Effect of cyclicals: Q3 corporate earnings driven by autos & financials

Effect of cyclicals: Q3 corporate earnings driven by autos & financials
Source: Pixabay

  • The aggregate earnings of 252 listed companies rose 29% YoY for the December quarter.
  • Five Nifty companies contributed 56% of the incremental YoY accretion in earnings, says Motilal Oswal.
  • Auto, BFSI sectors posted good earnings due to domestic demand, while global commodity prices aided metal and oil companies.
Corporate India’s earnings report card for the December quarter corporate earnings a few surprises both positively and negatively. Tata Motors, Tata Steel and ICICI Bank delivered better than expected results. But HDFC Bank and SBI disappointed the markets; with the former delivering a loan-to-deposit ratio shocker, and PSB’s one-time salary payouts impacted profits.

On an overall basis, however, listed companies saw widespread outperformance driven by margin tailwinds, says a report by Motilal Oswal. The aggregate earnings of the companies rose 29% YoY for the quarter.

Of the 252 companies across 23 sectors the research firm covers, 82 exceeded its profit estimates, 95 reported a miss, and 75 were in line.

“India is currently enjoying the confluence of the best macro and micro tailwinds with around 7% GDP growth, moderating inflation prints, range-bound crude prices, easing 10-year G-sec yield, stable currency, and resilient corporate earnings,” said a report by Motilal Oswal.

Heavyweights march ahead


Both domestic and global cyclicals aided the corporate earnings growth. Domestic cyclicals aided BFSI and auto sectors in terms of demand. Global commodity prices augured well for sectors like metals and oil & gas.

“BFSI clocked a 22% YoY growth while autos registered a significant growth of 60%. Metals earnings jumped 74% over a weak base of 3QFY23. Oil marketing companies’ profitability surged 4.6x due to strong marketing margins,” said Motilal Oswal report.

Within the Nifty universe, earnings growth was top-heavy this quarter. The 50 stocks under the index saw their sales grow in line with estimates by 6%; but PAT growth beat earnings estimates with 17% YoY growth.

“Five Nifty companies – Tata Motors, HDFC Bank, Tata Steel, ICICI Bank, and JSW Steel – contributed 56% of the incremental YoY accretion in earnings,” said MOSL.

Sales must grow

Like in Q2, Q3 also extended the trend of lean sales growth combined with strong profitability due to softening commodity prices. Even in sectors like FMCG where sales growth has either been negative or marginal saw decent margin expansion due to the commodity effect.

The IT sector too saw margins expand due to sharp decline in headcount, as most large players reported flat to slightly negative sequential revenue growth. Going ahead, analysts hope that revenue recovery across listed companies is necessary.

“The earnings revision trend in the broader coverage universe, excluding Nifty, was lackluster. The margin tailwind from 4QFY24 onwards will be receding and facing a high base, necessitating a recovery in revenue growth to drive earnings ahead,” said MOSL.

Nifty is trading at a 12-month forward price to earnings ratio of 19.4x. But broader markets are trading at expensive valuations, especially NSE Midcap 100 index trading at around 40% premium to Nifty.

“Markets, in the near term, will take cues from the outcome of the Lok Sabha elections scheduled in April-May 2024 and the timing and quantum of easing in the interest rate cycle, both globally and in India,” says MOSL.