in the previous three quarters where earnings growth of mid & small caps outpaced that of large caps, we expect YoY earnings growth of mid and small caps in Elara Universe in the current quarter to moderate to 1.6% and 0.4%, respectively. This moderation is mostly driven by OMC and metals stocks. On the otherhand we expect large cap earnings growth for Elara Universe at 12.9% YoY. We expect large cap auto, banks, energy, and utilities companies to outperform their mid & small cap counterparts.

Domestic demand revival to be in focus

As the high base effect kicks in, potential for earnings growth from margin expansion would diminish, necessitating companies to pivot toward revenue growth. We believe management commentary on demand revival, especially on the rural side, would be keenly monitored for any early signs of an uptick. We expect commentary on loan growth, deposit mobilization and NIM to dominate discussions on banks.

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