Q1 FY24 Earnings Review - Domestic Cyclicals Propel Growth; Heavyweights On The March: Motilal Oswal

Motilal Oswal Report

Corporate earnings – Banking, financial services and insurance and auto drive the quarter, as expected:

Corporate earnings for Q1 FY24 came in strong and could underpin the underlying overall optimistic narrative of India. After a solid 23% earnings compound annual growth rate over FY20-23, the Nifty posted 32% earnings growth in Q1 FY24, beating our estimate of 25% growth.

Our coverage universe in Q1 FY24 recorded the highest earnings growth in the last eight quarters, fueled by domestic cyclicals, such as BFSI and auto.

• Banks have guided for consistent growth momentum in loans, primarily driven by steady traction in the retail, business banking and small and medium enterprise segments. The Corporate segment is witnessing a gradual recovery, led by working capital loans and a robust sanction pipeline. While most banks have experienced net interest margin stagnation or decline, company managements expect the rising cost of funds to lead to further moderation in margins over the next few quarters.

• Within the non-banking financial company/housing finance company sector, managements highlighted the following:

1. Early signs of higher delinquencies and/or stress in rural personal loans,

2. Relatively higher compression in Vehicle Finance NIM in Q1 FY24 because of higher competitive intensity and higher proportion of new vehicles in the disbursement mix,

3. Strong demand momentum across product segments.

For the upcoming quarters, the managements shared that a) there will be a minor increase in borrowings costs followed by bottoming out of the margins, b) there could be a minor impact on collections from flooding in the Northern India but no Early Warning signals as yet.

• Automobiles companies expect domestic demand to remain intact in the coming quarters across segments, while exports are expected to see a gradual recovery from Q3 onward, followed by some mixed trends within the segment. A stable macro outlook should drive low double-digit growth in medium and heavy commercial vehicles, while light commercial vehicle growth should be flat or in low single digits YoY. In passenger vehicles, managements expect some signs of demand weakness for lower-end models; however, the execution of the healthy order book should drive 5-7% YoY growth in FY24 volumes.

• IT companies indicated that the unfavorable macro environment affected discretionary spending, which is leading them to re-prioritise activities in enterprises’ core operations. The managements believe that the weakness is expected to continue for a couple of quarters, although they have maintained margin guidance and see multiple levers that will optimize margins in FY24.

• Consumer companies have highlighted recovery in the performance of rural areas amid a softening in inflation, which drives volume growth. However, the managements indicated that they would watch out for the impact of EI-Nino, erratic weather pattern and spatial distribution of rainfall. The managements highlighted that advertising and promotion spending returned to the normal level with the benefits of gross profit margin expansion.

• In Healthcare, companies focusing on U.S. generics indicated a considerable reduction in the intensity of price erosion witnessed over the past couple of months. Managements highlighted that pricing pressure is reducing from double digits to mid-to-high single digits in Q1 FY24.

• In the Ferrous Metals space, managements highlighted: 1. lower ASP for Q2 FY24, 2. lower coking coal costs, 3. macroeconomic headwinds due to slowdown in China, and 4. development of captive raw material mines.

• For Cement, most companies remained positive about cement demand, led by sustained demand from the government’s infrastructure projects, pick-up in real estate, private capex and housing demand from tier-II/III/IV cities.

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