The current profit momentum of corporates is supported by a weak base, low input prices and a much below-trend BFSI credit cost. However, analysts believe that these tailwinds are fading while demand headwinds still loom.
Nuvama Institutional Equities believes that earnings momentum will decelerate sharply in H2FY24, with small and mid-sized companies (SMID) earnings more likely to decelerate. While consensus expects revenue to moderate in H2FY24, it is building a strong FY25 recovery, which, according to the brokerage, could be at risk.
Here are five key takeaways from the overall corporate earnings in the second quarter of FY24 (Q2FY24).
1) Top line slows, profits hold
Topline growth for BSE500 companies slowed further to 5% year-on-year (YoY), although net profit increased 25% YoY. This raised the net profit margin to 13% – 400 bps over pre-covid levels despite similar top line growth, making it an unsustainable dynamic.
By sector, the slowdown is most pronounced on external fronts such as IT and chemicals. The top line of the chemical sector slipped into deep contraction. Consumption especially at the lower end continues to remain weak as can be seen in very weak top line growth of FMCG and durables.
Read also: Results from the banking sector Q2: Healthy earnings print with slow momentum; asset quality continues to improve
“The worrisome part is that despite disinflation in prices, volume growth in FMCG is not picking up – a historical anomaly. Usually, when prices fall, volumes tend to rise. It basically reflects the rural distress that is going on,” the brokerage report said.
2) Operating cash flows are improving strongly
The tailwinds of lower input prices not only increased margins but also reduced working capital needs, propelling operating cash flow (OCF) growth to 50% YoY in H1FY24.
Operating cash flow margins also strengthened. The growth in operating cash flows is at a decade-high and not very sustainable, unless demand revives significantly.
Strong cash flows and healthy demand in the past has resulted in BSE500 capex growth continuing above 20% YoY. By sector, capital growth is strong in Automotive, Telecommunications and Industrial, and has decreased in Energy.
However, analysts believe that this capex growth may not continue due to the subdued top line. Consensus already foresees a sharp slowdown in capex in H2FY24 and outright contractions in FY25 and FY26.
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3) Small, Mid-cap top margins drive gains to performance
The top growth of small and midcaps (SMIDs) has also slowed over the past year, but is higher than large caps overall. However, this may be more due to the mix.
However, in terms of profits, the rebound is much higher probably due to the higher sensitivity of input prices in case of SMIDs versus large caps.
SMID profit growth outperforms that of large-cap peers in Auto, Durables and FMCG despite a much slower top line. This is essentially due to tailwinds from lower input prices. Even in BFSI, especially PSU banks and SMID earnings of NBFCs far outpace large peers due to lower credit costs. IT, metals and pharma are the sectors in which SMID is outperforming by large margins even on the demand front, the brokerage report said.
4) The growth of wages in the private sector moderates
Overall BSE500 wage growth slowed to 14%. The worrying aspect of wage growth is the sharper moderation of 11% YoY in private sector wage growth, a ten-year low.
“Such a sharp slowdown, if sustained, could weigh on consumption, especially high-end.
Read also: FMCG Sector Q2 Results Review: Slow demand seen with marginal earnings; check out key stocks to buy
By sector, wage growth is strong only in BFSI (25-30% YoY growth). The moderation is most pronounced in IT with salary growth now at just 8% YoY. Also, for IT companies, the calculation is now contracting YoY. Therefore, if demand does not revive, IT wage bill is likely to moderate more,” said Nuvama Institutional Equities.
5) Nifty 50 earnings stable
Nifty 50 delivered a strong 15-16% earnings per share (EPS) growth in H1FY24. However, despite this, overall revenues only saw a mild decline. The implied demand rate for H2FY24 is estimated at 8-10% against 25% in H1FY24 and hence FY24E numbers may not be at risk.
However, the 15% EPS growth forecast for FY25 appears elevated, and achieving it could be challenging if global growth fades and bank earnings support also stalls, the brokerage said.
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Updated: 17 Nov 2023, 13:10 IST