Nifty50 Q1 consolidated PAT is forecasted to grow by more than 20% YoY. This is a transformed perspective compared to the subdued presumption the market had a couple of quarters ago. The domestic market was presumed to face the dark side of the global recession, imprinting a slowdown in the domestic economy. However, contrary to expectations, the economy showcased a revamped state of affairs in Q4FY23. GDP growth and corporate results upheld much above the negative bias of the world, driven by stable domestic demand and consistent external orders.
And this sanguine trend is expected to continue in Q1. Key high frequency data from April to June has been robust like PMI, GST collection, Credit growth and Auto sales. Corporate earnings are forecast to be strong, and a large part of the revamp is due to an expansion in the operating margin as key raw material prices have heavily corrected YoY. As of today, key international commodity prices, from crude to steel, are down by in a range of 20 to 40% from the last year’s peak. This has drastically reduced the cost of manufacturing.
Regarding demand, it is stable due to external orders led by China plus strategy and firm local demand led by government & private expenditure. And the expansion in margins is expected to persist in the near future, as the recent decrease in raw material prices will continue to benefit corporates with a lag. However, it is important to note that the extent of improvements may be constrained in the latter part of the year due to the base effect, a potential global economic slowdown, and the already high forecast of +18% corporate earnings growth in FY24, like for Nifty50 index.
We need to note that though Q1 earnings growth is forecast to be robust, revenue growth is muted at 7.3%. This is due to the decline in commodity prices, which lead to a reduction in realization. Secondly, a majority of the earnings growth is from commodity linked sectors like oil marketing companies (OMCs) due to the fall in crude prices and high refining margin, which may not sustain in the future. Hence demand has to revert positively, or else the possibility of further upside in corporate financials will be limited. The US and Eurozone are forecast to become more pessimistic from July to Dec 2023, as per economist consensus.
In Q1, sectors like banks, auto and telecom are expected to perform well. Banking and NBFCs are forecasted to achieve robust earnings growth, led by 15% credit growth and lower provision. Despite an accelerated deposit growth rate of 12.1%, the declining current and savings account ratio (CASA) will limit margin improvement in the near- future. The auto sector is projected to see healthy revenue growth due to strong operational performance, aided by margin expansion and reasonable volume growth across segments.
Conversely, sectors such as IT, cement, metals, and chemicals are expected to face challenges and underperform. IT revenue growth is expected to undergo mutation due to macroeconomic challenges and delayed discretionary spending. However, diligent cost management, improved utilization rates and sharp moderation in US inflation are expected to contribute to stable operating performance, making it an attractive long-term
investment option. Cement sector growth will moderate due to weak demand and a decline in prices, while the benefit of lower input costs will be realized in the upcoming quarters. The metals and chemicals sectors are likely to be impacted by declining raw material prices, high channel inventory, sluggish orders, and delayed monsoon season. Similarly, the pharma sector displays a slightly weaker outlook, primarily due to the economic recession in developed nations and increased costs of chemicals. However, Pharma is a good long-term bet due to attractive valuation.
Regarding expectations for mid & small cap stocks, a similar trend is forecasted with muted top-line growth but decent net income growth due to a rise in operating margin. And we can expect better performance in the near-future due to a lag effect on economic efficiency. The monsoon deficit has narrowed, and rural activities are rapidly expanding, a benefit that will be visible in Q2-Q3. On valuation terms, Smallcaps are attractive compared to large and mid-caps trading below the long-term averages.
First published in The Economic Times