Over the past three years, Indian corporate earnings growth has maintained solid momentum, achieving a CAGR of 24%, for Nifty50. During this period of continued expansion, there were fluctuations. Following the challenges posed by the COVID-19 pandemic, businesses have exhibited remarkable recovery, as evidenced by a 40% increase in Profit After Tax (PAT) during FY22. However, this momentum moderated, resulting in sub-par growth of 8% in FY23, with projections indicating a healthy rebound to 23.5% growth in FY24E.
The start of business growth in FY24 was particularly favorable, supported by a low base in FY23. This growth was driven by a sharp decline in global inflation. Given India’s status as a net importer of crucial industrial raw materials such as Oil & Gas, Metals, Chemicals and Electronics, which contribute significantly to the cost of goods, fluctuations in global inflation directly impact corporate margins. As world inflation collapsed, like US CPI, from 9% in June 2022 to 3.4% in December 2023, it caused a sea expansion of operating margin.
At the same time, the large increase in profits was supported by India’s robust economy, which stood in stark contrast to the slow growth witnessed elsewhere in the world. This dynamic has led to a consistent upward adjustment of GDP growth forecasts. Gradually, the RBI has increased the FY24 growth forecast from 6.4% in February 2023 to 7.6% in April 2024. Basically, India has benefited a lot from strong external demand. Consequently, India experienced above-average growth in profits, driven by increased volume growth.
Typically, when production and service costs decrease, sales should also decrease. Therefore, the total sales growth of Nifty50 constituent companies remained at a normal rate of 12% in the last nine months of December FY24. However, the growth in PAT is above average due to the combined effect of high volume and expansion in operating margin, which led to a 25% gain in PAT growth in 9 months FY24.
However, Q4FY24 is different; here, the earnings growth is expected to reduce from 25% in the last 9 months to 6-8% on a YoY basis. This is because the opposite direction of the same factors – a contraction in the expansion of operating margin and a slowdown in sales growth – affects.
A year ago, crude oil was priced at $84 per barrel; today, it has exceeded $89, increasing manufacturing and logistics expenses for businesses. However, other raw material costs such as steel and coal have declined due to a global economic slowdown and increased post-COVID supply. For example, cement prices are down 4% YoY, and Active Pharmaceutical Ingredient (API), the key raw material used to manufacture formulations and medicines, is down an average of 50%. As a result, the price of selling is reduced, lower sales growth, and inflation is sticky for a long time. Like the US CPI, it remained at a rate of 3 to 3.7% in the last 10 months, reaching 3.5% in March 2024.
The market expects overall Nifty5o sales growth to contract from 12% in the last 9 months to 7% in Q4, although volume growth is still steady in India, led by external demand and new capex. But the knock-on effect of the slowdown in PAT is visible across the sector. The most notable are Metals, IT and Cement. And welfare sectors are domestic consumption, such as automotive, discretionary, retail, then healthcare and Oil and Gas.
The upcoming IT results this weekend mark the start of the Q4 earnings season on a subdued note. Aggregate data on the top 30 major IT stocks, ranked by market capitalization, are forecast to experience sales YoY growth of 2%. At the same time, it is anticipated that EBIT will exhibit growth of 3.5% YoY, attributed largely to strategic margin optimization initiatives. This improvement is expected to strengthen the margin by a small 30bps to 19.5%. Average PAT margin is forecast at 15.3% and EPS is expected to see an advance of 8.7%.
Our long-term view on the Indian IT sector remains optimistic, and we advise an accumulation strategy over the next 2-3 quarters. Amid the prevailing sluggish business conditions, industrial stocks may underperform in the near term. However, there are optimistic signs, such as new acquisitions and demand for AI & Gen AI, cloud and cyber security. Management’s guidance for FY25, along with the conclusion of the US tax rate tightening cycle, will be crucial in determining the sector’s growth trajectory in CY25.
The author Vinod Nair is Head of Research, Geojit Financial Services.
Disclaimer: The views and recommendations made above are those of individual analysts or trading companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions
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Published: 14 Apr 2024, 15:24 IST