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Trends ordinary, valuations extraordinary

The ongoing 4QFY24 season has hardly provided any positive surprise, with earnings in line with our expectations. A few companies have delivered negative surprises. Consumption and outsourcing continue to be weak, while financials continue to exhibit strength. Limited upgrades in earnings are in sharp contrast to elevated market expectations and rich valuations.

4QFY24 earnings have been broadly in line with expectations until now

The Nifty-50 Index has seen a 14% yoy growth in earnings 4QFY24, broadly in line with our expectations (see Exhibit 1). Only a handful of companies delivered strong operational beats, with the largest coming from an accounting change in COAL. We note that sales growth remains muted on an aggregate basis, with Nifty-50 companies delivering 9% yoy revenue growth. EBITDA grew 7.3% yoy (5.5% ex-COAL), given down-to-stable margins (see Exhibits 2-3). Exhibit 4 shows the sectoral earnings trends for the KIE universe.

Consumption and outsourcing drag, whereas financials have been steady

Consumer staples saw tepid volume growth again, but 2Ws have seen strong growth in 4QFY24 (see Exhibits 5-6). However, consumer and rural demand seems to be finally showing incipient signs of recovery. Margins continue to trend at elevated levels for most consumer companies (see Exhibits 7-8). Banks have seen decent loan growth, modest NIM compression and stable asset quality (see Exhibits 9-11). Meanwhile, IT services companies have struggled with revenue growth, even as deal wins have been strong in recent quarters (see Exhibits 12-13).

Marginal upgrades in aggregate; low visibility on volatility in some cases

The lack of earnings buoyancy in 4QFY24 has resulted in a limited earnings upgrade in recent months (see Exhibit 14). We currently project the Nifty-50 Index’s net profit growth at 8.9% for FY2025 and 13% for FY2026E on aggregate basis, and 14% for FY2025 and 13% for FY2026E, excluding COAL and OMCs (see Exhibit 15). We note that low earnings predictability for commodity sectors such as COAL and OMCs has been the key contributor to earnings deviations in the case of the Nifty-50 Index. Exhibit 16 shows the contribution of major sectors to the Nifty-50 Index’s net profits over FY2025-26E.

Valuations remain expensive across sectors

The Indian market continues to trade at expensive levels, relative to history and bond yields (see Exhibits 17-18). Nifty-50 valuations are a lot more palatable though. The broader market valuations are even more expensive, with the expensiveness being inversely proportional to capitalization, quality and risk (see Exhibits 19-20). Some are unhinged from fundamentals and reality, and entirely based on optimistic assumptions, wrong valuation methodologies and unrealistic narratives. In our view, assessing businesses on a bottom-up basis, in light of their business models, gives a better picture on the relative exuberance currently exhibited by narrative-based stocks (see Exhibits 21-26).

Minor changes to the model portfolio

Exhibit 27 is our revised recommended large-cap. model portfolio. We add Delhivery (150 bps) and SBI Cards (150 bps) to the model portfolio and remove Cummins (KKC; 250 bps previously) and reduce the position on Zomato (50 bps to 170 bps). We like Delhivery’s strong positioning in the delivery and logistics space; we see it as the key beneficiary of continued strong growth of the online delivery business. The stock’s current financials may be less relevant, given (1) large growth opportunity and (2) weak competitive positioning of competitors with heavy losses, which raises questions over the sustenance of their operations. SBI Cards has been a large under-performer ((-)10% over the past 12 months versus 24% for the Nifty-50 Index) and trades at 26.2X FY2025E EPS and 4.8X FY2025E BV for RoE of 20%.  

Both KKC and Zomato have performed exceptionally well in the past 12 months. KKC is up 98% over the past six months and trades at a punchy 49X one-year forward valuations. It has gone up 305% over the past three years and has been in our model portfolios for an extended period of time. We continue to like KKC’s growth prospects, but see a limited upside in the short term, as is the case with most investment-related stocks. Zomato has been up 59% over the past six months.

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